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1. DEVRY FIN 567 Class Project NEW
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Assume that you have $500,000 to invest in
equities and want to establish a new portfolio that
includes ten (10) stocks to be selected from the
Dow Jones Industrial Average of 30 companies. It
is also desired to start with nearly equal dollar
values of each issue. Use current market prices to
compute the number of shares required.
You are bullish on the markets in the long-term;
however, you have read analyst predictions that
over the next 18 months the market will likely stay
flat with some downside potential. Despite these
predictions, you want to make some money in the
short-term, and at the same time avoid any
downside spikes in the markets. A hedging
strategy using options and/or futures seems
appropriate. Please develop a plan to accomplish

2. your goal and give a detailed explanation, with
numerical computations, of the upside
opportunities and the downside risks for each
chosen position.
In addition to your investment in equities, you also
have $1 million dollars to invest conservatively in
U.S. Treasury issues and money market
securities. Select four T-bonds and/or T-notes
ranging in maturity from two years to five years
and purchase equal dollar amounts with a total of
approximately $500,000. Invest the remaining
$500,000 in the money market. You need not
select individual money market issues; just
assume that the money market investments are
secure and return the risk free rate. Please
discuss the how the inclusion of the fixed income
securities affects the risk in your total portfolio.
To begin the project you need to select 10 stocks
and fixed income issues. When buying large
quantities of stocks, it is most usual and
convenient to issue orders in round lots (rounded
to 100 shares). You should do this for your
analysis. When you sum the value of the rounded
lots, the result will almost certainly not be exactly
$500,000. Ignore that difference and use the sum
of the rounded lots as your equity investment. The

3. same holds true for the fixed income selections. A
spreadsheet is provided in Doc Sharing to help you
do the required computations.
General Guidelines
This project is about quality and substance, not
about volume. Your narratives should be concise,
comprehensive, and easy to read. APA format is
required. Your pricing numbers for derivatives
must be expressed in a spreadsheet format. Your
presentation should be in the following order:
1. Executive Summary
2. Explanation of Hedging Strategy
3. Spreadsheet
4. Explanation of the strategy’s risks and rewards
5. Conclusion
Executive Summary
This narrative should be a brief explanation of the
objective, strategy, and conclusion. There need
only be enough information to provide a reader an
overview of the issue, your approach, and your
perceptions on how you will benefit.
Spreadsheet

4. For every derivative security you select as a part of
your strategy, there should be a spreadsheet entry
identifying the derivative, and all purchasing or
selling elements, e.g. strike price, expiration, and
costs. You should also show possible
outcomes. Example, if you recommend selling a
call option, then show the net results if the
underlying stock moves down, stays flat, and rises
above the strike price. The net results should be
expressed in net dollars (actual return or loss),
actual percentage gain or loss, and annualized
percentage gain or loss.
Risks and Rewards
This is a narrative based on the probabilities
shown in your spreadsheet. You should provide a
brief explanation of the outcomes should the
market decline, stay flat, or rise.
Conclusion
This is your opportunity to express your
professional opinion that your strategy will
enhance your portfolio.

5. DEVRY FIN 567 Final Exam NEW
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Question 1. Question : (TCO E) A stock sells for $60
and the risk-free rate of interest is 10%. A call and
a put on this stock expire in one year and both
options have an exercise price of $55. How would
you trade to create a synthetic call option? If the
put sells for $2, how much is the call option worth?
(Assume annual compounding.)
Question 2. Question : (TCO H) Explain how a put
price varies with interest rates. Does the
relationship vary for European and American
puts? Explain.

6. Question 3. Question : (TCO D, F, G) Your newest
client believes that the Asian currency crisis is
going to increase the volatility of earnings for
firms involved in exporting, and that this earnings
volatility will be translated into large stock price
changes for the affected firms. Your client wants to
create speculative positions using options to
increase his/her exposure to the expected changes
in the riskiness of exporting firms. That is, your
client wants to prosper from changes in the
volatility of the firm’s stock returns. Discuss which
Greek your client should focus on when
developing his/her options positions.
Question 4. Question : (TCO B) Explain the
distinction between a normal and an inverted
market.
Question 5. Question : (TCO C) Describe the
difference between a stack hedge and a strip
hedge. What are the advantages and disadvantages
of each?
Question 6. Question : (TCO H) What is the main
difference in the calculation of the DJIA and the
S&P 500 index? Explain.
Question 7. Question : (TCO B) The spot value of
the euro is $1.50, and the 90-day forward rate is

7. $1.45. If the U.S. dollar interest factor to cover this
period is 2%, what is the EMU rate for this period?
Question 8. Question : (TCO K) The IMM Index
stands as 93.30. What is the discount yield? If you
buy a T-bill futures at that index value and the
index becomes 92.90, what is your gain or loss?
Question 9. Question : (TCO A) At a party, a man
tells you that he is an introducing broker. He goes
on to explain that his job is introducing
prospective traders such as you to futures brokers.
He also relates that he holds margin funds as a
service to investors. What do you make of this
explanation?
Question 10. Question : (TCO J, L) Consider a firm
financed only by common stock and a convertible
bond issue. When should the bondholders
exercise? Explain. If the common shares pay a
dividend, could it make sense for the bondholders
to exercise before the bond matures? Explain by
relating your answer to our discussion of the
exercise of American calls on dividend-paying
stocks.

8. DEVRY FIN 567 Midterm NEW
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Question 1. Question : (TCO A) An order that closes
an existing position is called a(n) ______.
Question 2. Question : (TCO A) Which of the
following is not a characteristic of a short call
position?
Question 3. Question : (TCO E) The owner of a call
that expires in the money (ignore cash settlement
options) ________.
Question 4. Question : (TCO C) For tax purposes,
futures contracts are assumed to be ______.
Question 5. Question : (TCO C) The agency that
administers the Commodity Exchange Act is ____.

9. Question 6. Question : (TCO D) A Jan 50 call option
is deep in the money when the ______.
Question 7. Question : (TCO A) How many equity
option exchanges exist in the United States?
Question 8. Question : (TCO C) What is the tax
consequence when a short call that was written
more than a year ago on stock expires worthless?
Question 9. Question : (TCO D) Assume that put
and call options with a $50 strike price expire with
the stock at $70. Which of the following statements
is correct?
Question 10. Question : (TCO E) Assume the
following:
Option Strike price Call price Put price
A 90 18 1
B 100 9 3
C 110 3 8
D 120 1 17
What would a short put condor include?
Question 11. Question : (TCO F) What happens to
gamma as expiration is approached for options
that are near the money?

10. Question 12. Question : (TCO G) The first rule of
the cash-and-carry relationship for futures
contracts is that the futures price must be _______.
Question 13. Question : (TCO G) The Dow Jones
Industrial Average is ______.
Question 14. Question : (TCO G) A fund manager
who wants to buy Japanese equities now, but won't
have the cash for three months can buy a stock
index futures contract as a ______.
Question 15. Question : (TCO F) Strangle writers
prefer ______.
Question 16. Question : (TCO F) What is the
approximate value of delta for a deep-in-the-
money call?
Question 17. Question : (TCO F) Vega is least for
options that are ______.
Question 18. Question : (TCO A) On which
exchanges do options on futures trade?
Question 19. Question : (TCO D) A trader sold a Sep
50 call for $5. At expiration, the stock closed at
$53. What was the net result after the trader
delivered the stock?

11. Question 20. Question : (TCO B) In 1979–1980, the
Hunt brothers manipulated which market?
Question 21. Question : (TCO B) Which of the
following is the most actively traded futures
contract?
Question 22. Question : (TCO E) The maximum
profit in a bull put spread at expiration occurs
when the stock price is _______.
Question 23. Question : (TCO C) What is the
limitation on the tax deductibility of net capital
losses in one tax year?
Question 24. Question : (TCO D) The maximum
profit in a bull call spread at expiration occurs
when the stock price is _______.
Question 1. Question : (TCO C) An investor bought
100 shares of stock at $40. The stock now sells for
$60 and the investor writes a 65 call for $2. What
is the maximum possible gain and loss in this
covered call position?
Question 2. Question : (TCO D) An investor bought
stock at $50 and sold a covered call with a 55
strike price for $2. The stock now sells for $60.
Part 1: What is the intrinsic value in the option?

12. Assume the call is priced at $7.
Part 2: What is the time value in the option?
Part 3: What would you expect to happen to the
value of the call and the 55 put if a shock to the
market causes volatility to increase dramatically?
Question 3. Question : (TCO E) Part 1: If you hold
two XYZ Dec 60 calls and the stock splits 2 for 1,
what will be your resulting position?
Part 2: What is the gain or loss for the following
long butterfly spread if the stock is at $302 at
expiration?
Buy 1 Jun 300 call at 9
Sell 2 Jun 305 calls at 5
Buy 1 Jun 310 call at 2
Part 3: Construct a bull put spread with the
following options:
Apr 40 put at 3
Apr 45 put at 6
Show the P/L result over a range of 38–47.
Question 4. Question : (TCO G) What are the
independent variables in the equity options
pricing model?
What would you expect deltas to be for an at-the-

13. money call and an at-the-money put?
Why do some portfolio managers attempt to
remain delta neutral?
What kind of position do straddle writers plan to
maintain?