Question 1

A shout option

Accepted Answer

A)  Is like a barrier option but in which the option holder gets to choose a barrier at any point. 
B)  Is effectively an American option which can be exercised at any time before maturity. 
C)  Is an option where you can lock-in "early-exercise" profits at any one point and receive, at maturity, the maximum of these locked-in profits or the moneyness of the option at maturity. 
D)  Is a Bermudan option with only one specified early-exercise date, that is, it can be exercised early on that given date or at maturity. 
A)  Is like a barrier option but in which the option holder gets to choose a barrier at any point. 
B)  Is effectively an American option which can be exercised at any time before maturity. 
C)  Is an option where you can lock-in "early-exercise" profits at any one point and receive, at maturity, the maximum of these locked-in profits or the moneyness of the option at maturity. 
D)  Is a Bermudan option with only one specified early-exercise date, that is, it can be exercised early on that given date or at maturity.

Question 2

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 3

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 4

In the 1990s, a number of companies which had experienced sharp stock price declines, "repriced" previously-awarded employee stock options. Repricing consisted of resetting the options' strike prices to the current stock price (so as to bring them closer to the money). Suppose a company awards at-the-money stock options to its employees and decides it will reprice them if the stock price falls 50% from the initial award date. Then, the employee stock option is equivalent to a portfolio of

Accepted Answer

A)  A vanilla call and a forward-starting call. 
B)  A knock-out and a knock-in barrier call option. 
C)  A knock-out call and a forward-strarting call. 
D)  A cliquet. 
A)  A vanilla call and a forward-starting call. 
B)  A knock-out and a knock-in barrier call option. 
C)  A knock-out call and a forward-strarting call. 
D)  A cliquet.

Question 5

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 6

A cliquet is analogous to

Accepted Answer

A)  A portfolio of vanilla options, all at-the-money today, and expiring on the reset dates of the cliquet. 
B)  A portfolio of digital options, with one option coming to life at each reset date and expiring at the next reset date. 
C)  A portfolio of forward-starts, with one option coming to life at each reset date and expiring at the next reset date. 
D)  A portfolio of exchange options, with one option coming to life at each reset date and expiring at the next reset date. 
A)  A portfolio of vanilla options, all at-the-money today, and expiring on the reset dates of the cliquet. 
B)  A portfolio of digital options, with one option coming to life at each reset date and expiring at the next reset date. 
C)  A portfolio of forward-starts, with one option coming to life at each reset date and expiring at the next reset date. 
D)  A portfolio of exchange options, with one option coming to life at each reset date and expiring at the next reset date.

Question 7

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 8

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 9

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 10

The USD/GBP exchange rate is $1.575/ £ . An investor buys a knock-out USD call/GBP put with a strike of $1.575/ £ 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 11

A portfolio comprising an up-and-out put and an up-and-in put is equivalent to

Accepted Answer

A)  A up-and-out call and a up-and-in call. 
B)  A vanilla call. 
C)  A down-and-out put and a down-and-in put. 
D)  A vanilla put 
A)  A up-and-out call and a up-and-in call. 
B)  A vanilla call. 
C)  A down-and-out put and a down-and-in put. 
D)  A vanilla put

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

Which of the following statements about backdating is most valid?

Accepted Answer

A)  A backdated option is one that is issued prior to today. 
B)  Backdating usually involves the issuance of an option with a prior issue date and lower strike than today's price. 
C)  Backdating usually involves the ex-post issuance of an out-of-the-money option. 
D)  A backdated option is exactly the same as a fixed-strike lookback option. 
A)  A backdated option is one that is issued prior to today. 
B)  Backdating usually involves the issuance of an option with a prior issue date and lower strike than today's price. 
C)  Backdating usually involves the ex-post issuance of an out-of-the-money option. 
D)  A backdated option is exactly the same as a fixed-strike lookback option.

Exam 19: Exotic Options II: Path-Dependent Options

A shout option

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

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

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.

A cliquet is analogous to

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

An Asian option is an option where

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

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

A portfolio comprising an up-and-out put and an up-and-in put is equivalent to

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?

Which of the following statements about backdating is most valid?

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 HJM and Libor Market Model LMM

Credit Derivative Products

Structural Models of Default Risk

Reduced-Form Models of Default Risk

Modeling Correlated Default

Filters

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?