Test Bank: Chapter 22
Estimating Volatilities and Correlations
1. The estimate of the volatility of an asset made at the end of Tuesday is 1% per day. On
Wednesday the return realized on the asset is 1.5%. Update the volatility estimate
(i) Use the EWMA m
Test Bank: Chapter 23
Credit Risk
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 is the
Test Bank: Chapter 25
Exotic Options
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 of a variable over a period
of
Test Bank: Chapter 18
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 14
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) The stock price at a fut
Test Bank: Chapter 16
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 21
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 17
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 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 20
Basic Numerical Procedures
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 5
The Determinants of Forward and Futures Prices
1. An investor shorts 100 shares when the share price is $50 and closes out the position
six months later when the share price is $43. The shares pay a dividend of $3 per
share during the
Test Bank: Chapter 13
Wiener Processes and Itos Lemma
1. A variable, x, starts at 10 and follows a generalized Wiener process
dx =a dt+b dz
where a = 2, b = 3, and dz is a Wiener process.
(i) What is the mean value of the variable after three years? _ _ _
Test Bank: Chapter 15
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 24
Credit Derivatives
1. The number of companies underlying the CDX NA IG index is (Circle one)
(a) 50
(b) 75
(c) 100
(d) 125
2. The companies underlying the iTraxx index are (Circle one)
(a) Rated A or above
(b) Rated BBB or above
(c)
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 12
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 is necessary to h