A volatility surface is a table showing the relationship between which of the following
A. Implied volatility, time to maturity, and strike price
B. Implied volatility, historical volatility, and time to maturity
C. Historical volatility, strike price, and time to maturity
D. None of the above
Which of the following is true?
A. An employee stock option is usually held to maturity
B. An employee stock option tends to be exercised earlier than an OTC option with the
same terms
C. An employee stock options tends to be exercised later than an OTC option with the
same terms
D. Employee stock options are usually exercised as early as possible
The price of a European call option on a stock with a strike price of $50 is $6. The stock
price is $51, the continuously compounded risk-free rate (all maturities) is 6% and the
time to maturity is one year. A dividend of $1 is expected in six months. What is the
price of a one-year European put option on the stock with a strike price of $50?
A. $8.97
B. $6.97
C. $3.06
D. $1.12
Which of the following is the put-call parity result for a non-dividend-paying stock?
A. The European put price plus the European call price must equal the stock price plus
the present value of the strike price
B. The European put price plus the present value of the strike price must equal the
European call price plus the stock price
C. The European put price plus the stock price must equal the European call price plus
the strike price
D. The European put price plus the stock price must equal the European call price plus
the present value of the strike price
In a binomial tree created to value an option on a stock, the expected return on stock is
A. Zero
B. The return required by the market
C. The risk-free rate
D. It is impossible to know without more information
Which of the following is the payoff from an average strike put option?
A. The excess of the strike price over the average stock price, if positive
B. The excess of the final stock price over the average stock price, if positive
C. The excess of the average stock price over the strike price, if positive
D. The excess of the average stock price over the final stock price, if positive
Why do traders use volatility smiles for pricing options?
A. To allow for non-lognormality of the probability distribution of future asset price
B. Because it is consistent with recent market moves
C. As a tool to reflect their views about extreme market moves
D. Because extreme market moves are always more likely than Black-Scholes-Merton
assumes
What does theta measure?
A. The rate of change of delta with the asset price
B. The rate of change of the portfolio value with the passage of time
C. The sensitivity of a portfolio value to interest rate changes
D. None of the above
Which of the following is NOT traded by the CBOE?
A. Weeklys
B. Monthlys
C. Binary options
D. DOOM options
What does N(x) denote?
A. The area under a normal distribution from zero to x
B. The area under a normal distribution up to x
C. The area under a normal distribution beyond x
D. The area under the normal distribution between –x and x
Which of the following is true?
A. The convenience yield is always positive or zero.
B. The convenience yield is always positive for an investment asset.
C. The convenience yield is always negative for a consumption asset.
D. The convenience yield measures the average return earned by holding futures
contracts.
When the strike price increases with all else remaining the same, which of the following
is true?
A. Both calls and puts increase in value
B. Both calls and puts decrease in value
C. Calls increase in value while puts decrease in value
D. Puts increase in value while calls decrease in value
Which of the following is true?
A. The quadratic model approximates daily changes in using delta and gamma
B. The quadratic model approximates daily changes using delta, but not gamma
C. The quadratic model approximates daily changes using gamma, but not delta
D. None of the above
Which of the following is true when dividends are expected?
A. Put-call parity does not hold
B. The basic put-call parity formula can be adjusted by subtracting the present value of
expected dividends from the stock price
C. The basic put-call parity formula can be adjusted by adding the present value of
expected dividends to the stock price
D. The basic put-call parity formula can be adjusted by subtracting the dividend yield
from the interest rate
Which of the following is NOT true?
A. Black’s model can be used to value an American-style option on futures
B. Black’s model can be used to value a European-style option on futures
C. Black’s model can be used to value a European-style option on spot
D. Black’s model is widely used by practitioners
Which of the following is true of the historical simulation method for calculating VaR?
A. It fits historical data on the behavior of variables to a normal distribution
B. It fits historical data on the behavior of variables to a lognormal distribution
C. It assumes that what will happen in the future is a random sample from what has
happened in the past
D. It uses Monte Carlo simulation to create random future scenarios
Which of the following is true?
A. A cap is a portfolio of put options on interest rates
B. A cap is a put option on a coupon-bearing bond
C. A cap is a call option on a coupon-bearing bond
D. None of the above
A silver mining company has used futures markets to hedge the price it will receive for
everything it will produce over the next 5 years. Which of the following is true?
A. It is liable to experience liquidity problems if the price of silver falls dramatically
B. It is liable to experience liquidity problems if the price of silver rises dramatically
C. It is liable to experience liquidity problems if the price of silver rises dramatically or
falls dramatically
D. The operation of futures markets protects it from liquidity problems
The spot price of an asset is positively correlated with the market. Which of the
following would you expect to be true?
A. The forward price equals the expected future spot price.
B. The forward price is greater than the expected future spot price.
C. The forward price is less than the expected future spot price.
D. The forward price is sometimes greater and sometimes less than the expected future
spot price.