practice questions for exam 2

practice questions for exam 2 - FINA 4320/6320 Derivatives...

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1 FINA 4320/6320 Derivatives Security Markets Practice Exam Questions for Second Exam Covering topics in Chapters 5 to 8 Instructions: You will be given the following equations and the cumulative normal probability table for the upcoming exam. 01 2 () c rT C S Nd X e Nd =− 20 1 [1 ( )] ( c PX e N d S N d 2 0 1 ln( ) ( ) 2 c S X d T σ ++ = 21 dd T
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2 Please choose the best answer. CLEARLY CIRCLE YOUR CHOICE FOR THE MULTIPLE CHOICE: 1. The simple discrete annual risk-free rate is 4.2 %. What is the risk-free rate that you would use in the Black-Scholes model? _______________________________________________ 2. Which of the following is not an assumption of the basic Black-Scholes model? a. the stock volatility is constant b. the stock’s payoff at option expiration time T,(defined as S T /S o ), follows a log normal distribution c. there are no transactions costs d. there are no taxes e. the option is American style 3. A protective put position makes sense if: a) You want to increase the expected return of your position b) You want current income and you anticipate a significant price decrease in the stock c) You expect an increased stock price movement in the short term d) You expect a significant decrease in the price of the stock e) You want insurance to ensure that your portfolio’s value does not fall below a certain level 4. Assume that you are an option market marker and hold a long position of 5000 puts on a particular stock. According to the Black-Scholes model, you can construct a hedge portfolio (that is valid only for a very small period of time over small stock price movements) by transacting with the underlying stock. What would your transactions be? (Assume that N(d 1 )=0.53 and N(d 2 )=0.45 in this case.) ___________________________________________________________________________ 5. The breakeven stock price at maturity for a protective put position can be represented by: a) S T =P+S 0 d) S T =S 0 -X-P b) S T =X-P e) S T =S 0 -X+P c) S T =S 0 -P 6. In regards to option pricing and the associated implied volatility, the expressions ‘volatility
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This note was uploaded on 06/06/2011 for the course FINA 4320 taught by Professor Mckeon during the Spring '08 term at University of Georgia Athens.

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practice questions for exam 2 - FINA 4320/6320 Derivatives...

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