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Which of the following is NOT true?
A. Risk-neutral valuation provides prices that are only correct in a world where
investors are risk-neutral
B. Options can be valued based on the assumption that investors are risk neutral
C. In risk-neutral valuation the expected return on all investment assets is set equal to
the risk-free rate
D. In risk-neutral valuation the risk-free rate is used to discount expected cash flows
If a company's five year credit spread is 200 basis points and the recovery rate in the
event of a default is estimated to be 20% what is the average hazard rate per year over
the five years
A. 0.4%
B. 1.2%
C. 1.8%
D. 2.5%
Suppose that the standard deviation of monthly changes in the price of commodity A is
$2. The standard deviation of monthly changes in a futures price for a contract on
commodity B (which is similar to commodity A) is $3. The correlation between the
futures price and the commodity price is 0.9. What hedge ratio should be used when
hedging a one month exposure to the price of commodity A?
A. 0.60
B. 0.67
C. 1.45
D. 0.90
The variance of a Wiener process in time t is
A. t
B. t squared
C. the square root of t
D. t to the power of 4
When interest rates increase 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
In the case of interest rate movements the second most important factor corresponds to
A. A parallel shift
B. A slope change
C. A bowing
D. An increase in short rates
Which of the following describes "base correlation"
A. The most basic correlation measure possible
B. A correlation used to value all tranches
C. The correlation implied from market data
D. The correlation for valuing a tranche with an attachment point of 0%
Which of the following is true for a September futures option?
A. The expiration month of option is September
B. The option was first traded in September
C. The delivery month of the underlying futures contract is September
D. September is the first month when the option can be exercised
Which of the following is true
A. All option implied volatilities tend to move by the same amount from one day to the
next
B. The implied volatilities of long-dated options tend to move by more than the implied
volatilities of short-dated options
C. The implied volatilities of short-dated options tend to move by more than the implied
volatilities of long-dated options
D. Sometimes B is true and sometimes C is true
Which of the following were introduced before the credit crisis that started in 2007
A. Basel II
B. Dodd-Frank
C. Basel III
D. Requirements for living wills
