The current price of a non-dividend paying stock is $30. Use a two-step tree to value a
European call option on the stock with a strike price of $32 that expires in 6 months.
Each step is 3 months, the risk free rate is 8% per annum with continuous
compounding. What is the option price when u = 1.1 and d = 0.9.
A. $1.29
B. $1.49
C. $1.69
D. $1.89
Suppose that ABSs are created from portfolios of subprime mortgages with the
following allocation of the principal to tranches: senior 85%, mezzanine 10%, and
equity 5%. (The portfolios of subprime mortgages have the same default rates.) An ABS
CDO is then created from the mezzanine tranches with the same allocation of principal.
How high can losses on the mortgages be before the mezzanine tranche of the ABD
CDO bears losses?
A. 5.0%
B. 5.5%
C. 6.0%
D. 6.5%
Employee stock options are particularly popular with start ups because
A. They encourage employees to work hard
B. The start up cannot afford to pay high salaries
C. The risk associated with the company’s success is shared with employees.
D. All of the above
How can a strap trading strategy be created?
A. Buy one call and one put with the same strike price and same expiration date
B. Buy one call and one put with different strike prices and same expiration date
C. Buy one call and two puts with the same strike price and expiration date
D. Buy two calls and one put with the same strike price and expiration date
Which of the following is true when 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
Which of the following describes European options?
A. Sold in Europe
B. Priced in Euros
C. Exercisable only at maturity
D. Calls (there are no European puts)
A one-year call option on a stock with a strike price of $30 costs $3; a one-year put
option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two
call options and one put option. The breakeven stock price above which the trader
makes a profit is
A. $35
B. $40
C. $30
D. $36
Which of the following is true?
A. A puttable bond allows the lender to ask for the principal to be repaid early
B. A puttable bond allows the borrower to repay the principal early
C. A puttable bond is a bond with an embedded stock option
D. None of the above
The implied volatilities for strike prices of 1.1 and 1.2 when the time to maturity is 6
months are 20% and 22%. The implied volatilities for strike prices of 1.1 and 1.2 when
the time to maturity is 1 year are 18.8% and 2%. Using linear interpolation, what is the
implied volatility for a strike price of 1.12 and a time to maturity of 10 months?
A. 19.24%
B. 19.52%
C. 20.48%
D. 19.96%
A company enters into an interest rate swap where it is paying fixed and receiving
LIBOR. When interest rates increase, which of the following is true?
A. The value of the swap to the company increases
B. The value of the swap to the company decreases
C. The value of the swap can either increase or decrease
D. The value of the swap does not change providing the swap rate remains the same
The zero curve is upward sloping. Define X as the 1-year par yield, Y as the 1-year zero
rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the
following is true?
A. X is less than Y which is less than Z
B. Y is less than X which is less than Z
C. X is less than Z which is less than Y
D. Z is less than Y which is less than X
For a futures contract trading in April 2012, the open interest for a June 2012 contract,
when compared to the open interest for Sept 2012 contracts, is usually
A. Higher
B. Lower
C. The same
D. Equally likely to be higher or lower
If the CDS-bond basis is X minus Y, what are X and Y?
A. X is the CDS spread and Y is the excess of the bond yield over the swap rate
B. X is the excess of the bond yield over the swap rate and Y is the CDS spread
C. X is the CDS spread and Y is the excess of the bond yield over the Treasury rate
D. X is the excess of the bond yield over the Treasury rate and Y is the CDS spread
Which of the following is true?
A. Volatility smile for European puts is the same as for European calls
B. Volatility smile for European puts is the same as for American puts
C. Volatility smile for European calls is the same as for American calls
D. Volatility smile for American puts is the same as for American calls
In a cap with quarterly reset dates, the cap rate is 3.5% per annum and the notional
principal is $1 million. Suppose that the LIBOR rate is 0% per annum for a particular
3-month period. What is the approximate payoff at the end of the 3 months?
A. $10,000
B. $5,000
C. $2,500
D. $1,250
At the end of Thursday, the estimated volatility of asset B is 1% per day. During Friday
asset B produces a return of zero. 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. 0.98%
B. 0.95%
C. 0.92%
D. 0.90%