CHAPTER 14
The Black-Scholes-Merton Model
Practice Questions
Problem 14.1.
What does the BlackScholesMerton stock option pricing model assume about the
probability distribution of the stock price in o
CHAPTER 1
Introduction
Practice Questions
Problem 1.1
What is the difference between a long forward position and a short forward position?
When a trader enters into a long forward contract, she is agr
CHAPTER 2
Mechanics of Futures Markets
Practice Questions
Problem 2.1.
Distinguish between the terms open interest and trading volume.
The open interest of a futures contract at a particular time is t
CHAPTER 3
Hedging Strategies Using Futures
Practice Questions
Problem 3.1.
Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
A short hedge is appropriate when a company
CHAPTER 5
Determination of Forward and Futures Prices
Practice Questions
Problem 5.1.
Explain what happens when an investor shorts a certain share.
The investors broker borrows the shares from another
CHAPTER 7
Swaps
Practice Questions
Problem 7.1.
Companies A and B have been offered the following rates per annum on a $20 million fiveyear loan:
Company A
Company B
Fixed Rate
5.0%
6.4%
Floating Rate
CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.1.
An investor buys a European put on a share for $3. The stock price is $42 and the strike price
is $40. Under what circumstances d
CHAPTER 10
Properties of Stock Options
Practice Questions
Problem 10.1.
List the six factors affecting stock option prices.
The six factors affecting stock option prices are the stock price, strike pr
CHAPTER 12
Binomial Trees
Practice Questions
Problem 12.1.
A stock price is currently $40. It is known that at the end of one month it will be either $42 or
$38. The risk-free interest rate is 8% per
CHAPTER 11
Trading Strategies Involving Options
Practice Questions
Problem 11.1.
What is meant by a protective put? What position in call options is equivalent to a protective
put?
A protective put co
CHAPTER 13
Wiener Processes and Its Lemma
Practice Questions
Problem 13.1.
What would it mean to assert that the temperature at a certain place follows a
Markov process? Do you think that temperatures
CHAPTER 16
Options on Stock Indices and Currencies
Practice Questions
Problem 16.1.
A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently
standing at 800. Explain how
CHAPTER 17
Futures Options
Practice Questions
Problem 17.1
Explain the difference between a call option on yen and a call option on yen futures.
A call option on yen gives the holder the right to buy
CHAPTER 18
The Greek Letters
Practice Questions
Problem 18.1.
Explain how a stop-loss trading rule can be implemented for the writer of an out-of-themoney call option. Why does it provide a relatively
CHAPTER 22
Estimating Volatilities and Correlations
Practice Problems
Problem 22.1.
Explain the exponentially weighted moving average (EWMA) model for estimating volatility
from historical data.
Defin
CHAPTER 21
Value at Risk
Practice Questions
Problem 21.1.
Consider a position consisting of a $100,000 investment in asset A and a $100,000
investment in asset B. Assume that the daily volatilities of