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When can Bermudan options be exercised?
A. Any time during the life of the options
B. Any time after a certain date up to the end of the life of the life
C. Any time before a certain date or at the end of the option€s life
D. On dates specified at the start of the option
Which of the following is necessary for tailing a hedge?
A. Comparing the size in units of the position being hedged with the size in units of the
futures contract
B. Comparing the value of the position being hedged with the value of one futures
contract
C. Comparing the futures price of the asset being hedged to its forward price
D. None of the above
Which of the following best describes a total return swap?
A. It exchanges the realized return on an asset, including both income and capital
gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset
B. It exchanges the promised return on an asset, including both income and capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
C. It exchanges the realized return on an asset, including income but not capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
D. It exchanges the promised return on an asset, including income but not capital
gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
An interest rate swap has three years of remaining life. Payments are exchanged
annually. Interest at 3% is paid and 12-month LIBOR is received. A exchange of
payments has just taken place. The one-year, two-year and three-year LIBOR/swap zero
rates are 2%, 3% and 4%. All rates an annually compounded. What is the value of the
swap as a percentage of the principal when LIBOR discounting is used.
A. 0.00%
B. 2.66%
C. 2.06%
D. 1.06%
At the end of Thursday, the estimated volatility of asset A is 2% per day. During Friday
asset A produces a return of 3%. An EWMA model with lambda equal to 0.9 is used.
What is an estimate of the volatility of asset A at the end of Friday?
A. 2.08%
B. 2.10%
C. 2.12%
D. 2.14%
In October 2008 the three-month LIBOR-OIS spread rose to
A. 231 basis points
B. 364 basis points
C. 450 basis points
D. 520 basis points
Suppose that ABSs are created from portfolios of subprime mortgages with the
following allocation of the principal to tranches: senior 94.5% (rated AAA), mezzanine
0.1% (rated BBB), and equity 5% (rated C) . The portfolios of subprime mortgages
have the same default rates. An ABS CDO is then created from the mezzanine tranches.
Which of the following is true?
A. The ABS CDO tranches should have ratings ranging from AAA to C
B. The ABS CDO tranches should all be rated BBB
C. The ABS CDO tranches should all be rated C
D. The ABS CDO tranches are almost worthless because the mezzanine tranches are so
thin
What is the quoted discount rate on a money market instrument?
A. The interest rate earned as a percentage of the final face value of a bond
B. The interest rate earned as a percentage of the initial price of a bond
C. The interest rate earned as a percentage of the average price of a bond
D. The risk-free rate used to calculate the present value of future cash flows from a
bond
Under liquidity preference theory, which of the following is always true?
A. The forward rate is higher than the spot rate when both have the same maturity.
B. Forward rates are unbiased predictors of expected future spot rates.
C. The spot rate for a certain maturity is higher than the par yield for that maturity.
D. Forward rates are higher than expected future spot rates.
Which of the following is true
A. Downgrade triggers are particularly valuable if they are widely used by a company's
counterparties
B. Downgrade triggers become less valuable if they are widely used by a company's
counterparties
C. Downgrade triggers are useless because their impact is always anticipated by the
market
D. Downgrade triggers are a two-edged sword. If company A has a downgrade trigger
for company B then company B has a downgrade trigger for company A
Suppose that an ABS is created from a portfolio of subprime mortgages with the
following allocation of the principal to tranches: senior 80%, mezzanine 10%, and
equity 10%. Losses on the mortgage portfolio prove to be 16%. What, as a percent of
tranche principal, are losses on the mezzanine tranche of the ABS
A. 50%
B. 60%
C. 80%
D. 100%
When the non-dividend paying stock price is $20, the strike price is $20, the risk-free
rate is 6%, the volatility is 20% and the time to maturity is 3 months which of the
following is the price of a European call option on the stock
A. 20N(0.1)-19.7N(0.2)
B. 20N(0.2)-19.7N(0.1)
C. 19.7N(0.2)-20N(0.1)
D. 19.7N(0.1)-20N(0.2)
