Question 1

A standard (Black-Scholes) European option is equivalent to a combination of a down-and-out call plus a down-and-out put.

Accepted Answer

A) True 
 B)False

Question 2

Digital options can be used to synthetically create a position in a zero coupon bond by

Accepted Answer

A)  purchasing a cash-or-nothing digital put and selling an asset-or-nothing digital call 
B)  purchasing both a cash-or-nothing digital call and a cash-or-nothing digital put 
C)  purchasing both an asset-or-nothing digital call and an asset-or-nothing digital put 
D)  purchasing a cash-or-nothing digital call and selling a cash-or-nothing digital put 
E)  purchasing an asset-or-nothing digital call and selling an asset-or-nothing digital put 
A)  purchasing a cash-or-nothing digital put and selling an asset-or-nothing digital call 
B)  purchasing both a cash-or-nothing digital call and a cash-or-nothing digital put 
C)  purchasing both an asset-or-nothing digital call and an asset-or-nothing digital put 
D)  purchasing a cash-or-nothing digital call and selling a cash-or-nothing digital put 
E)  purchasing an asset-or-nothing digital call and selling an asset-or-nothing digital put

Question 3

If you buy an asset-or-nothing option and a cash-or-nothing option, you hold the equivalent of an ordinary European option.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements about mortgage-backed security strips is true?

Accepted Answer

A)  both interest-only and principal-only strips are subject to pre-payment risk 
B)  only principal-only strips are subject to prepayment risk 
C)  only interest-only strips are subject to prepayment risk 
D)  the prepayment risk of interest-only and principal-only strips is precisely offsetting 
E)  none of the above 
A)  both interest-only and principal-only strips are subject to pre-payment risk 
B)  only principal-only strips are subject to prepayment risk 
C)  only interest-only strips are subject to prepayment risk 
D)  the prepayment risk of interest-only and principal-only strips is precisely offsetting 
E)  none of the above

Question 5

Large stock price moves reduce the effectiveness of portfolio insurance.

Accepted Answer

A) True 
 B)False

Question 6

Upside capture is defined as the

Accepted Answer

A)  dollar value of the uninsured portfolio value minus the insured portfolio value 
B)  percentage of the insured portfolio value that is represented by the uninsured portfolio value 
C)  dollar value of the insured portfolio value minus the uninsured portfolio value 
D)  percentage of the uninsured portfolio value that is represented by the insured portfolio value 
E)  put premium as a percentage of the original portfolio value 
A)  dollar value of the uninsured portfolio value minus the insured portfolio value 
B)  percentage of the insured portfolio value that is represented by the uninsured portfolio value 
C)  dollar value of the insured portfolio value minus the uninsured portfolio value 
D)  percentage of the uninsured portfolio value that is represented by the insured portfolio value 
E)  put premium as a percentage of the original portfolio value

Question 7

What is the minimum value of the insured portfolio?

Accepted Answer

A)  $16,672,344 
B)  $12,500,000 
C)  $12,091,709 
D)  $12,244,898 
E)  $13,375,000 
A)  $16,672,344 
B)  $12,500,000 
C)  $12,091,709 
D)  $12,244,898 
E)  $13,375,000

Question 8

An equity forward contract is

Accepted Answer

A)  a forward contract on LIBOR secured by a stock as collateral 
B)  a futures contract on a stock index that is not marked-to-market 
C)  a call option on a stock with greater downside risk than an ordinary call 
D)  a forward contract whose payoff is determined by a stock or index 
E)  none of the above 
A)  a forward contract on LIBOR secured by a stock as collateral 
B)  a futures contract on a stock index that is not marked-to-market 
C)  a call option on a stock with greater downside risk than an ordinary call 
D)  a forward contract whose payoff is determined by a stock or index 
E)  none of the above

Question 9

A contingent-pay option is replicated by which of the following combinations?

Accepted Answer

A)  long an ordinary call and long an ordinary put 
B)  long an ordinary call and short a cash-or-nothing call 
C)  long an ordinary call and short an asset-or-nothing call 
D)  long an ordinary call and long an equity forward 
E)  long an ordinary call and long a risk-free bond 
A)  long an ordinary call and long an ordinary put 
B)  long an ordinary call and short a cash-or-nothing call 
C)  long an ordinary call and short an asset-or-nothing call 
D)  long an ordinary call and long an equity forward 
E)  long an ordinary call and long a risk-free bond

Question 10

If the insured portfolio were dynamically hedged with T-bills, how many T-bills would be used?

Accepted Answer

A)  16,332 
B)  63,002 
C)  126,723 
D)  61,672 
E)  32,468 
A)  16,332 
B)  63,002 
C)  126,723 
D)  61,672 
E)  32,468

Question 11

A range floater is a security with which of the following characteristics

Accepted Answer

A)  the payments range from a given maximum to a given minimum 
B)  the maturity is limited to a fixed range 
C)  its payments are based on whether the rate stays within a range 
D)  all of the above 
E)  none of the above 
A)  the payments range from a given maximum to a given minimum 
B)  the maturity is limited to a fixed range 
C)  its payments are based on whether the rate stays within a range 
D)  all of the above 
E)  none of the above

Question 12

A security that pays off the return from a combination of mortgages is called a

Accepted Answer

A)  homeowners' equity claim 
B)  mortgage portfolio 
C)  mortgage option 
D)  mortgage-backed security 
E)  none of the above 
A)  homeowners' equity claim 
B)  mortgage portfolio 
C)  mortgage option 
D)  mortgage-backed security 
E)  none of the above

Question 13

Barrier options either begin or end when the stock hits a certain price.

Accepted Answer

A) True 
 B)False

Question 14

Mortgage-backed securities are widely used to make home ownership more affordable.

Accepted Answer

A) True 
 B)False

Question 15

A quanto is a derivative involving two currencies in which the payoff is based on a fixed exchange rate.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is correct about cash-or-nothing options

Accepted Answer

A)  they are subject to no credit risk 
B)  they must be priced by the binomial model 
C)  they have lower upside gains and lower downside losses than ordinary options 
D)  they are equivalent to short positions in asset-or-nothing options 
E)  none of the above 
A)  they are subject to no credit risk 
B)  they must be priced by the binomial model 
C)  they have lower upside gains and lower downside losses than ordinary options 
D)  they are equivalent to short positions in asset-or-nothing options 
E)  none of the above

Question 17

Identify the false statement related to break forward contracts.

Accepted Answer

A)  It is a combination of spot and derivative positions that replicates an ordinary call option. 
B)  The initial positions are structured so that the overall position costs nothing up front. 
C)  Penalizes the investor if the option ends up out-of-the-money. 
D)  Break denotes the ability of the purchaser to void the contract. 
E)  All of the above statements are true related to break forward contracts. 
A)  It is a combination of spot and derivative positions that replicates an ordinary call option. 
B)  The initial positions are structured so that the overall position costs nothing up front. 
C)  Penalizes the investor if the option ends up out-of-the-money. 
D)  Break denotes the ability of the purchaser to void the contract. 
E)  All of the above statements are true related to break forward contracts.

Question 18

Digital options can be used to synthetically create a position in an underlying instrument by

Accepted Answer

A)  purchasing a cash-or-nothing digital put and selling an asset-or-nothing digital call 
B)  purchasing both a cash-or-nothing digital call and a cash-or-nothing digital put 
C)  purchasing both an asset-or-nothing digital call and an asset-or-nothing digital put 
D)  purchasing a cash-or-nothing digital call and selling a cash-or-nothing digital put 
E)  purchasing an asset-or-nothing digital call and selling an asset-or-nothing digital put 
A)  purchasing a cash-or-nothing digital put and selling an asset-or-nothing digital call 
B)  purchasing both a cash-or-nothing digital call and a cash-or-nothing digital put 
C)  purchasing both an asset-or-nothing digital call and an asset-or-nothing digital put 
D)  purchasing a cash-or-nothing digital call and selling a cash-or-nothing digital put 
E)  purchasing an asset-or-nothing digital call and selling an asset-or-nothing digital put

Question 19

The rate on a constant maturity swap is based on a U. S. Treasury security of a given maturity.

Accepted Answer

A) True 
 B)False

Question 20

In practice portfolio insurance strategies are usually executed using put options.

Accepted Answer

A) True 
 B)False

A standard (Black-Scholes) European option is equivalent to a combination of a down-and-out call plus a down-and-out put.

Digital options can be used to synthetically create a position in a zero coupon bond by

If you buy an asset-or-nothing option and a cash-or-nothing option, you hold the equivalent of an ordinary European option.

Which of the following statements about mortgage-backed security strips is true?

Large stock price moves reduce the effectiveness of portfolio insurance.

Upside capture is defined as the

What is the minimum value of the insured portfolio?

An equity forward contract is

A contingent-pay option is replicated by which of the following combinations?

If the insured portfolio were dynamically hedged with T-bills, how many T-bills would be used?

A range floater is a security with which of the following characteristics

A security that pays off the return from a combination of mortgages is called a

Barrier options either begin or end when the stock hits a certain price.

Mortgage-backed securities are widely used to make home ownership more affordable.

A quanto is a derivative involving two currencies in which the payoff is based on a fixed exchange rate.

Which of the following statements is correct about cash-or-nothing options

Identify the false statement related to break forward contracts.

Digital options can be used to synthetically create a position in an underlying instrument by

The rate on a constant maturity swap is based on a U. S. Treasury security of a given maturity.

In practice portfolio insurance strategies are usually executed using put options.

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

A standard (Black-Scholes) European option is equivalent to a combination of a down-and-out call plus a down-and-out put.

Digital options can be used to synthetically create a position in a zero coupon bond by

If you buy an asset-or-nothing option and a cash-or-nothing option, you hold the equivalent of an ordinary European option.

Which of the following statements about mortgage-backed security strips is true?

Large stock price moves reduce the effectiveness of portfolio insurance.

Upside capture is defined as the

What is the minimum value of the insured portfolio?

An equity forward contract is

A contingent-pay option is replicated by which of the following combinations?

If the insured portfolio were dynamically hedged with T-bills, how many T-bills would be used?

A range floater is a security with which of the following characteristics

A security that pays off the return from a combination of mortgages is called a

Barrier options either begin or end when the stock hits a certain price.

Mortgage-backed securities are widely used to make home ownership more affordable.

A quanto is a derivative involving two currencies in which the payoff is based on a fixed exchange rate.

Which of the following statements is correct about cash-or-nothing options

Identify the false statement related to break forward contracts.

Digital options can be used to synthetically create a position in an underlying instrument by

The rate on a constant maturity swap is based on a U. S. Treasury security of a given maturity.

In practice portfolio insurance strategies are usually executed using put options.

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