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 a type of repo rate
Which of the following describes an interest rate swap?
A. The exchange of a fixed rate bond for a floating rate bond
B. A portfolio of forward rate agreements
C. An agreement to exchange interest at a fixed rate for interest at a floating rate
D. All of the above
A company will buy 1000 units of a certain commodity in one year. It decides to hedge
80% of its exposure using futures contracts. The spot price and the futures price are
currently $100 and $90, respectively. The spot price and the futures price in one year
turn out to be $112 and $110, respectively. What is the average price paid for the
commodity?
A. $92
B. $96
C. $102
D. $106
What is the expected growth rate of an index futures price in the risk-neutral world?
A. The excess of the risk-free rate over the dividend yield
B. The risk-free rate
C. The dividend yield on the index
D. Zero
Which of the following is true
A. EWMA is a particular case of GARCH (1,1) where the reversion rate is zero
B. EWMA has a lower reversion rate than GARCH (1,1), but it is not zero
C. EWMA has a higher reversion rate than GARCH (1,1)
D. Sometimes EWMA has a higher reversion rate than GARCH (1,1) and sometimes it
has a lower reversion rate than GARCH (1,1).
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 senior tranche of the ABS CDO
A. 50%
B. 60%
C. 80%
D. 100%
Which of following describes forward rates?
A. Interest rates implied by current zero rates for future periods of time
B. Interest rate earned on an investment that starts today and last for n-years in the
future without coupons
C. The coupon rate that causes a bond price to equal its par (or principal) value
D. A single discount rate that gives the value of a bond equal to its market price when
applied to all cash flows
When a CEO has employee stock options, he or she is in theory motivated to do which
of the following?
A. Take more risk
B. Take less risk
C. Buy some of the company’s stock
D. None of the above
A European option on a stock with a known dollar dividend is valued by setting the
stock price variable equal to the stock price minus the present value of the dividend in
the Black-Scholes-Merton formula. A second price can be obtained using the tree
building procedure in the chapter. Which of the following is true when a very large
number of time steps are used in the tree?
A. The first price is higher than the second price
B. The first price is lower than the second price
C. The first price is sometimes higher and sometimes lower than the second price
D. The two prices are almost exactly the same
One-year European call and put options on an asset are worth $3 and $4 respectively
when the strike price is $20 and the one-year risk-free rate is 5%. What is the one-year
futures price of the asset if there are no arbitrage opportunities? (Use put-call parity.)
A. $19.55
B. $18.95
C. $20.95
D. $20.45
A semi-annual pay interest rate swap where the fixed rate is 5.00% (with semi-annual
compounding) has a remaining life of nine months. The six-month LIBOR rate
observed three months ago was 4.85% with semi-annual compounding. Today’s three
and nine month LIBOR rates are 5.3% and 5.8% (continuously compounded)
respectively. From this it can be calculated that the forward LIBOR rate for the period
between three- and nine-months is 6.14% with semi-annual compounding. If the swap
has a principal value of $15,000,000, what is closest to the value of the swap to the
party receiving a fixed rate of interest?
A. $74,250
B. -$70,760
C. -$11,250
D. $103,790
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
Which of following is applicable to corporate bonds in the United States?
A. Actual/360
B. Actual/Actual
C. 30/360
D. Actual/365
How many nodes are there at the end of a Cox-Ross-Rubinstein five-step binomial tree?
A. 4
B. 5
C. 6
D. 7
Which of the following is true
A. Recovery rates are lower for investment grade companies
B. Recovery rates are higher for non-investment grade companies
C. Recovery rates are negatively correlated with default rates
D. Recovery rates are positively correlated with default rates
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