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The current price of a non-dividend-paying stock is $40. Over the next year it is
expected to rise to $42 or fall to $37. An investor buys put options with a strike price of
$41. What is the value of each option? The risk-free interest rate is 2% per annum with
continuous compounding.
A. $3.93
B. $2.93
C. $1.93
D. $0.93
What is the rating of the companies underlying the iTraxx index?
A. A or above
B. BBB or above
C. BB or below
D. BBB or below
Maintaining a delta-neutral portfolio is an example of which of the following
A. Stop-loss strategy
B. Dynamic hedging
C. Hedge and forget strategy
D. Static hedging
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 put
options on an index to provide protection against the portfolio falling below $9.5
million. The index is currently standing at 500 and each contract is on 100 times the
index. What should the strike price of options on the index be the portfolio has a beta of
0.5? Assume that the risk-free rate is 10% per annum and there are no dividends.
A. 400
B. 410
C. 420
D. 425
If the volatility for a portfolio is 20% per year, what is the volatility per quarter?
A. 20%
B. 10%
C. 5%
D. 2%
Which of the following is true when the tails of a future stock price distribution are
compared with those of a lognormal distribution with the same mean and standard
deviation?
A. The left tail and right tail are thinner
B. The left tail is thinner and the right tail is fatter
C. The right tail is thinner and the left tail is fatter
D. Both tails are fatter
When we move from assuming no dividends to assuming a constant dividend yield,
which of the following is true for a Cox, Ross, Rubinstein tree?
A. The parameters u and p change
B. p changes but u does not
C. u changes but p does not
D. Neither p nor u changes
On March 1 the price of a commodity is $1,000 and the December futures price is
$1,015. On November 1 the price is $980 and the December futures price is $981. A
producer of the commodity entered into a December futures contracts on March 1 to
hedge the sale of the commodity on November 1. It closed out its position on
November 1. What is the effective price (after taking account of hedging) received by
the company for the commodity?
A. $1,016
B. $1,001
C. $981
D. $1,014
A variable x starts at 10 and follows the generalized Wiener process
dx = a dt + b dz
If a = 3 and =4 what is the standard deviation of the value in three months?
A. 1
B. 2
C. 3
D. 4
What is the recommended way of making interest rates a function of time in a Cox,
Ross, Rubinstein tree?
A. Make u a function of time
B. Make p a function of time
C. Make u and p a function of time
D. Make the lengths of the time steps unequal
Which of the following is an argument used by Keynes and Hicks?
A. If hedgers hold long positions and speculators holds short positions, the futures price
will tend to be higher than the expected future spot price
B. If hedgers hold long positions and speculators holds short positions, the futures price
will tend to be lower than the expected future spot price
C. If hedgers hold long positions and speculators holds short positions, the futures price
will tend to be lower than today's spot price
D. If hedgers hold long positions and speculators holds short positions, the futures price
will tend to be higher than today's spot price
