Question 1

Which of the following statements is most valid?

Accepted Answer

A) Asian options are useful for hedging risk to markets in Asia. 
B) Asian options are usually more expensive than vanilla options because they are exotic. 
C) Asian options are useful for hedging exposure to the average price of a security or commodity. 
D) Asian options are more sensitive to volatility than vanilla options. 
A) Asian options are useful for hedging risk to markets in Asia. 
B) Asian options are usually more expensive than vanilla options because they are exotic. 
C) Asian options are useful for hedging exposure to the average price of a security or commodity. 
D) Asian options are more sensitive to volatility than vanilla options. C

Question 2

You hold a floating-strike lookback put option written on a stock.The stock price at inception was $56,the stock price at maturity is $63,and the lowest and highest stock prices observed over the option's life are,respectively,$52 and $64.The payoff from the option at maturity is

Accepted Answer

A) Zero. 
B) $1. 
C) $11 
D) Cannot be answered without information on the strike price. 
A) Zero. 
B) $1. 
C) $11 
D) Cannot be answered without information on the strike price. B

Question 3

Consider an option that pays $1000 if the stock price at maturity falls outside a range $\left[ K _ { 1 } , K _ { 2 } \right]$ .Which of the following is valid?

Accepted Answer

A) The option may be written as the sum of two barrier options. 
B) The option decreases in value as $K _ { 2 } - K _ { 1 }$
Decreases. 
C) The option may be written as the sum of two asset-or-nothing options. 
D) The option may be written as the sum of two cash-or-nothing options. 
A) The option may be written as the sum of two barrier options. 
B) The option decreases in value as $K _ { 2 } - K _ { 1 }$
Decreases. 
C) The option may be written as the sum of two asset-or-nothing options. 
D) The option may be written as the sum of two cash-or-nothing options. D

Question 4

Which of the following statements is accurate concerning knock-out call options?

Accepted Answer

A) The delta is positive if it is a down-and-out call but can be positive or negative if it is an up-and-out call. 
B) The delta can be positive or negative,but the gamma is always positive. 
C) The delta is always positive,but the gamma can be positive or negative. 
D) The delta can be positive or negative and the gamma can also be positive or engative. 
A) The delta is positive if it is a down-and-out call but can be positive or negative if it is an up-and-out call. 
B) The delta can be positive or negative,but the gamma is always positive. 
C) The delta is always positive,but the gamma can be positive or negative. 
D) The delta can be positive or negative and the gamma can also be positive or engative.

Question 5

An option is said to be path-dependent if

Accepted Answer

A) It has a payoff that depends in some way on the path of prices taken by the underlying. 
B) It can only be priced on a non-recombining tree. 
C) Different paths of the asset price necessarily lead to different payoffs. 
D) All of the above. 
A) It has a payoff that depends in some way on the path of prices taken by the underlying. 
B) It can only be priced on a non-recombining tree. 
C) Different paths of the asset price necessarily lead to different payoffs. 
D) All of the above.

Question 6

A cliquet is equivalent to a family of forward starting options in which one option comes to life at each reset date and expires on the next reset date.A reverse cliquet

Accepted Answer

A) Is a portfolio of vanilla put options,all at-the-money today,and expiring on the reset dates of the reverse cliquet. 
B) Is a portfolio of digital put options,with one option coming to life at each reset date and expiring at the next reset date. 
C) Is a cliquet that runs in reverse,with options expiring at each reset date whose strike is determined only at the next reset date. 
D) Has an identical structure to the cliquet but in which there is a promised fixed return at expiry that is reduced by the moneyness at expiry of each forward starting option in the cliquet. 
A) Is a portfolio of vanilla put options,all at-the-money today,and expiring on the reset dates of the reverse cliquet. 
B) Is a portfolio of digital put options,with one option coming to life at each reset date and expiring at the next reset date. 
C) Is a cliquet that runs in reverse,with options expiring at each reset date whose strike is determined only at the next reset date. 
D) Has an identical structure to the cliquet but in which there is a promised fixed return at expiry that is reduced by the moneyness at expiry of each forward starting option in the cliquet.

Question 7

Cliquet options are purchased because

Accepted Answer

A) A portfolio of forward start options is cheaper than buying them separately. 
B) There is diversification in a portfolio of forward start options. 
C) They are analogous to owning Asian forward options. 
D) It is the same as buying rolling forward start options but has the advantage of locking in possibly low volatilities today. 
A) A portfolio of forward start options is cheaper than buying them separately. 
B) There is diversification in a portfolio of forward start options. 
C) They are analogous to owning Asian forward options. 
D) It is the same as buying rolling forward start options but has the advantage of locking in possibly low volatilities today.

Question 8

The USD/GBP exchange rate is $1.575/ $f$ .An investor buys a knock-out USD call/GBP put with a strike of $1.575/ $f$ and a barrier of $1.515/ $£$ .The implied view of the investor is

Accepted Answer

A) GBP is going to appreciate against the dollar by at least $0.06/ $£$
) 
B) GBP is going to appreciate against the dollar but by at most $0.06/ $£$
) 
C) GBP is going to depreciate against the dollar by at least $0.06/ $£$
) 
D) GBP is going to depreciate against the dollar but by at most $0.06/ $£$
) 
A) GBP is going to appreciate against the dollar by at least $0.06/ $£$
) 
B) GBP is going to appreciate against the dollar but by at most $0.06/ $£$
) 
C) GBP is going to depreciate against the dollar by at least $0.06/ $£$
) 
D) GBP is going to depreciate against the dollar but by at most $0.06/ $£$
)

Question 9

When volatility increases,the value of a down-and-out put ,and the value of a down-and-in put.

Accepted Answer

A) increases;increases. 
B) decreases;increases. 
C) may increase or decrease;increases. 
D) decreases;may increase or decrease. 
A) increases;increases. 
B) decreases;increases. 
C) may increase or decrease;increases. 
D) decreases;may increase or decrease.

Question 10

Consider two paths A and B for stock prices in a barrier option setting that result in the same terminal price.Paths A and B will have different payoff consequences for the barrier option if

Accepted Answer

A) Path A crossed the barrier before maturity while Path B did not. 
B) Both paths crossed the barrier prior to maturity but Path A re-crossed it while Path B did not. 
C) Neither path crossed the barrier prior to maturity. 
D) All of the above. 
A) Path A crossed the barrier before maturity while Path B did not. 
B) Both paths crossed the barrier prior to maturity but Path A re-crossed it while Path B did not. 
C) Neither path crossed the barrier prior to maturity. 
D) All of the above.

Question 11

Given a current stock price $S$ ,strike price $K$ ,and barrier $H$ ,which of the following statements is most valid?

Accepted Answer

A) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-in put increases in value and a down-and-out put falls in value. 
B) Given $H < S < K$
,if the barrier
 $H$
Is moved lower,then a down-and-in put and a down-and-out put both increase in value. 
C) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-out call increases in value and a down-and-in call decreases in value. 
D) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-out call and a down-and-in call both increase in value. 
A) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-in put increases in value and a down-and-out put falls in value. 
B) Given $H < S < K$
,if the barrier
 $H$
Is moved lower,then a down-and-in put and a down-and-out put both increase in value. 
C) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-out call increases in value and a down-and-in call decreases in value. 
D) Given $H < K < S$
,if the barrier
 $H$
Is moved lower,then a down-and-out call and a down-and-in call both increase in value.

Question 12

Consider the following at-the-money options,all of the same maturity: a vanilla European call ( $C _ { E }$ ),an American vanilla call ( $C _ { A }$ ),a fixed-strike lookback call ( $C _ { L }$ ).Which of the following is correct?

Accepted Answer

A)  $C _ { L } \leq C _ {E } \leq C _ { A }$. 
B)  $C _ { L } \leq C _ {E } \leq C _ { A }$ 
C)  $C _ {E } \leq C _ { A } \leq C _ { L }$ 
D)  $C _ { A } \leq C _ { E } \leq C _ { L }$. 
A)  $C _ { L } \leq C _ {E } \leq C _ { A }$. 
B)  $C _ { L } \leq C _ {E } \leq C _ { A }$ 
C)  $C _ {E } \leq C _ { A } \leq C _ { L }$ 
D)  $C _ { A } \leq C _ { E } \leq C _ { L }$.

Question 13

An Asian option is an option where

Accepted Answer

A) The underlying is the average of the stock price for a specified period. 
B) The strike price is the average of the stock price over a specified period. 
C) The average can be an arithmetic or geometric average. 
D) All of the above are possible in an Asian option. 
A) The underlying is the average of the stock price for a specified period. 
B) The strike price is the average of the stock price over a specified period. 
C) The average can be an arithmetic or geometric average. 
D) All of the above are possible in an Asian option.

Question 14

You hold a fixed-strike lookback put option written on a stock that was at-the-money at inception.The stock price at inception was $56,the stock price at maturity is $63,and the lowest and highest stock prices observed over the option's life are,respectively,$52 and $64.The payoff from the option at maturity is

Accepted Answer

A) Zero. 
B) $4. 
C) $8. 
D) $11. 
A) Zero. 
B) $4. 
C) $8. 
D) $11.

Question 15

At inception,which of the following options would have the lowest value? Assume that the strike price of all the options is set equal to the current price of the underlying stock.

Accepted Answer

A) Arithmetic average Asian call option. 
B) Geometric average Asian call option. 
C) Vanilla European call. 
D) Vanilla American call. 
A) Arithmetic average Asian call option. 
B) Geometric average Asian call option. 
C) Vanilla European call. 
D) Vanilla American call.

Question 16

In one type of a lookback option,

Accepted Answer

A) You can decide to change the option from a call to a put or vice versa at the last minute. 
B) You can take any observed price prior to maturity as the strike of the option. 
C) You can take the average observed price of the underlying in determining the option payoff. 
D) The initial price of the underlying acts as the strike price of the option. 
A) You can decide to change the option from a call to a put or vice versa at the last minute. 
B) You can take any observed price prior to maturity as the strike of the option. 
C) You can take the average observed price of the underlying in determining the option payoff. 
D) The initial price of the underlying acts as the strike price of the option.

Question 17

When is an Asian option less useful than a vanilla option?

Accepted Answer

A) For reducing the incentives for price manipulation of the underlying close to maturity. 
B) For making the option less sensitive to jump risk close to maturity. 
C) For hedging exposure to the average price of a security. 
D) For taking directional bets. 
A) For reducing the incentives for price manipulation of the underlying close to maturity. 
B) For making the option less sensitive to jump risk close to maturity. 
C) For hedging exposure to the average price of a security. 
D) For taking directional bets.

Question 18

Assuming no rebates upon knock-out,a down-and-out call option is worth less than a vanilla call

Accepted Answer

A) When the knock-out barrier lies above the current stock price. 
B) When the knock-out barrier lies below the current stock price. 
C) When the knock-out barrier is far from the strike price. 
D) Always. 
A) When the knock-out barrier lies above the current stock price. 
B) When the knock-out barrier lies below the current stock price. 
C) When the knock-out barrier is far from the strike price. 
D) Always.

Question 19

An up-and-out put may be preferred to a vanilla put

Accepted Answer

A) Because it results in higher payoffs in all circumstances. 
B) Because it sometimes pays off even when the stock price rises whereas the vanilla only pays off when the stock price falls. 
C) By an Investor with strong directional views because it is a cheaper form of taking on a directional bet. 
D) By an investor more concerned with direction than volatility because the down-and-out put always reacts negatively to volatility unlike the vanilla put. 
A) Because it results in higher payoffs in all circumstances. 
B) Because it sometimes pays off even when the stock price rises whereas the vanilla only pays off when the stock price falls. 
C) By an Investor with strong directional views because it is a cheaper form of taking on a directional bet. 
D) By an investor more concerned with direction than volatility because the down-and-out put always reacts negatively to volatility unlike the vanilla put.

Question 20

A number of companies were accused of "backdating" executive stock options in the 2000s.Backdating is the procedure by which companies chose the date on which the stock was was most favorable (i.e. ,at its lowest)to act as the putative start date of the option grant.By permitting backdating,companies were essentially giving their executives a form of a

Accepted Answer

A) Cliquet option. 
B) Shout option. 
C) Floating-strike lookback option. 
D) Fixed-strike lookback option. 
A) Cliquet option. 
B) Shout option. 
C) Floating-strike lookback option. 
D) Fixed-strike lookback option.

Exam 19: Exotic Options II: Path-Dependent Options

Which of the following statements is most valid?

You hold a floating-strike lookback put option written on a stock.The stock price at inception was $56,the stock price at maturity is $63,and the lowest and highest stock prices observed over the option's life are,respectively,$52 and $64.The payoff from the option at maturity is

Consider an option that pays $1000 if the stock price at maturity falls outside a range [K1,K2]\left[ K _ { 1 } , K _ { 2 } \right][K1​,K2​] .Which of the following is valid?

Which of the following statements is accurate concerning knock-out call options?

An option is said to be path-dependent if

A cliquet is equivalent to a family of forward starting options in which one option comes to life at each reset date and expires on the next reset date.A reverse cliquet

Cliquet options are purchased because

The USD/GBP exchange rate is $1.575/ fff .An investor buys a knock-out USD call/GBP put with a strike of $1.575/ fff and a barrier of $1.515/ £££ .The implied view of the investor is

When volatility increases,the value of a down-and-out put ,and the value of a down-and-in put.

Consider two paths A and B for stock prices in a barrier option setting that result in the same terminal price.Paths A and B will have different payoff consequences for the barrier option if

Given a current stock price SSS ,strike price KKK ,and barrier HHH ,which of the following statements is most valid?

Consider the following at-the-money options,all of the same maturity: a vanilla European call ( CEC _ { E }CE​ ),an American vanilla call ( CAC _ { A }CA​ ),a fixed-strike lookback call ( CLC _ { L }CL​ ).Which of the following is correct?

An Asian option is an option where

At inception,which of the following options would have the lowest value? Assume that the strike price of all the options is set equal to the current price of the underlying stock.

In one type of a lookback option,

When is an Asian option less useful than a vanilla option?

Assuming no rebates upon knock-out,a down-and-out call option is worth less than a vanilla call

An up-and-out put may be preferred to a vanilla put

Overview

Futures Markets

Pricing Forwards and Futures I

Pricing Forwards Futures II

Hedging With Futures Forwards

Interest-Rate Forwards Futures

Options Markets

Options: Payoffs Trading Strategies

No-Arbitrage Restrictions

Early-Exercise/Put-Call Parity

Option Pricing: An Introduction

Binomial Option Pricing

Implementing the Binomial Model

The Black-Scholes Model

Mathematics of Black-Scholes

Beyond Black-Scholes

The Option Greeks

Path-Independent Exotic Options

Value at Risk

Swaps and Floating Rate Products

Equity Swaps

Currency and Commodity Swaps

Term Structure of Interest Rates: Concepts

Estimating the Yield Curve

Modeling Term Structure Movements

Factor Models of the Term Structure

The Heath-Jarrow-Morton Hjmand Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters

Consider an option that pays $1000 if the stock price at maturity falls outside a range $\left[ K _ { 1 } , K _ { 2 } \right]$ .Which of the following is valid?

The USD/GBP exchange rate is $1.575/ $f$ .An investor buys a knock-out USD call/GBP put with a strike of $1.575/ $f$ and a barrier of $1.515/ $£$ .The implied view of the investor is

Given a current stock price $S$ ,strike price $K$ ,and barrier $H$ ,which of the following statements is most valid?

Consider the following at-the-money options,all of the same maturity: a vanilla European call ( $C _ { E }$ ),an American vanilla call ( $C _ { A }$ ),a fixed-strike lookback call ( $C _ { L }$ ).Which of the following is correct?