1) In a shout call option the strike price is $30. The holder shouts when the asset price is
$40. What is the payoff from the option if the final asset price is $35? (Circle one)
a. $0
b. $5
c. $10
d. $15
2) In the corn futures contract a number of different types of corn can be delivered (with
price adjustments specified by the exchange) and there are a number of different
delivery locations. Which of the following is true? Circle one.
a. This flexibility tends increase the futures price
b. This flexibility tends decrease the futures price
c. This flexibility may increase and may decrease the futures price
d. This has no effect on the futures price
3) Which of the following would be referred to as an equity swap (Circle one)
a. An exchange of the return from an equity index for a fixed rate of interest
b. An exchange of a long position in one stock for a long position in another stock
c. An exchange of a short position in one stock for a short position in another stock
d. None of the above
4) The risk-free rate is 5% and the expected return on a stock is 12%. A derivative can
be valued by (circle one)
a. Assuming that the expected growth rate for the stock price is 13% and discounting
the expected payoff at 12%
b. Assuming that the expected growth rate for the stock price is 5% and discounting the
expected payoff at 12%
c. Assuming that the expected growth rate for the stock price is 5% and discounting the
expected payoff at 5%
d. Assuming that the expected growth rate for the stock price is 13% and discounting
the expected payoff at 5%
5) When a call futures is exercised, the holder of the call acquires (circle one)
a. A long position in the futures contract
b. A short position in the futures contract
c. A long position in the underlying asset
d. None of the above
6) An Asian option is a term used to describe (Circle one):
a. An option where the payoff depends on whether a barrier is hit
b. An option where the payoff depends on the average value of a variable over a period
of time
c. An option that trades on an exchange in the Far East
d. An option with a nonstandard payoff
7) Which of the following happens when default correlation of the companies
underlying a CDO increases (Circle one)
a. The value of the senior tranche and the equity tranche to the protection buyer both
increase
b. The value of the senior tranche and the equity tranche to the protection buyer both
decrease
c. The value of the senior tranche to the protection buyer decreases and the value of the
equity tranche to the protection buyer increases
d. The value of the senior tranche to the protection buyer increases and the value of the
equity tranche to the protection buyer decreases
8) Which of the following would tend to lead to an increase in house prices (Circle two)
a. A reduction in interest rates
b. Regulators specifying a maximum level for the loan-to-value ratio on mortgages
c. Banks reducing the minimum FICO that borrowers are required to have
d. An increase in foreclosures
9) Suppose that the standard deviation of monthly changes in the price of commodity A
is $2. The standard deviation of monthly changes in a futures price for a contract on
commodity B (which is similar to commodity A) is $3. The correlation between the
futures price and the commodity price is 0.9. What hedge ratio should be used when
hedging a one month exposure to the price of commodity A?
10) a) A banks assets and liabilities both have a duration of 5 years. Is the bank hedged
against interest rate movements? Explain carefully any limitations of the hedging
scheme it has chosen.
b) Explain what is meant by basis risk in the situation where a company knows it will
be purchasing a certain asset in two months and uses a three-month futures contract to
hedge its risk.
11) A company can invest funds for five years at LIBOR minus 30 basis points. The
five-year swap rate is 3%. What fixed rate of interest can the company earn? Ignore day
count issues
12) On March 1 the price of oil is $60 and the July futures price is $59. On June 1 the
price of oil is $64 and the July futures price is $63.50. A company entered into a futures
contracts on March 1 to hedge the purchase of oil on June 1 . It closed out its position
on June 1 . After taking account of the cost of hedging, what is the effective price paid
by the company for the oil?
13) The gain from a one-year project is uniformly distributed between $2 million and +
$8 million.
i. What is the one-year 99% value at risk
ii. What is the one-year 99% expected shortfall
14) A company is liable to default at two times. The probability of default at each time
is 0.01. The value of a derivative that pays off the exposure at the first time is $3
million and the value of a derivative that pays off the exposure at the second time is $5
million. The recovery rate is 40%. What is the CVA (1.e., expected loss from defaults)?
15) A trader sells 100 European put options (i.e., one contract) with a strike price of $50
and a time to maturity of six months. The price received for each option is $4. The price
of the underlying asset is $41 in six months. What is the traders gain or loss? Show a
dollar amount and indicate whether it is a gain or a loss.
16) Indicate whether the tails mentioned below are fatter or thinner than the tails for a
lognormal distribution based on the at-the-money volatility.
i. Left tail of foreign currency implied distribution
ii. Right tail of foreign currency implied distribution
iii. Left tail of stock index implied distribution
iv. Right tail of stock index implied distribution
17) What is the answer to question 4 if the option is American?
18) A hedger takes a long position in an oil futures contract on November 1, 2009 to
hedge an exposure on March 1, 2010 . The initial futures price is $60. On December 31,
1999 the futures price is $61. On March 1, 2010 it is $64. The contract is closed out on
March 1, 2010 . What gain is recognized in the accounting year January 1 to December
31, 2010? Each contract is on 1000 barrels of oil.
19) Suppose that the cumulative default probability for a company for years one, two,
three and four are 3%, 6.5%, 10%, and 14.5%.
i. What is the unconditional default probability for year four
ii. What is the default probability for year four conditional on no default in earlier years
20) The one-year Canadian dollar forward exchange rate is quoted as 1.0500. What the
corresponding futures quote? Give four decimal places