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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 […]

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. […]

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 […]

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 […]

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 […]

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 Which of the […]

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 […]

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 […]

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 […]

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 […]

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 […]

Which of the following is NOT traded by the CBOE? A. Weeklys B. Monthlys C. Binary options D. DOOM options Which of the following causes a volatility smile that is a “frown”? A. There is a small probability of a […]

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 […]

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 […]

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. […]

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 […]

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 […]

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% How many […]

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 […]

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 […]

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. […]

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 […]

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 […]

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, […]

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 […]

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 […]

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 […]

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 […]

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 When the stock price is 20 and the present value […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]

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 […]