1) Volatility can be defined as (circle one)
a. The standard deviation of the return, measured with continuous compounding, in one
year
b. The variance of the return, measured with continuous compounding, in one year
c. The standard deviation of the stock price in one year
d. The variance of the stock price in one year
2) Which of the following is true (circle one)
a. The futures rates calculated from a Eurodollar futures quote is always less than the
corresponding forward rate
b. The futures rates calculated from a Eurodollar futures quote is 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 is sometimes greater
than and sometimes less than the corresponding forward rate
3) Tailing the hedge is (circle one)
a. A strategy where the hedge position is increased at the end of the life of the hedge
b. A strategy where the hedge position is increased at the end of the life of the futures
contract
c. A more exact calculation of the hedge ratio when forward contracts are used for
hedging
d. None of the above
4) Options on an exchange rate can be valued using the formula for an option of a stock
paying a continuous dividend yield where the dividend yield is replaced by (Circle one)
a. the domestic risk-free rate
b. the foreign risk-free rate
c. the foreign risk-free rate minus the domestic risk-free rate
d. none of the above
5) A volatility smile such as that seen for foreign currency options can be caused by
(Circle two)
a. The fact that currencies are traded in different countries at different times of the day
b. The fact that volatility is not constant
c. The fact that the activities of central banks causes occasional jumps in the exchange
rate
d. The fact that interest rates may be different in the two countries
6) Which of the following is a consumption asset (circle one)
a. The S&P 500 index
b. The Canadian dollar
c. Copper
d. IBM shares
7) In a CDS with a notional principal of $100 million the reference entity defaults. The
payoff to the buyer of protection when the recovery rate is 30% is (Circle one)
a. $100 million
b. $30 million
c. $130 million
d. $70 million
8) Which of the following are always positively related to the price of a European call
option on a stock (circle three)
a. The stock price
b. The strike price
c. The time to expiration
d. The volatility
e. The risk-free rate
f. The magnitude of dividends anticipated during the life of the option
9) Which of the following is true (circle one)
a. Volatility smile for European puts is the same as that for European calls
b. Volatility smile for European puts is the same as that for American puts
c. Volatility smile for European calls is the same as that for American calls
d. Volatility smile for American puts is the same as that for American calls
10) The companies underlying the iTraxx index are (Circle one)
a. Rated A or above
b. Rated BBB or above
c. Rated BB or below
d. Rated BBB or below
11) The basis is defined as spot minus futures. For a short hedger basis strengthens
unexpectedly. Which of the following is true (circle one)
a. The hedgers position improves
b. The hedgers position worsens
c. The hedgers position sometimes worsens and sometimes improves
d. The hedgers position stays the same
12) Which of the following is true (Circle one)
a. The Gaussian copula model assumes that the defaults of different companies are
independent
b. The Gaussian copula model assumes that defaults, conditional on the value of a
factor , are independent
c. The Gaussian copula model assumes that the number of defaults is normally
distributed
d. None of the above
13) Consider a position in a single option on a stock. The position has a delta 12 . The
stock price is 10 . Suppose that the position has a gamma of 4 . Which of the following
is the extra term that should be added to the right hand side of your answer to question
3 (circle one)
a.
b.
c.
d.
14) Which of the following is true (Circle one)
a. Risk neutral default probabilities are usually much lower than real world default
probabilities
b. Risk neutral default probabilities are usually much higher than real world default
probabilities
c. Risk neutral and real world probabilities must be close to each other if there are to be
no arbitrage opportunities default
d. Risk-neutral default probabilities cannot be calculated from CDS spreads
15) A futures-style option is (circle one)
a. An option on a futures
b. An option on spot with daily settlement
c. A futures on an option payoff
d. None of the above
16) Which two statements are true (circle two)
a. Delta is a measure of the volatility of an option
b. Delta is a measure of the position in the underlying stock that should be taken to
hedge an option
c. Delta is estimated by considering two adjacent nodes on a tree at a certain time and
calculating the difference in option prices divided by the difference in the stock prices
d. The delta of a put option is positive
17) A company enters into a short futures contract to sell 50,000 units of a commodity
for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is
$3,000. What is the futures price per unit above which there will be a margin call?
18) A trader buys 100 European call options (i.e., one contract) with a strike price of
$20 and a time to maturity of one year. The cost of each option is $2. The price of the
underlying asset proves to be $25 in one year. What is the traders gain or loss? Show a
dollar amount and indicate whether it is a gain or a loss.
19) The three-year zero rate is 7% and the four-year zero rate is 7.5% (both
continuously compounded. What is the forward rate for the fourth year with continuous
compounding? Answer as a percent with two decimal place accuracy
20) The future probability distribution of a stock price has a fatter right tail and thinner
left tail than the lognormal distribution. Describe the effect of this on the prices of
in-the-money and out-of-the-money calls and puts. What is the volatility smile that
would be observed?
21) Six-month call options with strike prices of $35 and $40 cost $6 and $4,
respectively.
i. What is the maximum gain when a bull spread is created from the calls?
ii. What is the maximum loss when a bull spread is created from the calls?
iii. What is the maximum gain when a bear spread is created from the calls?
iv. What is the maximum loss when a bear spread is created from the calls?