Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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 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

A security that is sub-divided into securities called tranches is called a

Accepted Answer

A) principal-only strip 
B) asian lookback option 
C) range mortgage strip 
D) collateralized mortgage obligation 
E) none of the above 
A) principal-only strip 
B) asian lookback option 
C) range mortgage strip 
D) collateralized mortgage obligation 
E) none of the above

Question 6

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.
-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

Question 7

A lookback call option provides the right

Accepted Answer

A) to change the stock on which the option is written 
B) to buy the stock at its lowest price over the option's life 
C) to insure a stock against loss 
D) to change your mind about the exercise price 
E) none of the above 
A) to change the stock on which the option is written 
B) to buy the stock at its lowest price over the option's life 
C) to insure a stock against loss 
D) to change your mind about the exercise price 
E) none of the above

Question 8

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 9

Asian options provide the right to give up U.S.dollars and receive an Asian stock return.

Accepted Answer

A) True 
 B)False

Question 10

Portfolio insurance using stock and T-bills is less expensive than using stock and puts.

Accepted Answer

A) True 
 B)False

Question 11

Warrants have been around much longer than exchange-listed options.

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 were dynamically hedged with stock index futures,how many futures would be used? The call delta is 0.52 and the continuous risk-free rate is 5.48 percent.Each futures has a multiplier of 250 and a price of 777.30.

Accepted Answer

A) 60 
B) 64 
C) 30 
D) 32 
E) none of the above 
A) 60 
B) 64 
C) 30 
D) 32 
E) none of the above

Question 13

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 14

The primary problem in pricing electricity derivatives is that

Accepted Answer

A) the volatility cannot be measured 
B) the underlying asset cannot be stored 
C) electricity is a homogeneous product 
D) the demand for electricity is unpredictable 
E) the electricity market is unregulated 
A) the volatility cannot be measured 
B) the underlying asset cannot be stored 
C) electricity is a homogeneous product 
D) the demand for electricity is unpredictable 
E) the electricity market is unregulated

Question 15

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.
-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 16

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 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

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

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

Upside capture is defined as the

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

A security that is sub-divided into securities called tranches is called a

A lookback call option provides the right

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

Asian options provide the right to give up U.S.dollars and receive an Asian stock return.

Portfolio insurance using stock and T-bills is less expensive than using stock and puts.

Warrants have been around much longer than exchange-listed options.

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

The primary problem in pricing electricity derivatives is that

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

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

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

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

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

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

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

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

Upside capture is defined as the

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

A security that is sub-divided into securities called tranches is called a

A lookback call option provides the right

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

Asian options provide the right to give up U.S.dollars and receive an Asian stock return.

Portfolio insurance using stock and T-bills is less expensive than using stock and puts.

Warrants have been around much longer than exchange-listed options.

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

The primary problem in pricing electricity derivatives is that

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

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

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

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

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

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