A speculator takes a long position in a futures contract on a commodity on November 1,
2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On
December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is
closed out on March 1, 2013. What gain is recognized in the accounting year January 1
to December 31, 2013? Each contract is on 1000 units of the commodity.
A. $0
B. $1,000
C. $3,000
D. $4,000
Which of the following is NOT true about call and put options:
A. An American option can be exercised at any time during its life
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
Which of the following is true for a one-year call option on a stock that pays dividends
every three months?
A. It is never optimal to exercise the option early
B. It can be optimal to exercise the option at any time
C. It is only ever optimal to exercise the option immediately after an ex-dividend date
D. None of the above
Which of the following is true about a long forward contract
A. The contract becomes more valuable as the price of the asset declines
B. The contract becomes more valuable as the price of the asset rises
C. The contract is worth zero if the price of the asset declines after the contract has been
entered into
D. The contract is worth zero if the price of the asset rises after the contract has been
entered into
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 mezzanine tranche of the ABD
CDO bears losses?
A. 5.0%
B. 5.5%
C. 6.0%
D. 6.5%
Which of the following is true of a synthetic CDO?
A. It is created from portfolios of bonds
B. It is created from portfolios of CDSs
C. It references a standard portfolio of bonds
D. None of the above
When volatility 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 describes a known dividend yield on a stock?
A. The size of the dividend payments each year is known
B. Dividends per year as a percentage of today’s stock price are known
C. Dividends per year as a percentage of the stock price at the time when dividends are
paid are known
D. Dividends will yield a certain return to a person buying the stock today
A position in options on a particular stock has a delta of zero and a gamma of 4. The
stock price is 10. Which of the following is the approximate relation between the
change in the portfolio value in one day, dP, and the return on the stock, dx
A. dP = 4 times the square of dx
B. dP = 2 times the square of dx
C. dP = 20 times the square of dx
D. dP = 200 times the square of dx
In the case of interest rate movements the most important factor corresponds to
A. A parallel shift
B. A slope change
C. A bowing
D. An increase in short rates
When a six-month option is purchased
A. The price must be paid in full
B. Up to 25% of the option price can be borrowed using a margin account
C. Up to 50% of the option price can be borrowed using a margin account
D. Up to 75% of the option price can be borrowed using a margin account
Gaussian quadrature is
A. A quadratic spline approximation to a normal distribution
B. A way to approximate an integral of a function of a normally distribute variable as a
sum of terms
C. A procedure for speeding up Monte Carlo simulation when credit derivatives are
valued
D. An alternative to a look up table to determining values of the cumulative normal
distribution