Question 1

How many puts should be used to insure this portfolio?

Accepted Answer

A)  122,584 
B)  31,397 
C)  62,814 
D)  961,538 
E)  32,468 
A)  122,584 
B)  31,397 
C)  62,814 
D)  961,538 
E)  32,468 B

Question 2

One attractive feature of weather as the underlying in a derivative is that it is easily measurable.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following is a path-independent option

Accepted Answer

A)  a fixed strike Asian call option 
B)  a standard European call option 
C)  an up-and-out call option 
D)  an American put option 
E)  none of the above 
A)  a fixed strike Asian call option 
B)  a standard European call option 
C)  an up-and-out call option 
D)  an American put option 
E)  none of the above B

Question 4

A contingent-pay option allows the holder to decide at expiration if he or she wants to pay for it.

Accepted Answer

A) True 
 B)False

Question 5

The Black-Scholes model is not appropriate for pricing electricity derivatives.

Accepted Answer

A) True 
 B)False

Question 6

The cost of a break forward contract is a result of the possibility of having a negative value at expiration.

Accepted Answer

A) True 
 B)False

Question 7

If the stock price is currently 36, the exercise price is 35 and the stock ends up at 44, the value of an asset-or-nothing option at expiration is

Accepted Answer

A)  35 
B)  8 
C)  9 
D)  44 
E)  none of the above 
A)  35 
B)  8 
C)  9 
D)  44 
E)  none of the above

Question 8

Interest-only strips lose the some or all of the end of their stream of cash flows if prepayment occurs.

Accepted Answer

A) True 
 B)False

Question 9

Modified lookback options fix the exercise price and replace the expiration price of the asset with the maximum or minimum price.

Accepted Answer

A) True 
 B)False

Question 10

The opportunity cost of portfolio insurance is the difference in the value of the insured portfolio and the value of the uninsured portfolio when the market goes up.

Accepted Answer

A) True 
 B)False

Question 11

Path-dependent options have payoffs that cannot be determined without examining exactly how the asset moved during the life of the option.

Accepted Answer

A) True 
 B)False

Question 12

Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.

Accepted Answer

A) True 
 B)False

Question 13

A chooser option permits you to choose the exercise price at a later date before expiration.

Accepted Answer

A) True 
 B)False

Question 14

When pursuing portfolio insurance of a stock position, the minimum value of the portfolio is equal to

Accepted Answer

A)  zero 
B)  strike price times the number of shares of stocks and puts held 
C)  strike price divided by the number of shares of stocks and puts held 
D)  stock price times the number of shares of stocks held 
E)  strike price times the initial value of the portfolio divided by the stock price minus the put price 
A)  zero 
B)  strike price times the number of shares of stocks and puts held 
C)  strike price divided by the number of shares of stocks and puts held 
D)  stock price times the number of shares of stocks held 
E)  strike price times the initial value of the portfolio divided by the stock price minus the put price

Question 15

An inverse floater shortens its maturity when the underlying rate hits a certain level.

Accepted Answer

A) True 
 B)False

Question 16

Weather derivative payoffs can be based on each of the following variables except

Accepted Answer

A)  temperature above a given level 
B)  inches of snowfall 
C)  total value of insurance claims 
D)  temperature below a given level 
E)  sunshine 
A)  temperature above a given level 
B)  inches of snowfall 
C)  total value of insurance claims 
D)  temperature below a given level 
E)  sunshine

Question 17

The upside capture measure is always less than one hundred percent.

Accepted Answer

A) True 
 B)False

Question 18

Suppose a firm offers an equity-linked security. The face value is $1 million and its payoff is based on any appreciation in an equity index currently at 855.50. It has determined that of the $1 million raised, it can structure the option component so that its value is $135,000. Currently an at-the-money call option is worth $125. What percentage of the gain in the index can it offer?

Accepted Answer

A)  92 percent 
B)  100 percent 
C)  50 percent 
D)  8.23 percent 
E)  none of the above 
A)  92 percent 
B)  100 percent 
C)  50 percent 
D)  8.23 percent 
E)  none of the above

Question 19

If the S&P 500 ends up at 401, determine the upside capture.

Accepted Answer

A)  96.7 percent 
B)  96 percent 
C)  99.3 percent 
D)  94 percent 
E)  100 percent 
A)  96.7 percent 
B)  96 percent 
C)  99.3 percent 
D)  94 percent 
E)  100 percent

Question 20

The number of possible final average prices in an Asian option for a four period binomial model is

Accepted Answer

A)  8 
B)  4 
C)  16 
D)  32 
E)  none of the above 
A)  8 
B)  4 
C)  16 
D)  32 
E)  none of the above

How many puts should be used to insure this portfolio?

One attractive feature of weather as the underlying in a derivative is that it is easily measurable.

Which of the following is a path-independent option

A contingent-pay option allows the holder to decide at expiration if he or she wants to pay for it.

The Black-Scholes model is not appropriate for pricing electricity derivatives.

The cost of a break forward contract is a result of the possibility of having a negative value at expiration.

If the stock price is currently 36, the exercise price is 35 and the stock ends up at 44, the value of an asset-or-nothing option at expiration is

Interest-only strips lose the some or all of the end of their stream of cash flows if prepayment occurs.

Modified lookback options fix the exercise price and replace the expiration price of the asset with the maximum or minimum price.

The opportunity cost of portfolio insurance is the difference in the value of the insured portfolio and the value of the uninsured portfolio when the market goes up.

Path-dependent options have payoffs that cannot be determined without examining exactly how the asset moved during the life of the option.

Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.

A chooser option permits you to choose the exercise price at a later date before expiration.

When pursuing portfolio insurance of a stock position, the minimum value of the portfolio is equal to

An inverse floater shortens its maturity when the underlying rate hits a certain level.

Weather derivative payoffs can be based on each of the following variables except

The upside capture measure is always less than one hundred percent.

If the S&P 500 ends up at 401, determine the upside capture.

The number of possible final average prices in an Asian option for a four period binomial model is

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 14: Advanced Derivatives and Strategies

How many puts should be used to insure this portfolio?

One attractive feature of weather as the underlying in a derivative is that it is easily measurable.

Which of the following is a path-independent option

A contingent-pay option allows the holder to decide at expiration if he or she wants to pay for it.

The Black-Scholes model is not appropriate for pricing electricity derivatives.

The cost of a break forward contract is a result of the possibility of having a negative value at expiration.

If the stock price is currently 36, the exercise price is 35 and the stock ends up at 44, the value of an asset-or-nothing option at expiration is

Interest-only strips lose the some or all of the end of their stream of cash flows if prepayment occurs.

Modified lookback options fix the exercise price and replace the expiration price of the asset with the maximum or minimum price.

The opportunity cost of portfolio insurance is the difference in the value of the insured portfolio and the value of the uninsured portfolio when the market goes up.

Path-dependent options have payoffs that cannot be determined without examining exactly how the asset moved during the life of the option.

Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.

A chooser option permits you to choose the exercise price at a later date before expiration.

When pursuing portfolio insurance of a stock position, the minimum value of the portfolio is equal to

An inverse floater shortens its maturity when the underlying rate hits a certain level.

Weather derivative payoffs can be based on each of the following variables except

The upside capture measure is always less than one hundred percent.

If the S&P 500 ends up at 401, determine the upside capture.

The number of possible final average prices in an Asian option for a four period binomial model is

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters