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 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 23
Credit Derivatives
1. Suppose that the cumulative default probability for a company for years one, two, three
and four are 3%, 6.5%, 10%, and 14.5%.
(i) What is the unconditional default probability for year four _ _ _ _ _
(ii) What
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
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 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
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 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
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 16
Futures Options
1. When a put futures is exercised, the holder of the put acquires (circle one)
(a) A long position in the futures contract
(b) A short position in the futures contract
(c) A long position in the underlying asset
(d)
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
Test Bank: Chapter 14
Employee Stock Options
1. Which of the following is true about employee stock options (ESOPS) and regular
American exchange-traded call options (EXOPS). (Circle three)
(a) ESOPS usually cannot be exercised at all times whereas EXOPS
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 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 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 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 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 7
Swaps
1. Suppose that the yield curve is flat at 5% per annum with continuous compounding. A
swap with a notional principal of $100 million in which 6% is received and six-month
LIBOR is paid will last another 15 months. Payments are
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 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
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
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 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
CHAPTER 24
Weather, Energy, and Insurance Derivatives
Practices Questions
Problem 24.8.
HDD and CDD can be regarded as payoffs from options on temperature. Explain this
statement.
HDD is max(65 A, 0) where A is the average of the maximum and minimum tempe
CHAPTER 23
Credit Derivatives
Practice Questions
Problem 23.8.
Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding
and that defaults can occur half way through each year in a new five-year credit default
swap. Suppose
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
CHAPTER 21
Interest Rate Options
Practice Questions
Problem 21.8.
A bank uses Blacks model to price European bond options. Suppose that an implied price
volatility for a 5-year option on a bond maturing in 10 years is used to price a 9-year option
on the
CHAPTER 20
Value at Risk
Practice Questions
Problem 20.8.
A company uses an EWMA model for forecasting volatility. It decides to change the
parameter from 0.95 to 0.85. Explain the likely impact on the forecasts.
2
Reducing from 0.95 to 0.85 means that mo