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
Which of the following is true?
A. When interest rates in the economy increase, all bond prices increase
B. As its coupon increases, a bond€s price decreases
C. Longer maturity bonds are always worth more that shorter maturity bonds when the
coupon rates are the same
D. None of the above
Which of the following is NOT a theory of the term structure
A. Expectations theory
B. Market segmentation theory
C. Liquidity preference theory
D. Maturity preference theory
Which of the following is NOT true? (Present values are calculated from the end of the
life of the option to the beginning.)
A. An American put option is always worth less than the present value of the strike
price
B. A European put option is always worth less than the present value of the strike price
C. A European call option is always worth less than the stock price
D. An American call option is always worth less than the stock price
Which of the following is an example of an option series?
A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. All calls with a particular time to maturity on a certain stock
D. All calls with a particular time to maturity and strike price on a certain stock
If the volatility of a non-dividend-paying stock is 20% per annum and a risk-free rate is
5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter
p for a tree with a three-month time step?
A. 0.50
B. 0.54
C. 0.58
D. 0.62
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
The frequency with which futures margin accounts are adjusted for gains and losses is
A. Daily
B. Weekly
C. Monthly
D. Quarterly
Which of the following are NOT true
A. Risk-neutral valuation and no-arbitrage arguments give the same option prices
B. Risk-neutral valuation involves assuming that the expected return is the risk-free rate
and then discounting expected payoffs at the risk-free rate
C. A hedge set up to value an option does not need to be changed
D. All of the above
Which of the following is true about daily exchange rate moves?
A. Four standard deviation daily moves in an exchange rate happen less frequently than
they would do if changes were normally distributed
B. Four standard deviation daily movements in an exchange rate happen more
frequently than three standard deviation moves in the exchange rate
C. The frequency of six standard deviation daily movements in an exchange rate is
about once every 100 years
D. None of the above
When an employee stock option is exercised, which of the following is usually true?
A. The employee pays the market price for the shares and the company refunds the
difference between the market price and the strike price
B. The company or the company’s agent buys stock in the market for the employee
C. The company issues more shares and sells them to the employee for the strike price
D. The employee cannot immediately sell the shares
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 is true as the correlation between mortgage defaults increases?
A. Equity tranches are almost certain to incur losses
B. Senior tranches become more likely to incur losses
C. The expected number of defaults increases
D. Equity tranches are unaffected
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%
A volatility surface is a table showing the relationship between which of the following
A. Implied volatility, time to maturity, and strike price
B. Implied volatility, historical volatility, and time to maturity
C. Historical volatility, strike price, and time to maturity
D. None of the above
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
What does rho 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