Which of the following is NOT true about call and put options:
A. An American option can be exercised at any time during its life
B. A European option can only be exercised only on the maturity date
C. Investors must pay an upfront price (the option premium) for an option contract
D. The price of a call option increases as the strike price increases
A hedger takes a long position in a futures contract on a commodity on November 1,
2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On
December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is
closed out on March 1, 2013. What gain is recognized in the accounting year January 1
to December 31, 2013? Each contract is on 1000 units of the commodity.
A. $0
B. $1,000
C. $3,000
D. $4,000
What should a trader do when the one-year forward price of an asset is too low?
Assume that the asset provides no income.
A. The trader should borrow the price of the asset, buy one unit of the asset and enter
into a short forward contract to sell the asset in one year.
B. The trader should borrow the price of the asset, buy one unit of the asset and enter
into a long forward contract to buy the asset in one year.
C. The trader should short the asset, invest the proceeds of the short sale at the risk-free
rate, enter into a short forward contract to sell the asset in one year
D. The trader should short the asset, invest the proceeds of the short sale at the risk-free
rate, enter into a long forward contract to buy the asset in one year
If the volatility implied from an at-the-money put stock option were used to price other
put options on the stock, which of the following would be true?
A. Out-of-the money and in-the-money prices would be too high
B. Out-of-the money and in-the-money prices would be too low
C. Out-of-the-money option prices would be too high and in-the-money option prices
would be too low
D. Out-of-the-money option prices would be too low and in-the-money option prices
would be too high
Which of the following best describes a central clearing party
A. It is a trader that works for an exchange
B. It stands between two parties in the over-the-counter market
C. It is a trader that works for a bank
D. It helps facilitate futures trades
Which of the following is true when the tails of a future foreign currency distribution
are compared with those of a lognormal distribution with the same mean and standard
deviation?
A. The left tail and right tail are thinner
B. The left tail is thinner and the right tail is fatter
C. The right tail is thinner and the left tail is fatter
D. Both tails are fatter
Which of the following is true?
A. A callable bond allows the lender to ask for the principal to be repaid early
B. A callable bond allows the borrower to repay the principal early
C. A callable bond is a bond with an embedded stock option
D. None of the above
Which of the following survived the crisis without declaring bankruptcy or being taken
over by another financial institution?
A. Bear Stearns
B. Morgan Stanley
C. Lehman Brothers
D. Merrill Lynch
When moving from valuing an option on a non-dividend paying stock to an option on a
currency which of the following is true?
A. The risk-free rate is replaced by the excess of the domestic risk-free rate over the
foreign risk-free rate in all calculations
B. The formula for u changes
C. The risk-free rate is replaced by the excess of the domestic risk-free rate over the
foreign risk-free rate for discounting
D. The risk-free rate is replaced by the excess of the domestic risk-free rate over the
foreign risk-free rate when p is calculated
If the volatility implied from an at-the-money put currency option were used to price
other put options on the currency, which of the following would be true?
A. Out-of-the money and in-the-money prices would be too high
B. Out-of-the money and in-the-money prices would be too low
C. Out-of-the-money option prices would be too high and in-the-money option prices
would be too low
D. Out-of-the-money option prices would be too low and in-the-money option prices
would be too high
A floating-for-floating currency swap is equivalent to
A. Two interest rate swaps, one in each currency
B. A fixed-for-fixed currency swap and one interest rate swap
C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency
D. None of the above
A company surprises the market with an announcement that it has granted stock options
to senior executives. The options are exercised four years later. When does dilution take
place?
A. Dilution takes place when the options are exercised
B. Dilution takes place on the announcement date
C. Dilution takes place gradually over the four years
D. There is no dilution
A call option on a non-dividend-paying stock has a strike price of $30 and a time to
maturity of six months. The risk-free rate is 4% and the volatility is 25%. The stock
price is $28. What is the delta of the option?
A. N(-0.1342)
B. N(-0.1888)
C. N(-0.2034)
D. N(-0.2241)
Which of the following are NOT true
A. Risk-neutral valuation and no-arbitrage arguments give the same option prices
B. Risk-neutral valuation involves assuming that the expected return is the risk-free rate
and then discounting expected payoffs at the risk-free rate
C. A hedge set up to value an option does not need to be changed
D. All of the above
Which of the following is an example of an option class?
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
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 senior tranche of the ABS CDO
bears losses?
A. 5.5%
B. 6.0%
C. 6.5%
D. 7.0%
Which of the following is a way of extending the Black-Scholes-Merton formula to
value a European call option on a stock paying a single dividend?
A. Reduce the maturity of the option so that it equals the time of the dividend
B. Subtract the dividend from the stock price
C. Add the dividend to the stock price
D. Subtract the present value of the dividend from the stock price
Which of the following describes the five-year swap rate?
A. The rate on a five-year loan to a AA-rated company
B. The rate on a five-year loan to an A-rated company
C. The rate that can be earned over five years from a series of short-term loans to
AA-rated companies
D. The rate that can be earned over five years from a series of short-term loans to
A-rated companies
Which of the following are subject to prepayment risk?
A. Collateralized mortgage obligations
B. POs
C. IOs
D. All of the above
Which of the following is NOT true
A. When a CBOE call option on IBM is exercised, IBM issues more stock
B. An American option can be exercised at any time during its life
C. An call option will always be exercised at maturity if the underlying asset price is
greater than the strike price
D. A put option will always be exercised at maturity if the strike price is greater than the
underlying asset price.
Consider a put option and a call option with the same strike price and time to maturity.
Which of the following is true?
A. It is possible for both options to be in the money
B. It is possible for both options to be out of the money
C. One of the options must be in the money
D. One of the options must be either in the money or at the money
Suppose that ABSs are created from portfolios of subprime mortgages with the
following allocation of the principal to tranches: senior 80%, mezzanine 10%, and
equity 10%. (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. Losses on the mortgage portfolio prove to be 16%. What, as a percent of
tranche principal, are losses on the senior tranche of the ABS CDO?
A. 50%
B. 60%
C. 80%
D. 100%
Which of the following describes tailing the hedge?
A. A strategy where the hedge position is increased at the end of the life of the hedge
B. A strategy where the hedge position is increased at the end of the life of the futures
contract
C. A more exact calculation of the hedge ratio when forward contracts are used for
hedging
D. None of the above
When we move from assuming no dividends to assuming a constant dividend yield,
which of the following is true for a Cox, Ross, Rubinstein tree?
A. The parameters u and p change
B. p changes but u does not
C. u changes but p does not
D. Neither p nor u changes
Which of the following is true
A. OIS rates are less than the corresponding LIBOR rates
B. OIS rates are greater than corresponding LIBOR rates
C. OIS rates are sometimes greater and sometimes less than LIBOR rates
D. OIS rates are equivalent to one-day LIBOR rates