The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a
short futures position. The basis increases unexpectedly. Which of the following is true?
A. The hedger’s position improves.
B. The hedger’s position worsens.
C. The hedger’s position sometimes worsens and sometimes improves.
D. The hedger’s position stays the same.
A company has a $36 million portfolio with a beta of 1.2. The futures price for a
contract on an index is 900. Futures contracts on $250 times the index can be traded.
What trade is necessary to reduce beta to 0.9?
A. Long 192 contracts
B. Short 192 contracts
C. Long 48 contracts
D. Short 48 contracts
Which of the following must post margin?
A. The seller of an option
B. The buyer of an option
C. The seller and the buyer of an option
D. Neither the seller nor the buyer of an option
The parameters in a GARCH (1,1) model are: omega =0.000002, alpha = 0.04, and beta
= 0.95. Which of the following is the closest to the long run average volatility?
A. 1.1%
B. 1.2%
C. 1.3%
D. 1.4%
Consider a put option and a call option with the same strike price and time to maturity.
Which of the following is true?
A. It is possible for both options to be in the money
B. It is possible for both options to be out of the money
C. One of the options must be in the money
D. One of the options must be either in the money or at the money
When the Black-Scholes-Merton and binomial tree models are used to value an option
on a non-dividend-paying stock, which of the following is true?
A. The binomial tree price converges to a price slightly above the
Black-Scholes-Merton price as the number of time steps is increased
B. The binomial tree price converges to a price slightly below the
Black-Scholes-Merton price as the number of time steps is increased
C. Either A or B can be true
D. The binomial tree price converges to the Black-Scholes-Merton price as the number
of time steps is increased
A stock provides an expected return of 10% per year and has a volatility of 20% per
year. What is the expected value of the continuously compounded return in one year?
A. 6%
B. 8%
C. 10%
D. 12%
Which of the following describes LEAPS?
A. Options which are partly American and partly European
B. Options where the strike price changes through time
C. Exchange-traded stock options with longer lives than regular exchange-traded stock
options
D. Options on the average stock price during a period of time
The price of a stock, which pays no dividends, is $30 and the strike price of a one year
European call option on the stock is $25. The risk-free rate is 4% (continuously
compounded). Which of the following is a lower bound for the option such that there
are arbitrage opportunities if the price is below the lower bound and no arbitrage
opportunities if it is above the lower bound?
A. $5.00
B. $5.98
C. $4.98
D. $3.98
What does theta 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 number of companies underlying the CDX NA IG index?
A. 50
B. 75
C. 100
D. 125
Which of the following describes regulatory arbitrage?
A. Finding a way of reducing capital requirements without changing the risks being
taken
B. Buying products that are not subject to regulation
C. Shorting products that are not subject to regulation
D. Trading with the government
The original Black-Scholes and Merton papers on stock option pricing were published
in which year?
A. 1983
B. 1984
C. 1974
D. 1973
Which of the following describes a cliquet option
A. An option to exchange one asset for another
B. An instrument when the holder can choose between several alternative options
C. An option on an option with predetermined strike prices for the two options
D. A series of options with rules for determining strike prices
Which of the following is true?
A. The futures rates calculated from a Eurodollar futures quote are always less than the
corresponding forward rate
B. The futures rates calculated from a Eurodollar futures quote are always greater than
the corresponding forward rate
C. The futures rates calculated from a Eurodollar futures quote should equal the
corresponding forward rate
D. The futures rates calculated from a Eurodollar futures quote are sometimes greater
than and sometimes less than the corresponding forward rate