1) Which of the following is true (circle one)
a. Principals are not usually exchanged in a currency swap
b. The principal amounts usually flow in the opposite direction to interest payments at
the beginning of a currency swap and in the same direction as interest payments at the
end of the swap
c. The principal amounts usually flow in the same direction as interest payments at the
beginning of a currency swap and in the opposite direction to interest payments at the
end of the swap
d. Principals are not usually specified in a currency swap
2) The recovery rate of a bond is normally defined as (Circle one)
a. The value of the bond immediately after default as a percent of its face value
b. The value of the bond immediately after default as a percent of the sum of the bonds
face value and accrued interest
c. The amount finally realized by a bondholder as a percent of face value
d. The amount finally realized by a bondholder as a percent of the sum of the bonds
face value and accrued interest
3) The VIX index measures (circle one)
a. Implied volatilities for stock options trading on the CBOE
b. Historical volatilities for stock options trading on CBOE
c. Implied volatilities for options trading on the S&P 500 index
d. Historical volatilities for options trading on the S&P 500 index
4) In a one-year forward contract on a CDS that will last five years, what happens if
there is a default during the first year? (Circle one)
a. There is a payoff to the forward protection buyer at the time of default
b. There is a payoff to the forward protection buyer at the end of one year
c. There is a payoff to the forward protection buyer at the end of six years
d. The contract ceases to exist
5) Which of the following is true (circle one)
a. The volatility skew for equities is much more pronounced now than it was in 1985
b. The volatility skew for equities was much more pronounced in 1985 than it is now
c. The volatility skew for equities is consistent with the BlackScholes model
d. The volatility skew for equities is similar to that for foreign currencies
6) Which two of the following are true when futures prices exceed spot prices (circle
two)
a. American call options on futures are worth more than the corresponding American
call option on spot
b. American call options on futures are worth less than the corresponding American call
option on spot
c. American put options on futures are worth more than the corresponding American
call option on spot
d. American put options on futures are worth less than the corresponding American call
option on spot
7) Which of the following is true (circle one)
a. The convenience yield is always positive or zero
b. The convenience yield is always positive for an investment asset
c. The convenience yield is always negative for a consumption asset
d. The convenience yield measures the average return earned by holding futures
contracts
8) In the Gaussian copula model which of the following is true
a. The time to default for a company is assumed to be normally distributed
b. The time to default for a company is assumed to be lognormally distributed
c. The time to default for a company is transformed to a normal distribution
d. The time to default for a company is transformed to a lognormal distribution
9) American options can be valued using a binomial tree by (circle one)
a. Checking whether early exercise is optimal at all nodes where the option is
in-the-money
b. Checking whether early exercise is optimal at the final nodes
c. Checking whether early exercise is optimal at the penultimate nodes and the final
nodes
d. Increasing the number of time steps on the tree
10) Consider an employee stock option on a company that does not pay dividends.
When the most common valuation method is used what is likely to happen to the value
calculated for the option when the vesting period is increased (Circle one)
a. The value stays the same
b. The value stays the same or increases
c. The value stays the same or decreases
d. The value can increase, stay the same, or decrease depending on the circumstances
11) Which of the following is not true (Circle one)
a. The bonus structure at banks is liable to lead to short term horizons for decision
making
b. A portfolio of BBB tranches created from mortgages has a loss probability
distribution similar to a portfolio of BBB bonds
c. The term agency costs describes the situation where the incentives of two parties in a
business relationship are not perfectly aligned
d. Correlations tend to increase in stressed market conditions
12) In a Cox-Ross-Rubinstein binomial tree the formula for the proportional
up-movement, u, is with the books notation, (circle one)
a.
b.
c.
d.
13) The put call parity formula for options on a currency is the same as that for options
on a non-dividend-paying stock except that
a. S0 is replaced by S0eqT
b. S0 is replaced by S0erT
c. S0 is replaced by S0eqT
d. S0 is replaced by S0erT
14) A floating lookback put option pays off (Circle one)
a. The amount by which the final stock price exceeds the minimum stock price
b. The amount by which the maximum stock price exceeds the final stock price
b. The amount by which the strike price exceeds the minimum stock price
c. The amount by which the maximum stock price exceeds the strike price
15) Consider a position in a single option on a stock. The position has a delta 12 . The
stock price is 10 . What is an approximate relationship between the change in the
portfolio value in one day, , and the return on the stock in one day, (circle one)
a.
b.
c.
d.
16) Which of the following is not true (circle one)
a. Blacks model can be used to value an American-style option on futures
b. Blacks model can be used to value a European-style option on futures
c. Blacks model can be used to value a European-style option on spot
d. Blacks model is widely used by practitioners
17) The quoted futures price is 103.5. Which of the following four bonds is cheapest to
deliver (circle one)
a. Quoted price = 110; conversion factor = 1.0400
b. Quoted price = 160; conversion factor = 1.5200
c. Quoted price =131; conversion factor = 1.2500
d. Quoted price = 143; conversion factor = 1.3500
18) 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 options
on the S&P 100 to provide protection against the portfolio falling below$9.5 million.
The S&P 100 index is currently standing at 500 and each contract is on 100 times the
index.
i. If the portfolio has a beta of 1, how many put option contracts should be purchased?
ii. If the portfolio has a beta of 1, what should the strike price of the put options be?
iii. If the portfolio has a beta of 0.5, how many put options should be purchased?
iv. If the portfolio has a beta of 0.5, what should the strike prices of the put options be?
Assume that the risk-free rate is 10% and the dividend yield on both the portfolio and
the index is 2%.
19) Which of the following cannot be calculated directly from a binomial tree (Circle
two)
a. vega
b. delta
c. rho
d. gamma
e. theta
20) The price of a stock is $36 and the price of a three-month call option on the stock
with a strike price of $36 is $3.60. Suppose a trader has $3,600 to invest and is trying to
choose between buying 1,000 options and 100 shares of stock. How high does the stock
price have to rise for an investment in options to lead to the same profit as an
investment in the stock?
21) An interest rate is 15% per annum when expressed with annual compounding. What
is the equivalent rate with continuous compounding? Answer as a percent with two
decimal place accuracy
22) A trader writes two naked put option contracts. The option price is $3, the strike
price is $ 40 and the stock price is $4 What is the initial margin?
23) A trader enters into a one-year short forward contract to sell an asset for $60 when
the spot price is $58. The spot price in one year proves to be $6 What is the traders gain
or loss? Show a dollar amount and indicate whether it is a gain or a loss.
24) A European call option on a certain stock has a strike price of $30, a time to
maturity of one year and an implied volatility of 30%. A put option on the same stock
has a strike price of $30, a time to maturity of one year and an implied volatility of
33%. What is the arbitrage opportunity open to a trader. Does the opportunity work only
when the lognormal assumption underlying Black-Scholes holds. Explain the reasons
for your answer carefully.