Question 1

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 2

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 3

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 4

Dynamic hedging can be performed by using stock and risk-free debt to achieve portfolio insurance by setting the delta of the stock-debt combination to the delta of a combination of stock and puts.

Accepted Answer

A) True 
 B)False

Question 5

Because a chooser option enables the holder to end up with either a put or a call,it is equivalent to a straddle.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

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 9

A chooser option is similar to what other type of option strategy

Accepted Answer

A) put-call parity 
B) a covered call 
C) a protective put 
D) a combination bull and bear spread 
E) none of the above 
A) put-call parity 
B) a covered call 
C) a protective put 
D) a combination bull and bear spread 
E) none of the above

Question 10

An option to buy an option is called a compound option.

Accepted Answer

A) True 
 B)False

Question 11

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 12

Answer questions 1 through 6 about insuring a portfolio identical to the S&P 500 worth $12,500,000 with a three-month horizon. The risk-free rate is 7 percent. Three-month T-bills are available at a price of $98.64 per $100 face value. The S&P 500 is at 385. Puts with an exercise price of 390 are available at a price of 13. Calls with an exercise price of 390 are available at a price of 13.125. Round off your answers to the nearest integer.
-If the insured portfolio consisted entirely of calls and T-bills,how many would be used?

Accepted Answer

A) 19,143 calls and 124,176 T-bills 
B) 31,397 calls and 122,449 T-bills 
C) 933,238 calls and 2,547 T-bills 
D) 31,407 calls and 119,997 T-bills 
E) 32,468 calls and 32,468 T-bills 
A) 19,143 calls and 124,176 T-bills 
B) 31,397 calls and 122,449 T-bills 
C) 933,238 calls and 2,547 T-bills 
D) 31,407 calls and 119,997 T-bills 
E) 32,468 calls and 32,468 T-bills

Question 13

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 14

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 15

Which of the following is not a type of structured note?

Accepted Answer

A) range floater 
B) inverse floater 
C) diff floater 
D) reverse floater 
E) none of the above 
A) range floater 
B) inverse floater 
C) diff floater 
D) reverse floater 
E) none of the above

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Answer questions 1 through 6 about insuring a portfolio identical to the S&P 500 worth $12,500,000 with a three-month horizon. The risk-free rate is 7 percent. Three-month T-bills are available at a price of $98.64 per $100 face value. The S&P 500 is at 385. Puts with an exercise price of 390 are available at a price of 13. Calls with an exercise price of 390 are available at a price of 13.125. Round off your answers to the nearest integer.
-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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

Identify the false statement related to break forward contracts.

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

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

Dynamic hedging can be performed by using stock and risk-free debt to achieve portfolio insurance by setting the delta of the stock-debt combination to the delta of a combination of stock and puts.

Because a chooser option enables the holder to end up with either a put or a call,it is equivalent to a straddle.

An equity forward contract is

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

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

A chooser option is similar to what other type of option strategy

An option to buy an option is called a compound option.

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

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

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

Which of the following is not a type of structured note?

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

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

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

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

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

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 13: Advanced Derivatives and Strategies

Identify the false statement related to break forward contracts.

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

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

Dynamic hedging can be performed by using stock and risk-free debt to achieve portfolio insurance by setting the delta of the stock-debt combination to the delta of a combination of stock and puts.

Because a chooser option enables the holder to end up with either a put or a call,it is equivalent to a straddle.

An equity forward contract is

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

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

A chooser option is similar to what other type of option strategy

An option to buy an option is called a compound option.

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

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

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

Which of the following is not a type of structured note?

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

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

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

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

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

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