On a certain day the highest temperature is 77 degrees and the lowest temperature is 61
degrees. What is the day’s CDD?
A. 5
B. 12
C. 4
D. 0
For what range of losses is the equity tranche of iTraxx (or CDX NA IG) responsible?
A. 0 to 10%
B. 0 to 7%
C. 0 to 6%
D. 0 to 3%
A binary option pays of $100 if a non-dividend-paying stock price is greater than its
current value in three months. The risk-free rate is 3% and the volatility is 40%. Which
of the following is its value?
A. 99.25N(-0.1375)
B. 99.25N(0.1375)
C. 99.25N(-0.0625)
D. 99.25N(0.0625)
Vega 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 short time to maturity
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 out on March 1, 2013. What gain is recognized in the accounting year January 1
to December 31, 2013? Each contract is on 1000 units of the commodity.
A. $0
B. $1,000
C. $3,000
D. $4,000
Which of the following is a five-year interest rate swap that can be canceled at the two
year point?
A. The difference between two plain vanilla interest rate swaps
B. The difference between a plain vanilla interest rate swap and a forward start swap
C. A regular interest rate swap plus a European swap option
D. A regular interest rate swap plus a Bermudan swap option
Which of the following describes how American options can be valued using a binomial
tree?
A. Check whether early exercise is optimal at all nodes where the option is
in-the-money
B. Check whether early exercise is optimal at the final nodes
C. Check whether early exercise is optimal at the penultimate nodes and the final nodes
D. None of the above
A company knows it will have to pay a certain amount of a foreign currency to one of
its suppliers in the future. Which of the following is true
A. A forward contract can be used to lock in the exchange rate
B. A forward contract will always give a better outcome than an option
C. An option will always give a better outcome than a forward contract
D. An option can be used to lock in the exchange rate
Which of the following ensures that managers are rewarded only when a company
performs better than its competitors?
A. A constant strike price for executive stock options
B. A strike price that increases with time
C. A strike price that changes in line with an index of stock prices
D. A strike price that is tied to reported profit
Which of the following best describes a total return swap?
A. It exchanges the realized return on an asset, including both income and capital
gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset
B. It exchanges the promised return on an asset, including both income and capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
C. It exchanges the realized return on an asset, including income but not capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
D. It exchanges the promised return on an asset, including income but not capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
A trader creates a long butterfly spread from options with strike prices $60, $65, and
$70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is
the maximum net loss (after the cost of the options is taken into account)?
A. $100
B. $200
C. $300
D. $400
The 10-day VaR is often assumed to be which of the following
A. The 1-day VaR multiplied by 10
B. The 1-day VaR multiplied by the square root of10
C. The 1-day VaR divided by 10
D. The 1-day VaR divided by the square root of 10
Which of the following is NOT true?
A. Management has an incentive to issue executive stock options after bad news
B. Management has an incentive to issue executive stock options before good news
C. Executive stock options encourage management to pursue strategies that are best for
the company in the long run
D. Management have an incentive to time the announcement of good news just before
they plan to exercise their stock options
Which of the following is assumed by the Black-Scholes-Merton model?
A. The return from the stock in a short period of time is lognormal
B. The stock price at a future time is lognormal
C. The stock price at a future time is normal
D. None of the above
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 trader’s net profit or loss is
A. Loss of $1,000
B. Loss of $2,000
C. Gain of $200
D. Gain of $1000
In the Lehman bankruptcy the payoff to people who had bought CDS protection was
91.375% of the notional principal. How was this determined?
A. By calculation of the cheapest-to-deliver bond
B. By an auction process
C. By a calculation agent
D. By Lehman’s liquidators
Which of the following describes a typical reinsurance contract?
A. Covers a percentage of all losses by an insurance company
B. Covers all losses of the insurance company up to a certain amount
C. Covers all losses of the insurance company above a certain amount
D. Covers all losses of the insurance company between two amounts
Which of the following is NOT true about gamma?
A. A highly positive or highly negative value of gamma indicates that a portfolio needs
frequent rebalancing to stay delta neutral
B. The magnitude of gamma is a measure of the curvature of the portfolio value as a
function of the underlying asset price
C. A big positive value for gamma indicates that a big movement in the asset price in
either direction will lead to a loss
D. A long position in either a call or a put has a positive gamma
Which of the following is the most popular life for a credit default swap?
A. 1 year
B. 3 years
C. 5 years
D. 10 years