Which of the following describes a cliquet option
A. An option to exchange one asset for another
B. An instrument when the holder can choose between several alternative options
C. An option on an option with predetermined strike prices for the two options
D. A series of options with rules for determining strike prices
In a shout call option the strike price is $30. The holder shouts when the asset price is
$40. What is the payoff from the option if the final asset price is $35?
A. $0
B. $5
C. $10
D. $15
The spot price of an investment asset is $30 and the risk-free rate for all maturities is
10% with continuous compounding. The asset provides an income of $2 at the end of
the first year and at the end of the second year. What is the three-year forward price?
A. $19.67
B. $35.84
C. $45.15
D. $40.50
Which of the following is true?
A. An American call option on a stock should never be exercised early
B. An American call option on a stock should never be exercised early when no
dividends are expected
C. There is always some chance that an American call option on a stock will be
exercised early
D. There is always some chance that an American call option on a stock will be
exercised early when no dividends are expected
Bootstrapping involves
A. Calculating the yield on a bond
B. Working from short maturity instruments to longer maturity instruments determining
zero rates at each step
C. Working from long maturity instruments to shorter maturity instruments determining
zero rates at each step
D. The calculation of par yields
Which of the following would be referred to as an equity swap?
A. An exchange of the return from an equity index for a fixed rate of interest
B. An exchange of a long position in one stock for a long position in another stock
C. An exchange of a short position in one stock for a short position in another stock
D. None of the above
Maintaining a delta-neutral portfolio is an example of which of the following
A. Stop-loss strategy
B. Dynamic hedging
C. Hedge and forget strategy
D. Static hedging
Which of the following is true?
A. Risk neutral default probabilities are usually much lower than real world default
probabilities
B. Risk neutral default probabilities are usually much higher than real world default
probabilities
C. Risk neutral and real world probabilities must be close to each other if there are to be
no arbitrage opportunities
D. Risk-neutral default probabilities cannot be calculated from CDS spreads
A trader has a portfolio worth $5 million that mirrors the performance of a stock index.
The stock index is currently 1,250. Futures contracts trade on the index with one
contract being on 250 times the index. To remove market risk from the portfolio the
trader should
A. Buy 16 contracts
B. Sell 16 contracts
C. Buy 20 contracts
D. Sell 20 contracts
When there are two dividends on a stock, Black’s approximation sets the value of an
American call option equal to which of the following
A. The value of a European option maturing just before the first dividend
B. The value of a European option maturing just before the second (final) dividend
C. The greater of the values in A and B
D. The greater of the value in B and the value assuming no early exercise
Which of the following creates a bull spread?
A. Buy a low strike price put and sell a high strike price put
B. Buy a high strike price put and sell a low strike price put
C. Buy a high strike price call and sell a low strike price put
D. Buy a high strike price put and sell a low strike price call
What does the shape of the volatility smile reveal about call options on a currency?
A. Options close-to-the-money have the lowest implied volatility
B. Options deep-in-the-money have a relatively high implied volatility
C. Options deep-out-of-the-money have a relatively high implied volatility
D. All of the above
Suppose that the standard deviation of monthly changes in the price of commodity A is
$2. The standard deviation of monthly changes in a futures price for a contract on
commodity B (which is similar to commodity A) is $3. The correlation between the
futures price and the commodity price is 0.9. What hedge ratio should be used when
hedging a one month exposure to the price of commodity A?
A. 0.60
B. 0.67
C. 1.45
D. 0.90
If a tranche spread is 55 basis points and the fixed coupon is 60 basis points, which of
the following happens when a trader buys protection?
A. The trader pays an estimate of the present value of 5 basis points per year and then
pays 55 basis points per year
B. The trader pays an estimate of the present value of 5 basis points per year and then
pays 60 basis points per year
C. The trader receives an estimate of the present value of 5 basis points per year and
then pays 55 basis points per year
D. The trader receives an estimate of the present value of 5 basis points per year and
then pays 60 basis points per year
When Black’s model used to value a European option on the spot price of an asset,
which of the following is NOT true?
A. It is necessary to know the futures or forward price for a contract maturing at the
same time as the option
B. It is not necessary to estimate income on the underlying asset
C. It is not necessary to know the risk-free rate
D. The underlying asset can be an investment or a consumption asset
At the end of Thursday, the estimated volatility of asset A is 2% per day. During Friday
asset A produces a return of 3%. 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. 2.08%
B. 2.10%
C. 2.12%
D. 2.14%
Which of the following is measured by the VIX index
A. Implied volatilities for stock options trading on the CBOE
B. Historical volatilities for stock options trading on CBOE
C. Implied volatilities for options trading on the S&P 500 index
D. Historical volatilities for options trading on the S&P 500 index
Which of the following is true for an interest rate swap?
A. A swap is usually worth close to zero when it is first negotiated
B. Each forward rate agreement underlying a swap is worth close to zero when the
swap is first entered into
C. Comparative advantage is a valid reason for entering into the swap
D. None of the above
The compounding frequency for an interest rate defines
A. The frequency with which interest is paid
B. A unit of measurement for the interest rate
C. The relationship between the annual interest rate and the monthly interest rate
D. None of the above
In the corn futures contract a number of different types of corn can be delivered (with
price adjustments specified by the exchange) and there are a number of different
delivery locations. Which of the following is true
A. This flexibility tends increase the futures price.
B. This flexibility tends decrease the futures price.
C. This flexibility may increase and may decrease the futures price.
D. This flexibility has no effect on the futures price
Which of the following can be valued without using a numerical procedure such as a
binomial tree?
A. American put options on a non-dividend paying stock
B. American call options on a non-dividend paying tock
C. American call options on a currency
D. American put options on futures
A short forward contract on an asset plus a long position in a European call option on
the asset with a strike price equal to the forward price is equivalent to
A. A short position in a call option
B. A short position in a put option
C. A long position in a put option
D. None of the above