Test Bank: Chapter 24
Weather, Energy, and Insurance Derivatives
1. On a certain day the highest temperature was 77F and the lowest temperature was 61F.
(i) What was the CDD for the day _
(ii) What was the HDD for the day _
2. Name two refined products of
Test Bank: Chapter 13
Valuing Stock Options: The Black-Scholes-Merton Model
1. The Black-Scholes-Merton model assumes (circle one)
(a) The return from the stock in a short period of time is lognormal
(b) The stock price at a future time is lognormal
(c) T
Test Bank: Chapter 1
Introduction
1. List three types of traders in futures, forward, and options markets
i.
_
ii.
_
iii.
_
2. Which of the following is not true (circle one)
a. When a CBOE call option on IBM is exercised, IBM issues more stock
b. An Amer
Test Bank: Chapter 9
Mechanics of Options Markets
1. Consider an exchange traded put option to sell 100 shares for $20. Give (a) the
strike price and (b) the number of shares that can be sold after
(i)
A 5 for 1 stock split (a) _ _ _ _ _ _
(b) _ _ _ _ _ _
Test Bank: Chapter 8
Securitization and the Credit Crisis of 2007
1. Suppose that ABSs are created from portfolios of subprime mortgages with the following
allocation of the principal to tranches: senior 75%, mezzanine 20%, and equity 5%. An
ABS CDO is th
Test Bank: Chapter 11
Trading Strategies Involving Options
1. Six-month call options with strike prices of $35 and $40 cost $6 and $4,
respectively.
(i)
What is the maximum gain when a bull spread is created from the calls?
_
(ii)
What is the maximum loss
Test Bank: Chapter 22
Exotic Options and Other Nonstandard Products
1. An Asian option is a term used to describe (Circle one):
(a) An option where the payoff depends on whether a barrier is hit
(b) An option where the payoff depends on the average value
Test Bank: Chapter 15
Options on Stock Indices and Currencies
1. A portfolio manager in charge of a portfolio worth $10 million is concerned that the
market might decline rapidly during the next six months and would like to use options
on the S&P 100 to p
CHAPTER 22
Exotic Options and Other Nonstandard Products
Practice Questions
Problem 22.8.
Describe the payoff from a portfolio consisting of a lookback call and a lookback put with the
same maturity.
A lookback call provides a payoff of ST S min . A lookb
Test Bank: Chapter 19
Volatility Smiles
1. In a volatility smile diagram
(i) What is plotted on the horizontal axis? _ _ _ _ _ _
(ii) What is plotted on the vertical axis? _ _ _ _ _ _
2. Indicate whether the tails mentioned below are fatter or thinner tha
Test Bank: Chapter 12
Introduction to Binomial Trees
1. The current price of a non-dividend-paying stock is $30. Over the next six months
it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero
(i)
What long position in the stock i
Test Bank: Chapter 10
Properties of Stock Options
1. Which of the following are always positively related to the price of a European
call option on a stock (circle three)
(a) The stock price
(b) The strike price
(c) The time to expiration
(d) The volatili
Test Bank: Chapter 20
Value at Risk
1. The gain from a one-year project is uniformly distributed between $2 million and
+$8 million.
(i) What is the one-year 99% value at risk _ _ _ _ _ _
(ii) What is the one-year 99% expected shortfall _ _ _ _ _ _
2. Sto
CHAPTER 19
Volatility Smiles
Problem 19.8.
A stock price is currently $20. Tomorrow, news is expected to be announced that will either
increase the price by $5 or decrease the price by $5. What are the problems in using Black
Scholes to value one-month op
Test Bank: Chapter 17
The Greek Letters
1. A call option on an asset has a delta of 0.4. A trader has sold 2000 options and wants
to create a delta-neutral position
(i) Should the trader take a long or short position in the asset_ _ _ _ _ _
(ii) How many
Test Bank: Chapter 6
Interest Rate Futures
1. Which of following is applicable to corporate bonds in the United States (circle
one)
(a) Actual/360
(b) Actual/Actual
(c) 30/360
(d) Actual/365
2. It is May 1. The quoted price of a bond with an Actual/365 da
Test Bank: Chapter 2
Mechanics of Futures and Forward Markets
1. Which of the following is true (circle one)
(a) Both forward and futures contracts are traded on exchanges.
(b) Forward contracts are traded on exchanges, but futures contracts are not.
(c)
Test Bank: Chapter 4
Interest Rates
1. An interest rate is 15% per annum when expressed with annual compounding. What is
the equivalent rate with continuous compounding? Answer as a percent with two
decimal place accuracy _ _ _ _ _ _
2. An interest rate i
CHAPTER 16
Futures Options
Practice Questions
Problem 16.8.
Suppose you buy a put option contract on October gold futures with a strike price of $900
per ounce. Each contract is for the delivery of 100 ounces. What happens if you exercise
when the October
CHAPTER 7
Swaps
Practice Questions
Problem 7.8.
Explain why a bank is subject to credit risk when it enters into two offsetting swap contracts.
At the start of the swap, both contracts have a value of approximately zero. As time passes, it
is likely that
1.
Aboxspreadisacombinationofabullspreadcomposedoftwocalloptionswithstrike
prices X 1 and X 2 andabearspreadcomposedoftwoputoptionswiththesametwo
strikeprices.
a) Describe the payoff from a box spread on the expiration date of the options.
b) What would
Test Bank: Chapter 3
Hedging Strategies Using Futures
1. The basis is defined as spot minus futures. For a short hedger basis strengthens
unexpectedly. Which of the following is true (circle one)
(a) The hedgers position improves.
(b) The hedgers position
CHAPTER 12
Introduction to Binomial Trees
Practice Questions
Problem 12.8.
Consider the situation in which stock price movements during the life of a European option
are governed by a two-step binomial tree. Explain why it is not possible to set up a posi
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.8.
The price of a 90-day Treasury bill is quoted as 10.00. What continuously compounded
return (on an actual/365 basis) does an investor earn on the Treasury bill for the 90-day
period?
The cash
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.8.
In the Chicago Board of Trades corn futures contract, the following delivery months are
available: March, May, July, September, and December. State the contract that should be
used
CHAPTER 15
Options on Stock Indices and Currencies
Practice Questions
Problem 15.8.
Show that the formula in equation (15.9) for a put option to sell one unit of currency A for
currency B at strike price K gives the same value as equation (15.8) for a cal
CHAPTER 13
Valuing Stock Options: The Black-Scholes-Merton Model
Practice Questions
Problem 13.8.
A stock price is currently $40. Assume that the expected return from the stock is 15% and its
volatility is 25%. What is the probability distribution for the
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.8.
The party with a short position in a futures contract sometimes has options as to the precise
asset that will be delivered, where delivery will take place, when delivery will take plac
Chapter 21
Interest Rate Options
1. A 10-year interest rate cap has a cap rate of 4%, quarterly resets, and a notional principal
of $1 million
(i) How many caplets are there underlying the cap _ _ _ _ _ _
(ii) Suppose the three-month interest rate at time
Test Bank: Chapter 18
Binomial Trees in Practice
1. An exchange rate has a volatility of 12%. The domestic and foreign risk-free
interest rates are both 4%, respectively. The time step on a binomial tree is three
months.
(i) What are the p , u and d param