Which of the following describes the way the forward price of a foreign currency is
quoted?
A. The number of U.S. dollars per unit of the foreign currency
B. The number of the foreign currency per U.S. dollar
C. Some forward prices are quoted as the number of U.S. dollars per unit of the foreign
currency and some are quoted the other way round
D. There are no quotation conventions for forward prices
Which of the following is true when a bank uses OIS discounting for valuing a
LIBOR-for-fixed swap
A. The LIBOR/swap zero curve is calculated before the OIS zero curve
B. The OIS zero curve is calculated before the LIBOR/swap zero curve
C. The swap is valued using OIS forward rates and OIS discounting
D. The forward rates are calculated from the bank’s borrowing costs
Which of the following describes how American options can be valued using a binomial
tree?
A. Check whether early exercise is optimal at all nodes where the option is
in-the-money
B. Check whether early exercise is optimal at the final nodes
C. Check whether early exercise is optimal at the penultimate nodes and the final nodes
D. None of the above
What is the difference between valuing an American and a European option using a
tree?
A. The value of u is higher for American options
B. The value of u is lower for American options
C. The time steps for American options are not equal
D. It is necessary to do two calculations at nodes where the option is in the money
An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest
rates are 5% and 7% (both expressed with continuous compounding). What is the
six-month forward rate?
A. 0.7070
B. 0.7177
C. 0.7249
D. 0.6930
Which of the following is true?
A. A stock option is settled daily
B. A futures-style option is settled daily
C. A foreign currency option is settled daily
D. None of the above
A trader enters into a long position in one Eurodollar futures contract. How much does
the trader gain when the futures price quote increases by 6 basis points?
A. $6
B. $150
C. $60
D. $600
In a fully collateralized transaction which of the following leads to a pricing adjustment
A. The rate paid on cash collateral is the fed funds rate
B. The rate paid on cash collateral is greater than the fed funds rate
C. The rate paid on cash collateral is less than the fed funds rate
D. Both B and C
How many parameters are necessary to define an EWMA model
A. 1
B. 2
C. 3
D. 4
Which of the following describes a difference between a warrant and an
exchange-traded stock option?
A. In a warrant issue, someone has guaranteed the performance of the option seller in
the event that the option is exercised
B. The number of warrants is fixed whereas the number of exchange-traded options in
existence depends on trading
C. Exchange-traded stock options have a strike price
D. Warrants cannot be traded after they have been purchased
Which of the following could NOT be a delta-neutral portfolio?
A. A long position in call options plus a short position in the underlying stock
B. A short position in call options plus a short position in the underlying stock
C. A long position in put options and a long position in the underlying stock
D. A long position in a put option and a long position in a call option
It is assumed that a company can default after one year or after two years. The
probability of default at each time is 1.5%. The present value of the expected loss to a
bank on a derivatives portfolio if the company defaults after one year is estimated to be
$1 million. The present value of the expected loss if it defaults after two years is
estimated to be $2 million. Which of the following is the bank’s CVA ?
A. $3,000,000
B. $300,000
C. $45,000
D. $150,000
Which of the following describes the way that the parameters in a binomial tree are
chosen?
A. The expected return during each time step is the risk-free rate
B. The standard deviation of the return in each time step is, for small time steps, almost
exactly equal to the volatility per annum times the square root of the length of the time
step in years
C. The tree recombines
D. All of the above
What is the same as 100 call options to buy one unit of currency A with currency B at a
strike price of 1.25?
A. 100 call options to buy one unit of currency B with currency A at a strike price of 0.8
B. 125 call options to buy one unit of currency B with currency A at a strike price of 0.8
C. 100 put options to sell one unit of currency B for currency A at a strike price of 0.8
D. 125 put options to sell one unit of currency B for currency A at a strike price of 0.8
Which of the following is NOT true about forward and futures contracts?
A. Forward contracts are more liquid than futures contracts
B. The futures contracts are traded on exchanges while forward contracts are traded in
the over-the-counter market
C. In theory forward prices and futures prices are equal when there is no uncertainty
about future interest rates
D. Taxes and transaction costs can lead to forward and futures prices being different
A floating for floating currency swap is equivalent to
A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D. None of the above
Suppose that the domestic risk free rate is r and dividend yield on an index is q. How
should the put-call parity formula for options on a non-dividend-paying stock be
changed to provide a put-call parity formula for options on a stock index? Assume the
options last T years.
A. The stock price is replaced by the value of the index multiplied by exp(qT)
B. The stock price is replaced by the value of the index multiplied by exp(rT)
C. The stock price is replaced by the value of the index multiplied by exp(-qT)
D. The stock price is replaced by the value of the index multiplied by exp(-rT)
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
An investor has earned 2%, 12% and -10% on equity investments in successive years
(annually compounded). This is equivalent to earning which of the following annually
compounded rates for the three year period.
A. 1.33%
B. 1.23%
C. 1.13%
D. 0.93%