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A binomial tree with one-month time steps is used to value an index option. The interest
rate is 3% per annum and the dividend yield is 1% per annum. The volatility of the
index is 16%. What is the probability of an up movement?
A. 0.4704
B. 0.5065
C. 0.5592
D. 0.5833
What does EWMA stand for?
A. Equally weighted moving average
B. Equally weighted median approximation
C. Exponentially weighted moving average
D. Exponentially weighted median average
Which of the following describes a call option?
A. The right to buy an asset for a certain price
B. The obligation to buy an asset for a certain price
C. The right to sell an asset for a certain price
D. The obligation to sell an asset for a certain price
Which of the following is true of a gap option
A. The strike price determining whether a payoff is made is not the same as the strike
price determining the size of the payoff
B. There is a straightforward valuation formula similar to Black-Scholes-Merton
C. It describes an option where there is a cost to exercising
D. All of the above
When LIBOR is used as the discount rate:
A. A swap is worth zero immediately after a payment date
B. A swap is worth zero immediately before a payment date
C. The floating rate bond underlying a swap is worth par immediately after a payment
date
D. The floating rate bond underlying a swap is worth par immediately before a payment
date
Which of the following is true of the historical simulation method for calculating VaR?
A. It fits historical data on the behavior of variables to a normal distribution
B. It fits historical data on the behavior of variables to a lognormal distribution
C. It assumes that what will happen in the future is a random sample from what has
happened in the past
D. It uses Monte Carlo simulation to create random future scenarios
Which of the following is true when the parameter lambda equals 0.95?
A. The weight given to the most recent observation is 0.95
B. The weight given to the observation one day ago is 95% of the weight given to the
observation two days ago
C. The weights given to observations add up to 0.95
D. The weights given to the observation two days ago is 95% of the weight given to the
observation one day ago
The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%. Which of
the following is correct when a futures option on the index is being valued?
A. The futures price of the S&P 500 is treated like a stock paying a dividend yield of
5%.
B. The futures price of the S&P 500 is treated like a stock paying a dividend yield of
2%.
C. The futures price of the S&P 500 is treated like a stock paying a dividend yield of
3%.
D. The futures price of the S&P 500 is treated like a non-dividend-paying stock.
If a tranche spread is 55 basis points and the fixed coupon is 60 basis points, which of
the following happens when a trader buys protection?
A. The trader pays an estimate of the present value of 5 basis points per year and then
pays 55 basis points per year
B. The trader pays an estimate of the present value of 5 basis points per year and then
pays 60 basis points per year
C. The trader receives an estimate of the present value of 5 basis points per year and
then pays 55 basis points per year
D. The trader receives an estimate of the present value of 5 basis points per year and
then pays 60 basis points per year
A haircut of 20% means that
A. A bond with a market value of $100 is considered to be worth $80 when used to
satisfy a collateral request
B. A bond with a face value of $100 is considered to be worth $80 when used to satisfy
a collateral request
C. A bond with a market value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
D. A bond with a face value of $100 is considered to be worth $83.3 when used to
satisfy a collateral request
