Options, Futures, and Other Derivatives 9th Edition

Which of the following is true of the fed funds rate A. It is the same as the Treasury rate B. It is an overnight interbank rate C. It is a rate for which collateral is posted D. It is a type of repo rate Answer: BAt the end of each day some banks have

If a stock price follows a Markov process which of the following could be true A. Whenever the stock price has gone up for four successive days it has a 70% chance of going up on the fifth day. B. Whenever the stock price has gone up for four successive days there

What was the original Black-Scholes-Merton model designed to value? A. A European option on a stock providing no dividends B. A European or American option on a stock providing no dividends C. A European option on any stock D. A European or American option on any stock Answer: AThe original Black-Scholes-Merton model was designed to

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 80%, mezzanine 10%, and equity 10%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches of the ABSs with

Suppose that ABSs are created from portfolios of subprime mortgages with the following allocation of the principal to tranches: senior 85%, mezzanine 10%, and equity 5%. (The portfolios of subprime mortgages have the same default rates.) An ABS CDO is then created from the mezzanine tranches with the same allocation of

The gain from a project is equally likely to have any value between -$0.15 million and +$0.85 million. What is the 99% value at risk? A. $0.145 million B. $0.14 million C. $0.13 million D. $0.10 million Answer: BThe gain is uniformly distributed between -0.15 and +0.85 million dollars. The probability that it will be

The standard deviation of the values of an option calculated using 10,000 Monte Carlo trials is 4.5. The average of the values is 20. What is the standard error of this as an estimate of the option price? A. 4.5 B. 0.45 C. 0.045 D. 0.0045 Answer: CThe standard deviation of 20 as an estimate

A variable x starts at 10 and follows the generalized Wiener process dx = a dt + b dz where time is measured in years. If a = 3 and =4 what is the standard deviation of the value in 4 years? A. 4 B. 8 C. 12 D. 16 Answer: BThe variance per year is

Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be paid? A. Buy a put and sell a call on the currency with the strike price of the put higher than that of the call B. Buy

A limit order A. Is an order to trade up to a certain number of futures contracts at a certain price B. Is an order that can be executed at a specified price or one more favorable to the investor C. Is an order that must be executed within a specified period of

If the volatility implied from an at-the-money put stock option were used to price other put options on the stock, which of the following would be true? A. Out-of-the money and in-the-money prices would be too high B. Out-of-the money and in-the-money prices would be too low C. Out-of-the-money option prices would be

Which of the following is NOT traded by the CBOE? A. Weeklys B. Monthlys C. Binary options D. DOOM options Answer: BMonthlys are not a CBOE product. The others are. Answer: BMonthlys are not a CBOE product. The others are. Answer: B Monthlys are not a CBOE product. The others are. Which of the following causes a volatility smile

Which of the following describes the way the forward price of a foreign currency is quoted? A. The number of U.S. dollars per unit of the foreign currency B. The number of the foreign currency per U.S. dollar C. Some forward prices are quoted as the number of U.S. dollars per unit of

The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European put option on the stock with a strike price of $32 that expires in 6 months with u = 1.1 and d = 0.9. Each step is 3 months, the risk free

A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? A. The hedger's position improves. B. The hedger's position worsens. C. The hedger's position sometimes worsens and sometimes improves. D. The hedger's position

The price of a stock is $67. A trader sells 5 put option contracts on the stock with a strike price of $70 when the option price is $4. The options are exercised when the stock price is $69. What is the traders net profit or loss? A. Loss of $1,500 B.

The six month and one-year rates are 3% and 4% per annum with semiannual compounding. Which of the following is closest to the one-year par yield expressed with semiannual compounding? A. 3.99% B. 3.98% C. 3.97% D. 3.96% Answer: AThe six month rate is 1.5% per six months. The one year rate is 2% per

The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum

Which of the following is NOT true? A. Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral B. Options can be valued based on the assumption that investors are risk neutral C. In risk-neutral valuation the expected return on all investment assets is set equal to the

Which of the following is true about a futures option and a spot option on the same underlying asset when they have the same strike price? The expiration dates of the two options and the futures are all the same. A. A European call spot option and an American call futures

The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The traders net profit or loss is A. Loss of

In a one-year forward contract on a CDS that will last five years, what usually happens if there is a default during the first year? A. There is a payoff to the forward protection buyer at the time of default B. There is a payoff to the forward protection buyer at the

Which of the following is the payoff from an average strike put option? A. The excess of the strike price over the average stock price, if positive B. The excess of the final stock price over the average stock price, if positive C. The excess of the average stock price over the strike

Which of the following best describes the term 'spot price" A. The price for immediate delivery B. The price for delivery at a future time C. The price of an asset that has been damaged D. The price of renting an asset Answer: AThe spot price is the price for immediate delivery. The futures or

As inventories of a commodity decline, which of the following is true? A. The one-year futures price as a percentage of the spot price increases B. The one-year futures price as a percentage of the spot price decreases C. The one-year futures price as a percentage of the spot price stays the same D.

A binomial tree with one-month time steps is used to value an index option. The interest rate is 3% per annum and the dividend yield is 1% per annum. The volatility of the index is 16%. What is the probability of an up movement? A. 0.4704 B. 0.5065 C. 0.5592 D. 0.5833 Answer: BThe parameter u

When can Bermudan options be exercised? A. Any time during the life of the options B. Any time after a certain date up to the end of the life of the life C. Any time before a certain date or at the end of the options life D. On dates specified at the start

Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution? A. Bear Stearns B. Morgan Stanley C. Lehman Brothers D. Merrill Lynch Answer: BMorgan Stanley survived. Bear Stearns was taken over by JPMorgan and Merrill Lynch was taken over by Bank of America. Lehman Brothers of course

A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in the next six months. The risk-free interest rate is 6%. What is the value of a six-month put option with a strike price of 37 cents? A. 3.00 cents B. 2.91

Which of the following best describes central clearing parties A. Help market participants to value derivative transactions B. Must be used for all OTC derivative transactions C. Are used for futures transactions D. Perform a similar function to exchange clearing houses Answer: DCCPs do for the OTC market what exchange clearing houses do for the

Which of the following is true A. Conditional default probabilities are at least as high as unconditional default probabilities B. Conditional default probabilities are at least as low as unconditional default probabilities C. Conditional default probabilities are sometimes lower and sometimes higher than unconditional default probabilities. D. There is no difference between conditional and

Which of the following is true? A. An American call option on a stock should never be exercised early B. An American call option on a stock should never be exercised early when no dividends are expected C. There is always some chance that an American call option on a stock will be

Clearing houses are A. Never used in futures markets and sometimes used in OTC markets B. Used in OTC markets, but not in futures markets C. Always used in futures markets and sometimes used in OTC markets D. Always used in both futures markets and OTC markets Answer: CClearing houses are always used by exchanges

The current price of a non-dividend paying stock is $50. Use a two-step tree to value an American put option on the stock with a strike price of $48 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility

Which of the following is true of a non-recourse mortgage? A. The house buyer, if unable to make payments, can lose all his or her possessions B. The house buyer has an American-style put option on the house C. The house buyer has a European-style put option on the house D. The lender is