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 agreeing to buy the underlying asset
for a certain price a
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 owns an asset and expects to sell that asset in the
fut
CHAPTER 6
Interest Rate Futures
Practice Questions
Problem 6.1.
A U.S. Treasury bond pays a 7% coupon on January 7 and July 7. How much interest
accrues per $100 of principal to the bond holder between July 7, 2011 and August 9, 2011?
How would your answe
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 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 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 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
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 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 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 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 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 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 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 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 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
Swaps Revisited
Chapter 32
Options, Futures, and Other
Derivatives, 7th Edition, Copyright
1
Valuation of Swaps
The
standard approach is to assume that
forward rates will be realized
This works for plain vanilla interest rate and
plain vanilla currency s
The Black-Scholes-Merton
Model
Chapter 13
Options, Futures, and Other
Derivatives, 7th Edition, Copyright
1
The Stock Price Assumption
Consider
a stock whose price is S
In a short period of time of length t,
the return on the stock is normally
distribute
Binomial Trees
Chapter 11
Options, Futures, and Other
Derivatives, 7th Edition, Copyright
1
A Simple Binomial Model
A
stock price is currently $20
In 3 months it will be either $22 or $18
Stock Price = $22
Stock price = $20
Stock Price = $18
Options, Fut
Mechanics of Options
Markets
Chapter 8
Options, Futures, and Other
Derivatives, 7th Edition, Copyright
1
Review of Option Types
A
call is an option to buy
A put is an option to sell
A European option can be exercised only at
the end of its life
An Americ
Introduction
Chapter 1
Options, Futures, and Other
Derivatives, 7th Edition, Copyright
1
Size of OTC and Exchange-Traded Markets
(Figure 1.1, Page 3)
Source: Bank for International Settlements. Chart shows total principal
amounts for OTC market and value
CHAPTER 4
Interest Rates
Practice Questions
Problem 4.1.
A bank quotes you an interest rate of 14% per annum with quarterly compounding. What is
the equivalent rate with (a) continuous compounding and (b) annual compounding?
(a) The rate with continuous c
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 the total number of long positions
outstanding. (Equival