FM FM Derivatives and Options 1

Question 1

A forward contract on the FM exam obligates the buyer to:

Accepted Answer

Purchase an asset at a predetermined price on a specified future date

Answer

A forward contract locks in a purchase price (the forward price) for delivery of the asset at a future date.

Question 2

The no-arbitrage forward price F₀ for a non-dividend-paying stock with current price S₀ at effective annual rate i over T years is:

Accepted Answer

F₀ = S₀ × (1 + i)^T

Answer

The no-arbitrage forward price equals the future value of the current spot price: F₀ = S₀(1 + i)^T.

Question 3

A call option gives the holder the right to:

Accepted Answer

Buy the underlying asset at the strike price before or at expiration

Answer

A call option grants the holder the right (but not the obligation) to buy the underlying asset at the strike price.

Question 4

Put-call parity for European options states:

Accepted Answer

C − P = S₀ − K·v^T

Answer

Put-call parity: C − P = S₀ − K·v^T, where C and P are call and put prices, S₀ is spot, K is strike, and v = 1/(1+i).

Question 5

On the FM exam, the payoff of a long call option at expiration with strike K and terminal asset price S_T is:

Accepted Answer

max(S_T − K, 0)

Answer

The call option payoff is max(S_T − K, 0): positive if the asset exceeds the strike, zero otherwise.

FM - Certifications in Financial Mathematics Practice Test