Which of the following is true for a long position in an option
A. Both gamma and vega are negative
B. Gamma is negative and vega is positive
C. Gamma is positive and vega is negative
D. Both gamma and vega are positive
A portfolio manager in charge of a portfolio worth $10 million is concerned that the
market might decline rapidly during the next six months and would like to use put
options on an index to provide protection against the portfolio falling below $9.5
million. The index is currently standing at 500 and each contract is on 100 times the
index. What should the strike price of options on the index be the portfolio has a beta of
1?
A. 425
B. 450
C. 475
D. 500
Which of the following describes the five-year swap rate?
A. The fixed rate of interest which a swap market maker is prepared to pay in exchange
for LIBOR on a 5-year swap
B. The fixed rate of interest which a swap market maker is prepared to receive in
exchange for LIBOR on a 5-year swap
C. The average of A and B
D. The higher of A and B
The frequency with which futures margin accounts are adjusted for gains and losses is
A. Daily
B. Weekly
C. Monthly
D. Quarterly
When the interest rate is 5% per annum with continuous compounding, which of the
following creates a principal protected note worth $1000?
A. A one-year zero-coupon bond plus a one-year call option worth about $59
B. A one-year zero-coupon bond plus a one-year call option worth about $49
C. A one-year zero-coupon bond plus a one-year call option worth about $39
D. A one-year zero-coupon bond plus a one-year call option worth about $29
A one-year forward contract is an agreement where
A. One side has the right to buy an asset for a certain price in one year’s time.
B. One side has the obligation to buy an asset for a certain price in one year’s time.
C. One side has the obligation to buy an asset for a certain price at some time during the
next year.
D. One side has the obligation to buy an asset for the market price in one year’s time.
The time-to-maturity of a Eurodollars futures contract is 4 years and the
time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard
deviation of the change in the short term interest rate, = 0.011. What does the model
in the text give as the difference between the futures and the forward interest rate.
A. 0.105%
B. 0.103%
C. 0.098%
D. 0.093%
Since the 2008 credit crisis
A. LIBOR has replaced OIS as the discount rate for non-collateralized swaps
B. OIS has replaced LIBOR as the discount rate for non-collateralized swaps
C. LIBOR has replaced OIS as the discount rate for collateralized swaps
D. OIS has replaced LIBOR as the discount rate for collateralized swaps
Which of the following is NOT a reason why a short position in a stock is closed out?
A. The investor with the short position chooses to close out the position
B. The lender of the shares issues instructions to close out the position
C. The broker is no longer able to borrow shares from other clients
D. The investor does not maintain margins required on his/her margin account
A five-year cap is reset annually period. The cap rate is 3% and the notional principal is
$100 million. The 12-month LIBOR interest rate for the third year proves to be 5%.
Which of the following is approximately true?
A. The resulting payoff is $2 million at the beginning of the third year
B. The resulting payoff is $2 million at the end of the fifth year
C. The resulting payoff is $2 million at the end of the third year
D. The resulting payoff is $2 million half way through the third year
What is the recommended way of making interest rates a function of time in a Cox,
Ross, Rubinstein tree?
A. Make u a function of time
B. Make p a function of time
C. Make u and p a function of time
D. Make the lengths of the time steps unequal
Which of the following is true when the tails of a future stock price distribution are
compared with those of a lognormal distribution with the same mean and standard
deviation?
A. The left tail and right tail are thinner
B. The left tail is thinner and the right tail is fatter
C. The right tail is thinner and the left tail is fatter
D. Both tails are fatter
Which of the following could NOT be a delta-neutral portfolio?
A. A long position in call options plus a short position in the underlying stock
B. A short position in call options plus a short position in the underlying stock
C. A long position in put options and a long position in the underlying stock
D. A long position in a put option and a long position in a call option
Which of the following are true of employee stock options?
A. They are commonly valued as though they are regular American options
B. They are commonly valued as though they are regular American options, but with a
reduced life.
C. They are commonly valued as though they are regular European option
D. They are commonly valued as though they are regular European options but with a
reduced life.
Which of the following describes a short position in an option?
A. A position in an option lasting less than one month
B. A position in an option lasting less than three months
C. A position in an option lasting less than six months
D. A position where an option has been sold
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 call option with a strike price of 39 cents?
A. 5.00 cents
B. 2.91 cents
C. 3.00 cents
D. 4.21 cents
In 2008 the three month LIBOR-OIS spread reached a high of
A. 164 basis points
B. 264 basis points
C. 364 basis points
D. 464 basis points
An interest rate is 12% per annum with semiannual compounding. What is the
equivalent rate with quarterly compounding?
A. 11.83%
B. 11.66%
C. 11.77%
D. 11.92%