A company has a $36 million portfolio with a beta of 1.2. The futures price for a
contract on an index is 900. Futures contracts on $250 times the index can be traded.
What trade is necessary to increase beta to 1.8?
A. Long 192 contracts
B. Short 192 contracts
C. Long 96 contracts
D. Short 96 contracts
Which of the following is true of a volatility smile?
A. Implied volatility is on the horizontal axis and strike price is on the vertical axis
B. Historical volatility is on the horizontal axis and strike price is on the vertical axis
C. Implied volatility is on the vertical axis and strike price is on the horizontal axis
D. Historical volatility is on the vertical axis and strike price is on the horizontal axis
Suppose that the cumulative probability of a company defaulting by years one, two,
three and four are 3%, 6.5%, 10%, and 14.5%, respectively. What is the probability of
default in the fourth year conditional on no earlier default?
A. 4.5%
B. 5.0%
C. 5.5%
D. 6.0%
Which of the following is true for a consumption commodity?
A. There is no limit to how high or low the futures price can be, except that the futures
price cannot be negative
B. There is a lower limit to the futures price but no upper limit
C. There is an upper limit to the futures price but no lower limit, except that the futures
price cannot be negative
D. The futures price can be determined with reasonable accuracy from the spot price
and interest rates
A tree is constructed to value an option on an index which is currently worth 100 and
has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is
constructed to value an option on a non-dividend-paying stock which is currently worth
100 and has a volatility of 25%. Which of the following are true?
A. The parameters p and u are the same for both trees
B. The parameter p is the same for both trees but u is not
C. The parameter u is the same for both trees but p is not
D. None of the above
Gamma tends to be high for which of the following
A. At-the money options
B. Out-of-the money options
C. In-the-money options
D. Options with a long time to maturity
Which of the following strategies makes no sense?
A. An employee exercises stock options early and sells the stock. No dividends are
expected
B. An employee exercises stock options early and keeps the stock. No dividends are
expected
C. An employee exercises stock options early and sells the stock. Dividends are
expected
D. An employee exercises stock options early and keeps the stock. Dividends are
expected.
The gamma of a delta-neutral portfolio is 500. What is the impact of a jump of $3 in the
price of the underlying asset?
A. A gain of $2,250
B. A loss of $2,250
C. A gain of $750
D. A loss of $750
Which of the following is true for a call option on a non-dividend-paying stock when
the stock’s price equals the strike price?
A. It has a delta of 0.5
B. It has a delta less than 0.5
C. It has a delta greater than 0.5
D. Delta can be greater than or less than 0.5
What does vega measure?
A. The rate of change of delta with the asset price
B. The rate of change of the portfolio value with the passage of time
C. The sensitivity of a portfolio value to interest rate changes
D. None of the above
Which of the following is NOT true about electricity?
A. Supply and demand for electricity are matched within 140 control areas in the US,
then excess power sold to other control areas
B. The ability to sell excess power is constrained by transmission capacity
C. Electricity is a commodity that can be easily stored
D. Air conditioning is a big use of electricity
At the end of Thursday, the estimated covariance between assets A and B is 0.0001.
During Friday asset A produces a return of 3% and asset B produces a return of zero.
An EWMA model with lambda equal to 0.9 is used. What is an estimate of the
covariance at the end of Friday?
A. 0.000090
B. 0.000081
C. 0.000100
D. 0.000095
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
A company enters into a long futures contract to buy 1,000 units of a commodity for
$60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What
futures price will allow $2,000 to be withdrawn from the margin account?
A. $58
B. $62
C. $64
D. $66
Which of the following is a reason for hedging a portfolio with an index futures?
A. The investor believes the stocks in the portfolio will perform better than the market
but is uncertain about the future performance of the market
B. The investor believes the stocks in the portfolio will perform better than the market
and the market is expected to do well
C. The portfolio is not well diversified and so its return is uncertain
D. All of the above
Which of the following is true of LIBOR
A. The LIBOR rate is free of credit risk
B. A LIBOR rate is lower than the Treasury rate when the two have the same maturity
C. It is a rate used when borrowing and lending takes place between banks
D. It is subject to favorable tax treatment in the U.S.
A repo rate is
A. An uncollateralized rate
B. A rate where the credit risk is relative high
C. The rate implicit in a transaction where securities are sold and bought back at a
higher price
D. None of the above
What is exchanged when a put option on an interest rate futures is exercised?
A. A long position in a futures contract for the holder of the option and a short position
in a futures contract for the option writer
B. A short position in a futures contract for the holder of the option and a long position
in a futures contract for the option writer
C. Cash payoff, a long position in a futures contract for the holder of the option, and a
short position in a futures contract for the option writer
D. Cash payoff, a short position in a futures contract for the holder of the option, and a
long position in a futures contract for the option writer