Which of the following is true?
A. An American call option on a stock should never be exercised early
B. An American call option on a stock should never be exercised early when no
dividends are expected
C. There is always some chance that an American call option on a stock will be
exercised early
D. There is always some chance that an American call option on a stock will be
exercised early when no dividends are expected
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 one-year put options with a
strike price of $41. Which of the following is necessary to hedge the position?
A. Buy 0.2 shares for each option purchased
B. Sell 0.2 shares for each option purchased
C. Buy 0.8 shares for each option purchased
D. Sell 0.8 shares for each option purchased
Suppose that OIS rates for all maturities are 2.5% and swap rates for all maturities are
3%. Which of the following is true?
A. Forward LIBOR rates are greater when OIS discounting is used than when LIBOR
discounting is used
B. Forward LIBOR rates are less when OIS discounting is used than when LIBOR
discounting is used
C. Forward LIBOR rates are the same for both OIS discounting and LIBOR discounting
D. Either A or B can be true
The gamma of a delta-neutral portfolio is 500. What is the impact of a jump of $3 in the
price of the underlying asset?
A. A gain of $2,250
B. A loss of $2,250
C. A gain of $750
D. A loss of $750
To be investment grade, a company has to have a credit rating of
A. AA or better
B. A or better
C. BBB or better
D. BB or better
Which of the following is true
A. A variance swap is worth the square of a volatility swap
B. The payments on a variance swap are the square of the payments on a volatility swap
C. Variance swaps can be valued in terms of European call and put options.
D. None of the above
The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.
The recovery rate is 60%. What is closest to the unconditional default probability for
the sixth year?
A. 0.04
B. 0.05
C. 0.06
D. 0.07
What is the size of one option contract on the S&P 500?
A. 250 times the index
B. 100 times the index
C. 50 times the index
D. 25 times the index
When a bank’s borrowing rate goes up, which of the following is true
A. DVA increases so that the bank’s profit goes down
B. DVA increases so that the bank’s profit goes up
C. DVA declines so that the bank’s profit goes down
D. DVA declines so that the bank’s profit goes up
A portfolio of ten companies is formed. In a third-to-default swap (Circle one)
A. There is a payoff when the third default on the portfolio happens
B. There is a payoff when the first, second and third companies defaults happen
C. There is a payoff when the third, fourth, fifth€¦tenth companies defaults happen
D. None of the above
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 put option on the stock
A. 19.7N(-0.1)-20N(-0.2)
B. 20N(-0.1)-20N(-0.2)
C. 19.7N(-0.2)-20N(-0.1)
D. 20N(-0.2)-20N(-0.1)
Which of the following was true about employee stock options prior to 1995?
A. The options never had any affect on a company’s financial statements
B. The value of options which were at-the-money when issued had to be expensed on
the income statement
C. The value of options which were at-the-money when issued had to be reported in the
notes to the financial statements
D. Options which were at-the-money when issued did not affect a company’s financial
statements
The parameters in a GARCH (1,1) model are: omega =0.000002, alpha = 0.04, and beta
= 0.95. What is the reversion rate for the variance rate implied by the model
A. 0.5% per day
B. 1.0% per day
C. 1.5% per day
D. 2.0% per day
Which of the following is possible in a modified Cox, Ross, Rubinstein binomial tree?
A. The interest rate and volatility can both be functions of time
B. The interest rate or the volatility can be a function of time, but not both
C. The interest rate can be a function of time but the volatility cannot
D. The interest rate and volatility must be constant
When there are two dividends on a stock, Black’s approximation sets the value of an
American call option equal to which of the following
A. The value of a European option maturing just before the first dividend
B. The value of a European option maturing just before the second (final) dividend
C. The greater of the values in A and B
D. The greater of the value in B and the value assuming no early exercise
Duration matching immunizes a portfolio against
A. Any parallel shift in the yield curve
B. All shifts in the yield curve
C. Changes in the steepness of the yield curve
D. Small parallel shifts in the yield curve
A stock price is $20. It has an expected return of 12% and a volatility of 25%. What is
the standard deviation of the change in the price in one day. (For this question assume
that there are 365 days in the year.)
A. $0.20
B. $0.23
C. $0.26
D. $0.29
With bilateral clearing, the number of agreements between four dealers, who trade with
each other, is
A. 12
B. 1
C. 6
D. 2