Question 1

Which of the following is the payoff from an average strike call option?

Accepted Answer

A)  The excess of the strike price over the average stock price, if positive 
B)  The excess of the final stock price over the average stock price, if positive 
C)  The excess of the average stock price over the strike price, if positive 
D)  The excess of the average stock price over the final stock price, if positive 
A)  The excess of the strike price over the average stock price, if positive 
B)  The excess of the final stock price over the average stock price, if positive 
C)  The excess of the average stock price over the strike price, if positive 
D)  The excess of the average stock price over the final stock price, if positive B

Question 2

Which of the following are subject to prepayment risk?

Accepted Answer

A)  Collateralized mortgage obligations 
B)  POs 
C)  IOs 
D)  All of the above 
A)  Collateralized mortgage obligations 
B)  POs 
C)  IOs 
D)  All of the above D

Question 3

An Asian option is a term used to describe which of the following?

Accepted Answer

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 time 
C)  An option that trades on an exchange in the Far East 
D)  Any option with a nonstandard payoff 
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 time 
C)  An option that trades on an exchange in the Far East 
D)  Any option with a nonstandard payoff B

Question 4

An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted. What describes these options?

Accepted Answer

A)  Chooser options 
B)  Forward start options 
C)  Compound options 
D)  Shout options 
A)  Chooser options 
B)  Forward start options 
C)  Compound options 
D)  Shout options

Question 5

There are two types of regular options (calls and puts). How many types of barrier options are there?

Accepted Answer

A)  Two 
B)  Four 
C)  Six 
D)  Eight 
A)  Two 
B)  Four 
C)  Six 
D)  Eight

Question 6

A binary option pays of $100 if a stock price is greater than its current value in three months. The risk-free rate is 3% and the volatility is 40%. Which of the following is its value?

Accepted Answer

A)  99.25N(-0.1375) 
B)  99.25N(0.1375) 
C)  99.25N(-0.0625) 
D)  99.25N(0.0625) 
A)  99.25N(-0.1375) 
B)  99.25N(0.1375) 
C)  99.25N(-0.0625) 
D)  99.25N(0.0625)

Question 7

In a shout call option the strike price is $30. The holder shouts when the asset price is $40. What is the payoff from the option if the final asset price is $35?

Accepted Answer

A)  $0 
B)  $5 
C)  $10 
D)  $15 
A)  $0 
B)  $5 
C)  $10 
D)  $15

Question 8

Which of the following is the payoff from an average strike put option?

Accepted Answer

A)  The excess of the strike price over the average stock price, if positive 
B)  The excess of the final stock price over the average stock price, if positive 
C)  The excess of the average stock price over the strike price, if positive 
D)  The excess of the average stock price over the final stock price, if positive 
A)  The excess of the strike price over the average stock price, if positive 
B)  The excess of the final stock price over the average stock price, if positive 
C)  The excess of the average stock price over the strike price, if positive 
D)  The excess of the average stock price over the final stock price, if positive

Question 9

Which of the following is a five-year interest rate swap that can be canceled at the two year point?

Accepted Answer

A)  The difference between two plain vanilla interest rate swaps 
B)  The difference between a plain vanilla interest rate swap and a forward start swap 
C)  A regular interest rate swap plus a European swap option 
D)  A regular interest rate swap plus a Bermudan swap option 
A)  The difference between two plain vanilla interest rate swaps 
B)  The difference between a plain vanilla interest rate swap and a forward start swap 
C)  A regular interest rate swap plus a European swap option 
D)  A regular interest rate swap plus a Bermudan swap option

Question 10

A floating lookback put option pays off which of the following?

Accepted Answer

A)  The amount by which the final stock price exceeds the minimum stock price 
B)  The amount by which the maximum stock price exceeds the final stock price 
C)  The amount by which the strike price exceeds the minimum stock price 
D)  The amount by which the maximum stock price exceeds the strike price 
A)  The amount by which the final stock price exceeds the minimum stock price 
B)  The amount by which the maximum stock price exceeds the final stock price 
C)  The amount by which the strike price exceeds the minimum stock price 
D)  The amount by which the maximum stock price exceeds the strike price

Question 11

When can Bermudan options be exercised?

Accepted Answer

A)  Any time during the life of the options 
B)  Any time after a certain date up to the end of the life 
C)  Any time before a certain date or at the end of the option's life 
D)  On dates specified at the start of the option 
A)  Any time during the life of the options 
B)  Any time after a certain date up to the end of the life 
C)  Any time before a certain date or at the end of the option's life 
D)  On dates specified at the start of the option

Question 12

Which of the following is equivalent to a short position in a European put option?

Accepted Answer

A)  A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option 
B)  A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option 
C)  A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option 
D)  A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option 
A)  A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option 
B)  A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option 
C)  A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option 
D)  A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 13

There are two types of regular options (calls and puts). How many types of compound options are there?

Accepted Answer

A)  Two 
B)  Four 
C)  Six 
D)  Eight 
A)  Two 
B)  Four 
C)  Six 
D)  Eight

Question 14

A fixed lookback put option pays off which of the following?

Accepted Answer

A)  The amount by which the final stock price exceeds the minimum stock price 
B)  The amount by which the maximum stock price exceeds the final stock price 
C)  The amount by which the strike price exceeds the minimum stock price 
D)  The amount by which the maximum stock price exceeds the strike price 
A)  The amount by which the final stock price exceeds the minimum stock price 
B)  The amount by which the maximum stock price exceeds the final stock price 
C)  The amount by which the strike price exceeds the minimum stock price 
D)  The amount by which the maximum stock price exceeds the strike price

Question 15

Which of the following is equivalent to a long position in a European call option?

Accepted Answer

A)  A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option 
B)  A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option 
C)  A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option 
D)  A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option 
A)  A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option 
B)  A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option 
C)  A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option 
D)  A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 16

As the barrier is observed more frequently, a knock out option becomes which of the following?

Accepted Answer

A)  More valuable 
B)  Less valuable 
C)  There is no effect on value 
D)  May become more valuable or less valuable 
A)  More valuable 
B)  Less valuable 
C)  There is no effect on value 
D)  May become more valuable or less valuable

Question 17

Which of the following describes a cliquet option?

Accepted Answer

A)  An option to exchange one asset for another 
B)  An instrument when the holder can choose between several alternative options 
C)  An option on an option with predetermined strike prices for the two options 
D)  A series of options with rules for determining strike prices 
A)  An option to exchange one asset for another 
B)  An instrument when the holder can choose between several alternative options 
C)  An option on an option with predetermined strike prices for the two options 
D)  A series of options with rules for determining strike prices

Question 18

Which of the following would be referred to as an equity swap?

Accepted Answer

A)  An exchange of the return from an equity index for a fixed rate of interest 
B)  An exchange of a long position in one stock for a long position in another stock 
C)  An exchange of a short position in one stock for a short position in another stock 
D)  None of the above 
A)  An exchange of the return from an equity index for a fixed rate of interest 
B)  An exchange of a long position in one stock for a long position in another stock 
C)  An exchange of a short position in one stock for a short position in another stock 
D)  None of the above

Question 19

A PO is a "principal only" MBS and an IO is an "interest only" MBS. As prepayments increase which of the following happens?

Accepted Answer

A)  Both the PO and IO become more valuable 
B)  The PO becomes more valuable and the IO becomes less valuable 
C)  The PO becomes less valuable and the IO becomes more valuable 
D)  Both the PO and IO become less valuable 
A)  Both the PO and IO become more valuable 
B)  The PO becomes more valuable and the IO becomes less valuable 
C)  The PO becomes less valuable and the IO becomes more valuable 
D)  Both the PO and IO become less valuable

Question 20

In a LIBOR-in-arrears swap, which of the following is true?

Accepted Answer

A)  The floating payment made on a date is the LIBOR rate on the previous payment date 
B)  The floating payment on a date is the LIBOR rate two payment dates ago 
C)  The floating payment on a date is the LIBOR rate on that date 
D)  The floating payment on a date is the LIBOR rate on that date only when it is higher than the LIBOR rate on the previous payment date 
A)  The floating payment made on a date is the LIBOR rate on the previous payment date 
B)  The floating payment on a date is the LIBOR rate two payment dates ago 
C)  The floating payment on a date is the LIBOR rate on that date 
D)  The floating payment on a date is the LIBOR rate on that date only when it is higher than the LIBOR rate on the previous payment date

Exam 22: Exotic Options and Other Nonstandard Products

Which of the following is the payoff from an average strike call option?

Which of the following are subject to prepayment risk?

An Asian option is a term used to describe which of the following?

An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted. What describes these options?

There are two types of regular options (calls and puts). How many types of barrier options are there?

A binary option pays of $100 if a stock price is greater than its current value in three months. The risk-free rate is 3% and the volatility is 40%. Which of the following is its value?

In a shout call option the strike price is $30. The holder shouts when the asset price is $40. What is the payoff from the option if the final asset price is $35?

Which of the following is the payoff from an average strike put option?

Which of the following is a five-year interest rate swap that can be canceled at the two year point?

A floating lookback put option pays off which of the following?

When can Bermudan options be exercised?

Which of the following is equivalent to a short position in a European put option?

There are two types of regular options (calls and puts). How many types of compound options are there?

A fixed lookback put option pays off which of the following?

Which of the following is equivalent to a long position in a European call option?

As the barrier is observed more frequently, a knock out option becomes which of the following?

Which of the following describes a cliquet option?

Which of the following would be referred to as an equity swap?

A PO is a "principal only" MBS and an IO is an "interest only" MBS. As prepayments increase which of the following happens?

In a LIBOR-in-arrears swap, which of the following is true?

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Bsm Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Credit Derivatives

Weather, Energy, and Insurance Derivatives

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