Suppose that ABSs are created from portfolios of subprime mortgages with the
following allocation of the principal to tranches: senior 85%, mezzanine 10%, and
equity 5%. (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.
How high can losses on the mortgages be before the senior tranche of the ABS CDO
bears losses?
A. 5.5%
B. 6.0%
C. 6.5%
D. 7.0%
How can a strangle trading strategy be created?
A. Buy one call and one put with the same strike price and same expiration date
B. Buy one call and one put with different strike prices and same expiration date
C. Buy one call and two puts with the same strike price and expiration date
D. Buy two calls and one put with the same strike price and expiration date
The time-to-maturity of a Eurodollar 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
estimate as the difference between the futures and the forward interest rate?
A. 0.105%
B. 0.103%
C. 0.098%
D. 0.093%
What does vega 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
What is the cash settlement if a put futures option on 50 units of the underlying asset is
exercised?
A. (Current Futures Price – Strike Price) times 50
B. (Strike Price – Current Futures Price) times 50
C. (Most Recent Futures Settlement Price – Strike Price) times 50
D. (Strike Price – Most Recent Futures Settlement Price) times 50
A binomial tree prices an American option at $3.12 and the corresponding European
option at $3.04. The Black-Scholes-Merton price of the European option is $2.98. What
is the control variate price of the American option?
A. $3.06
B. $3.18
C. $2.90
D. $3.08
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 European call and a European put on a stock have the same strike price and time to
maturity. At 10:00am on a certain day, the price of the call is $3 and the price of the put
is $4. At 10:01am news reaches the market that has no effect on the stock price or
interest rates, but increases volatilities. As a result the price of the call changes to $4.50.
Which of the following is correct?
A. The put price increases to $6.00
B. The put price decreases to $2.00
C. The put price increases to $5.50
D. It is possible that there is no effect on the put price
Which of the following is true?
A. The implicit finite difference method is equivalent to using a trinomial tree
B. The explicit finite difference method is equivalent to using a trinomial tree
C. Both methods are equivalent to using a trinomial tree
D. Neither method is equivalent to using a trinomial tree
When the stock price increases with all else remaining the same, which of the following
is true?
A. Both calls and puts increase in value
B. Both calls and puts decrease in value
C. Calls increase in value while puts decrease in value
D. Puts increase in value while calls decrease in value
Which of the following defines the vesting period?
A. The period during which employee stock options can be exercised
B. The period during which the options are issued
C. The period during which the strike price of the options equals the stock price
D. The period during which employee stock options cannot be exercised
The price of a European call option on a stock with a strike price of $50 is $6. The stock
price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the
time to maturity is one year. A dividend of $1 is expected in six months. What is the
price of a one-year European put option on the stock with a strike price of $50?
A. $8.97
B. $6.97
C. $3.06
D. $1.12
Which of the following best describes the capital asset pricing model?
A. Determines the amount of capital that is needed in particular situations
B. Is used to determine the price of futures contracts
C. Relates the return on an asset to the return on a stock index
D. Is used to determine the volatility of a stock index
What does the shape of the volatility smile reveal about put options on equity?
A. Options close-to-the-money have the lowest implied volatility
B. Options deep-in-the-money have a relatively high implied volatility
C. Options deep-out-of-the-money have a relatively high implied volatility
D. All of the above
The process followed by a variable X is
dX = mX dt+sX dz
What is the coefficient of dz in the process for the square of X.
A. sX
B. sX2
C. 2sX2
D. msX
A stock price is currently $23. A reverse (i.e short) butterfly spread is created from
options with strike prices of $20, $25, and $30. Which of the following is true?
A. The gain when the stock price is greater than $30 is less than the gain when the stock
price is less than $20
B. The gain when the stock price is greater than $30 is greater than the gain when the
stock price is less than $20
C. The gain when the stock price is greater than $30 is the same as the gain when the
stock price is less than $20
D. It is incorrect to assume that there is always a gain when the stock price is greater
than $30 or less than $20
Which of the following is the most popular life for a credit default swap?
A. 1 year
B. 3 years
C. 5 years
D. 10 years
Who initiates delivery in a corn futures contract
A. The party with the long position
B. The party with the short position
C. Either party
D. The exchange