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
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 zer
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 depen
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 (Circl
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 defaul
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
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
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 t
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 o
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 co
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 m
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
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
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 $4
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)