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
How many nodes are there at the end of a Cox-Ross-Rubinstein five-step binomial tree?
A. 4
B. 5
C. 6
D. 7
Which of the following describes regulatory arbitrage?
A. Finding a way of reducing capital requirements without changing the risks being
taken
B. Buying products that are not subject to regulation
C. Shorting products that are not subject to regulation
D. Trading with the government
Futures contracts trade with every month as a delivery month. A company is hedging
the purchase of the underlying asset on June 15. Which futures contract should it use?
A. The June contract
B. The July contract
C. The May contract
D. The August contract
Which of the following describes the way the futures price of a foreign currency is
quoted by the CME group?
A. The number of U.S. dollars per unit of the foreign currency
B. The number of the foreign currency per U.S. dollar
C. Some futures prices are always quoted as the number of U.S. dollars per unit of the
foreign currency and some are always quoted the other way round
D. There are no quotation conventions for futures prices
A PO is a ‘principal only’ MBS and an IO is an ‘interest only’ MBS. As prepayments
increase which of the following happens.
A. Both the PO and IO become more valuable
B. The PO becomes more valuable and the IO becomes less valuable
C. The PO becomes less valuable and the IO becomes more valuable
D. Both the PO and IO become less valuable
Which of the following describes an interest rate swap?
A. The exchange of a fixed rate bond for a floating rate bond
B. A portfolio of forward rate agreements
C. An agreement to exchange interest at a fixed rate for interest at a floating rate
D. All of the above
A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year
zero-coupon bond. What is the duration of the portfolio?
A. 6 years
B. 7 years
C. 8 years
D. 9 years
Which of the following is NOT true
A. The bonus structure at banks can lead to short-term horizons for decision making
B. Securitization involves the transfer of risk
C. The term ‘agency costs’ describes the situation where the incentives of two parties in
a business relationship are not perfectly aligned
D. Correlations decrease in stressed market conditions
Which of the following are true for CBOE stock options?
A. There are no margin requirements
B. The initial margin and maintenance margin are determined by formulas and are equal
C. The initial margin and maintenance margin are determined by formulas and are
different
D. The maintenance margin is usually about 75% of the initial margin
A short forward contract that was negotiated some time ago will expire in three months
and has a delivery price of $40. The current forward price for three-month forward
contract is $42. The three month risk-free interest rate (with continuous compounding)
is 8%. What is the value of the short forward contract?
A. +$2.00
B. −$2.00
C. +$1.96
D. −$1.96
Which of the following is a definition of the covariance between X and Y?
A. Correlation between X and Y times variance of X times variance of Y
B. Variance of X times the variance of Y
C. Correlation between X and Y divided by the product of the standard deviation of X
and the standard deviation of Y
D. Correlation between X and Y times standard deviation of X times standard deviation
of Y
The price of a stock on February 1 is $48. A trader sells 200 put options on the stock
with a strike price of $40 when the option price is $2. The options are exercised when
the stock price is $39. The trader’s net profit or loss is
A. Loss of $800
B. Loss of $200
C. Gain of $200
D. Loss of $900
Which of the following describes a protective put?
A. A long put option on a stock plus a long position in the stock
B. A long put option on a stock plus a short position in the stock
C. A short put option on a stock plus a short call option on the stock
D. A short put option on a stock plus a long position in the stock
The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a
short futures position. The basis increases unexpectedly. Which of the following is true?
A. The hedger’s position improves.
B. The hedger’s position worsens.
C. The hedger’s position sometimes worsens and sometimes improves.
D. The hedger’s position stays the same.
An investor has exchange-traded put options to sell 100 shares for $20. There is 25%
stock dividend. Which of the following is the position of the investor after the stock
dividend?
A. Put options to sell 100 shares for $20
B. Put options to sell 75 shares for $25
C. Put options to sell 125 shares for $15
D. Put options to sell 125 shares for $16