Which of the following is NOT true?
A. A volatility surface provides more information than a single volatility smile
B. A volatility surface is used to determine the implied volatility of an option that does
not trade actively
C. A volatility surface can be determined from a single volatility smile using
interpolation
D. A volatility surface incorporates information about options with different maturity
dates
An investor sells a futures contract an asset when the futures price is $1,500. Each
contract is on 100 units of the asset. The contract is closed out when the futures price is
$1,540. Which of the following is true
A. The investor has made a gain of $4,000
B. The investor has made a loss of $4,000
C. The investor has made a gain of $2,000
D. The investor has made a loss of $2,000
Which of the following is a consumption asset?
A. The S&P 500 index
B. The Canadian dollar
C. Copper
D. IBM stock
Index put options are used to provide protection against the value of the portfolio
falling below a certain level. Which of the following is true as the beta of the portfolio
increases?
A. The cost of hedging increases
B. The required options have a higher strike price
C. The number of options required increases
D. All of the above
A CDS with a number of reference entities provides for each reference entity a payoff if
it defaults. What is a name for this CDS?
A. Binary CDS
B. Add-up Basket CDS
C. First-to-Default CDS
D. n-to-Default CDS
Which of the following is true?
A. The volatility skew for equities is much more pronounced now than it was in 1985.
B. The volatility skew for equities has a positive gradient
C. The volatility skew for equities is consistent with the Black-Scholes-Merton model.
D. The volatility skew for equities is similar to that for foreign currencies.
Which of the following is NOT usually true about employee stock options?
A. There is a vesting period
B. They can be sold to other employees
C. They are often at-the-money when issued
D. Their value is currently a charge to the income statement
An investor has $2,000 invested in stock A and $5,000 in stock B. The daily volatilities
of A and B are 1.5% and 1% respectively and the coefficient of correlation is 0.8. What
is the one day 99% VaR? (Note that N(-2.326)=0.01)
A. $177
B. $135
C. $215
D. $331
A binomial tree with three-month time steps is used to value a currency option. The
domestic and foreign risk-free rates are 4% and 6% respectively. The volatility of the
exchange rate is 12%. What is the probability of an up movement?
A. 0.4435
B. 0.5267
C. 0.5565
D. 0.5771
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 with the same allocation of
principal. Losses on the mortgage portfolio prove to be 16%. What, as a percent of
tranche principal, are losses on the mezzanine tranche of the ABS CDO
A. 50%
B. 60%
C. 80%
D. 100%
The original Black-Scholes and Merton papers on stock option pricing were published
in which year?
A. 1983
B. 1984
C. 1974
D. 1973
Where are oil, gas, and electricity derivatives traded?
A. On exchanges and the OTC market
B. On exchanges, but not on the OTC market
C. On the OTC market , but not on exchanges
D. Oil is traded in both markets, but the other two are traded only in the OTC market
An investor has exchange-traded put options to sell 100 shares for $20. There is a 2 for
1 stock split. Which of the following is the position of the investor after the stock split?
A. Put options to sell 100 shares for $20
B. Put options to sell 100 shares for $10
C. Put options to sell 200 shares for $10
D. Put options to sell 200 shares for $20
Which of the following is true for American options?
A. Put-call parity provides an upper and lower bound for the difference between call
and put prices
B. Put call parity provides an upper bound but no lower bound for the difference
between call and put prices
C. Put call parity provides an lower bound but no upper bound for the difference
between call and put prices
D. There are no put-call parity results
Which of the following best describes the intrinsic value of an option?
A. The value it would have if the owner had to exercise it immediately or not at all
B. The Black-Scholes-Merton price of the option
C. The lower bound for the option’s price
D. The amount paid for the option
Which of the following is true?
A. The futures rates calculated from a Eurodollar futures quote are always less than the
corresponding forward rate
B. The futures rates calculated from a Eurodollar futures quote are always greater than
the corresponding forward rate
C. The futures rates calculated from a Eurodollar futures quote should equal the
corresponding forward rate
D. The futures rates calculated from a Eurodollar futures quote are sometimes greater
than and sometimes less than the corresponding forward rate
Which of the following describes a futures-style option?
A. An option on a futures
B. An option on spot with daily settlement
C. A futures on an option payoff
D. None of the above
Which was the minimum capital requirement for market risk in the 1996 BIS
Amendment?
A. At least 3 times the 10-day VaR with a 99% confidence level
B. At least 3 times 7-day VaR with a 97% confidence level
C. At least 2 times 5-day VaR with a 95% confidence level
D. 1-day VaR with a 99% confidence level
When the non-dividend paying stock price is $20, the strike price is $20, the risk-free
rate is 5%, the volatility is 20% and the time to maturity is 3 months which of the
following is the price of a European put option on the stock
A. 19.7N(-0.1)-20N(-0.2)
B. 20N(-0.1)-20N(-0.2)
C. 19.7N(-0.2)-20N(-0.1)
D. 20N(-0.2)-20N(-0.1)
On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July
1 the spot price is $64 and the August futures price is $650. A company entered into
futures contracts on March 1 to hedge its purchase of the commodity on July 1. It
closed out its position on July 1. What is the effective price (after taking account of
hedging) paid by the company?
A. $59.50
B. $60.50
C. $61.50
D. $63.50
For an option on futures, the volatility is 35%, the time step is three months, and the
risk-free rate is 5%. What is the Cox, Ross, Rubinstein parameter, u?
A. 1.34
B. 1.29
C. 1.09
D. 1.19