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 of the ABSs 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 mezzanine tranche of the ABS CDO
A. 50%
B. 60%
C. 80%
D. 100%
Which of the following describes a situation where an American put option on a stock
becomes more likely to be exercised early?
A. Expected dividends increase
B. Interest rates decrease
C. The stock price volatility decreases
D. All of the above
Which of the following creates a bull spread?
A. Buy a low strike price call and sell a high strike price call
B. Buy a high strike price call and sell a low strike price call
C. Buy a low strike price call and sell a high strike price put
D. Buy a low strike price put and sell a high strike price call
A variable x starts at 10 and follows the generalized Wiener process
dx = a dt + b dz
where time is measured in years. If a = 2 and =3 what is the expected value after 3
years?
A. 12
B. 14
C. 16
D. 18
Which of the following is a reason for hedging a portfolio with an index futures?
A. The investor believes the stocks in the portfolio will perform better than the market
but is uncertain about the future performance of the market
B. The investor believes the stocks in the portfolio will perform better than the market
and the market is expected to do well
C. The portfolio is not well diversified and so its return is uncertain
D. All of the above
Which was the minimum capital requirement for market risk in the 1996 BIS
Amendment?
A. At least 3 times the 10-day VaR with a 99% confidence level
B. At least 3 times 7-day VaR with a 97% confidence level
C. At least 2 times 5-day VaR with a 95% confidence level
D. 1-day VaR with a 99% confidence level
Which of the following is true
A. Netting always leads to a reduction in a company’s exposure to a counterparty
B. Netting always leads to a company’s exposure to a counterparty either staying the
same or going down
C. Netting always increases a company’s exposure to a counterparty
D. Netting can increase or reduce the exposure
One futures contract is traded where both the long and short parties are closing out
existing positions. What is the resultant change in the open interest?
A. No change
B. Decrease by one
C. Decrease by two
D. Increase by one
Which of the following is true when the futures price exceeds the spot price?
A. Calls on futures should never be exercised early
B. Put on futures should never be exercised early
C. A call on futures is always worth at least as much as the corresponding call on spot
D. A call on spot is always worth at least as much as the corresponding call on futures
The price of a stock on February 1 is $48. A trader sells 200 put options on the stock
with a strike price of $40 when the option price is $2. The options are exercised when
the stock price is $39. The trader€s net profit or loss is
A. Loss of $800
B. Loss of $200
C. Gain of $200
D. Loss of $900
Which of the following was true about employee stock options between 1996 and
2004?
A. The options never had any affect on a company’s financial statements
B. The value of options which were at-the-money when issued had to be expensed on
the income statement
C. The value of options which were at-the-money when issued had to be reported in the
notes to the financial statements
D. Options which were at-the-money when issued did not affect a company’s financial
statements
In a principal components analysis which of the following is the quantity of a particular
factor in an observation
A. Factor loading
B. Factor score
C. Factor size
D. Factor rating
A company due to pay a certain amount of a foreign currency in the future decides to
hedge with futures contracts. Which of the following best describes the advantage of
hedging?
A. It leads to a better exchange rate being paid
B. It leads to a more predictable exchange rate being paid
C. It caps the exchange rate that will be paid
D. It provides a floor for the exchange rate that will be paid
Which of the following does NOT describe beta?
A. A measure of the sensitivity of the return on an asset to the return on an index
B. The slope of the best fit line when the return on an asset is regressed against the
return on the market
C. The hedge ratio necessary to remove market risk from a portfolio
D. Measures correlation between futures prices and spot prices for a commodity