AIG lost money because
A. It bought tranches created from mortgages
B. It invested heavily in real estate
C. It invested heavily in the stock market
D. It insured AAA tranches of ABS CDOs
A company due to pay a certain amount of a foreign currency in the future decides to
hedge with futures contracts. Which of the following best describes the advantage of
hedging?
A. It leads to a better exchange rate being paid
B. It leads to a more predictable exchange rate being paid
C. It caps the exchange rate that will be paid
D. It provides a floor for the exchange rate that will be paid
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
A hazard rate is 1% per annum. What is the probability of a default during the first two
years?
A. 2.00%
B. 2.02%
C. 1.98%
D. 1.96%
Which of the following is assumed to be lognormal when a swap option is valued?
A. A future bond price
B. A future swap rate
C. A future short-term rate
D. A future bond yield
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 describes a difference between a warrant and an
exchange-traded stock option?
A. In a warrant issue, someone has guaranteed the performance of the option seller in
the event that the option is exercised
B. The number of warrants is fixed whereas the number of exchange-traded options in
existence depends on trading
C. Exchange-traded stock options have a strike price
D. Warrants cannot be traded after they have been purchased
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 method of testing how often a VaR with a certain confidence level was
exceeded in the past called?
A. Stress testing
B. Backtesting
C. EWMA
D. The model-building approach
How can an energy producer hedge its risks?
A. Use weather derivatives for price risk and energy derivatives for volume risk
B. Use energy derivatives for price and volume risk
C. Use energy derivatives for price risk and weather derivatives for volume risk
D. Use weather derivatives for price and volume risk
There are two types of regular options (calls and puts). How many types of barrier
options are there?
A. Two
B. Four
C. Six
D. Eight
If the volatility of a non-dividend-paying stock is 20% per annum and a risk-free rate is
5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter
p for a tree with a three-month time step?
A. 0.50
B. 0.54
C. 0.58
D. 0.62
Which of the following would be described by the term ‘liar loan’?
A. A situation where the lender concealed information from the borrower
B. A situation where the lender lied to the borrower about the interest rate
C. A situation where the borrower lied about the his or her income
D. None of the above
Which of the following describes a subprime mortgage?
A. The rate of interest is less than the prime rate of interest
B. The loan-to-value ratio is below average
C. The life of the mortgage is less than 25 years
D. The credit risk is high
Which of the following is true for the party paying fixed in a newly negotiated interest
rate swap when the yield curve is upward sloping?
A. The early forward contracts underlying the swap have a positive value and the later
ones have a negative value
B. The early forward contracts underlying the swap have a negative value and the later
ones have a positive value
C. The swap is designed so that all forward rates have zero value
D. Sometimes A is true and sometimes B is true
Which of the following is an example of an option series?
A. All calls on a certain stock
B. All calls with a particular strike price on a certain stock
C. All calls with a particular time to maturity on a certain stock
D. All calls with a particular time to maturity and strike price on a certain stock
Which of the following is true about the practice of backdating a stock options grant?
A. It is illegal
B. It is illegal in the majority of states in the U.S., but not all states
C. It is illegal in roughly half the states in the U.S.
D. It is unethical, but not illegal
Which of the following is NOT true about forward and futures contracts?
A. Forward contracts are more liquid than futures contracts
B. The futures contracts are traded on exchanges while forward contracts are traded in
the over-the-counter market
C. In theory forward prices and futures prices are equal when there is no uncertainty
about future interest rates
D. Taxes and transaction costs can lead to forward and futures prices being different