1) For equities it is usually assumed that the number of trading days in the year is
a. 365
b. 252
c. 262
d. 272
2) In a LIBOR-in-arrears swap the following is true (Circle one)
a. The floating payment made on a date is the LIBOR rate on the previous payment date
b. The floating payment on a date is the LIBOR rate two payment dates ago
c. The floating payment on a date is the LIBOR rate on that date
d. The floating payment on a date is the LIBOR rate on that date only when it is higher
than the LIBOR rate on the previous payment date
3) In the Black-Scholes-Merton option pricing formula N(d1) denotes (circle one)
a. The area under a normal distribution from zero to d1
b. The area under a normal distribution up to d1
c. The area under a normal distribution beyond d1
d. The area under the normal distribution between -d1 and d1
4) Which of the following is true (Circle one)
a. Netting always leads to a reduction in a companys exposure to a counterparty
b. Netting always leads to a companys exposure to a counterparty either staying the
same or reducing
c. Netting always increases a companys exposure to a counterparty
d. Netting can increase or reduce the exposure
5) When a mortgage is non-recourse (Circle one)
a. The house buyer can lose all possessions if he or she is unable to make payments
b. The purchaser has a free American style put option on the house
c. The purchaser has a free European style put option on the house
d. The lender is less likely to lose money on the mortgage
6) Which of the following is not true? Circle one.
a. Futures contracts nearly always last longer than forward contracts
b. Futures contracts are standardized; forward contracts are not
c. Delivery or final cash settlement usually takes place with forward contracts; the same
is not true of futures contracts
d. Forward contract usually have one specified delivery date; futures contract often
have a range of delivery dates
7) When a put futures is exercised, the holder of the put 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
8) A bank has sold a product that offers investors the total return (excluding dividends)
on the Toronto 300 index over a one year period. The return is capped at 20%. If the
index goes down the original investment of the investor is returned.
a) What option position is equivalent to the product
b) Write down the formulas you would use to value the product and explain in detail
how you would decide whether it is a good deal to the investor
9) In a Cox-Ross-Rubinstein binomial tree the relationship between the proportional
down-movement, d, and the proportional up-movement, u, is (circle one)
a. d = u 1
b. d = 1/u
c. d=2u
d. None of the above
10) Under liquidity preference theory, which of the following is always true (circle one)
a. The forward rate is higher than the spot rate when both have the same maturity
b. Forward rates are unbiased predictors of expected future spot rates
c. The spot rate for a certain maturity is higher than the par yield for that maturity
d. Forward rates are higher than expected future spot rates
11) The term structure is flat at 5% per annum with continuous compounding. Some
time ago a financial institution entered into a 5-year swap with a principal of $100
million in which every year it pays 12-month LIBOR and receives 6%. The swap now
has two years eight months to run. Four months ago 12-month LIBOR was 4% (with
annual compounding). What is the value of the swap today? What is the financial
institutions credit exposure on the swap?
12) A bond portfolio worth 5 million has a modified duration of 6 years and the yield
curve is flat at 7%. Assume only parallel shifts in rates can happen. What is the standard
deviation of the change in the value of the bond portfolio in one day if the standard
deviation of the change in interest rates in one day is 0.1%?
13) The spot price of an investment asset that provides no income is $30 and the
risk-free rate for all maturities (with continuous compounding) is 10%. What, to the
nearest cent, is the three-year forward price?
14) List three types of traders in futures, forward, and options markets
15) A variable, x, starts at 10 and follows a generalized Wiener process
dx=a dt+b dz
During the first two years a = 4 and b = 3 . During the following three years a = 6 and b
= 4
(i) What is the mean value of the variable at the end of the five years?
(ii) What is the standard deviation of the variable at the end of the five years?
16) A stock price has a expected return of 12% per annum and a volatility of 25% per
annum. Currently the stock price is $40. Assume 252 days per year.
(i) What is the standard deviation of the stock price at the end of one day?
(ii) What is the width of the 95% confidence interval for the stock price at the end of
one day?
17) An interest rate is 12% when expressed with quarterly compounding. What is the
equivalent rate with semiannual compounding? Answer as a percent with two decimal
place accuracy
18) The yield curve is flat at 6% per annum with semiannual compounding. What (to
the nearest cent) is the value of an FRA where the holder receives interest at the rate of
8% per annum for a six-month period on a principal of $1,000 starting in two years?
19) A trader uses a stoploss strategy to hedge a short position in a three-month call
option with a strike price of 0.7000 on an exchange rate. The trader covers the option
when the exchange rate is 0.7005 and assumes a naked position when the exchange rate
is 0.6995. The value of the option is 0.1. Estimate the expected number of times the
trader covers the position during the life of the option