Deck 22: Exotic Options and Other Nonstandard Products

Question 1

Which of the following would be referred to as an equity swap?

A)An exchange of the return from an equity index for a fixed rate of interest
B)An exchange of a long position in one stock for a long position in another stock
C)An exchange of a short position in one stock for a short position in another stock
D)None of the above

Answer 1

A

Question 2

A floating lookback put option pays off which of the following?

A)The amount by which the final stock price exceeds the minimum stock price
B)The amount by which the maximum stock price exceeds the final stock price
C)The amount by which the strike price exceeds the minimum stock price
D)The amount by which the maximum stock price exceeds the strike price

Answer 2

B

Question 3

In a shout call option the strike price is $30.The holder shouts when the asset price is $40.What is the payoff from the option if the final asset price is $35?

A)$0
B)$5
C)$10
D)$15

Answer 3

C

Question 4

An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted.What describes these options?

A)Chooser options
B)Forward start options
C)Compound options
D)Shout options

Question 5

In a LIBOR-in-arrears swap,which of the following is true?

A)The floating payment made on a date is the LIBOR rate on the previous payment date
B)The floating payment on a date is the LIBOR rate two payment dates ago
C)The floating payment on a date is the LIBOR rate on that date
D)The floating payment on a date is the LIBOR rate on that date only when it is higher than the LIBOR rate on the previous payment date

Question 6

A fixed lookback put option pays off which of the following?

A)The amount by which the final stock price exceeds the minimum stock price
B)The amount by which the maximum stock price exceeds the final stock price
C)The amount by which the strike price exceeds the minimum stock price
D)The amount by which the maximum stock price exceeds the strike price

Question 7

A PO is a "principal only" MBS and an IO is an "interest only" MBS.As prepayments increase which of the following happens?

A)Both the PO and IO become more valuable
B)The PO becomes more valuable and the IO becomes less valuable
C)The PO becomes less valuable and the IO becomes more valuable
D)Both the PO and IO become less valuable

Question 8

Which of the following are subject to prepayment risk?

A)Collateralized mortgage obligations
B)POs
C)IOs
D)All of the above

Question 9

There are two types of regular options (calls and puts).How many types of barrier options are there?

A)Two
B)Four
C)Six
D)Eight

Question 10

An Asian option is a term used to describe which of the following?

A)An option where the payoff depends on whether a barrier is hit
B)An option where the payoff depends on the average value of a variable over a period of time
C)An option that trades on an exchange in the Far East
D)Any option with a nonstandard payoff

Question 11

As the barrier is observed more frequently,a knock out option becomes which of the following?

A)More valuable
B)Less valuable
C)There is no effect on value
D)May become more valuable or less valuable

Question 12

Which of the following is equivalent to a long position in a European call option?

A)A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option
B)A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option
C)A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option
D)A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 13

When can Bermudan options be exercised?

A)Any time during the life of the options
B)Any time after a certain date up to the end of the life
C)Any time before a certain date or at the end of the option's life
D)On dates specified at the start of the option

Question 14

A binary option pays of $100 if a stock price is greater than its current value in three months.The risk-free rate is 3% and the volatility is 40%.Which of the following is its value?

A)99.25N(-0.1375)
B)99.25N(0.1375)
C)99.25N(-0.0625)
D)99.25N(0.0625)

Question 15

There are two types of regular options (calls and puts).How many types of compound options are there?

A)Two
B)Four
C)Six
D)Eight

Question 16

Which of the following is the payoff from an average strike call option?

A)The excess of the strike price over the average stock price.if positive
B)The excess of the final stock price over the average stock price.if positive
C)The excess of the average stock price over the strike price.if positive
D)The excess of the average stock price over the final stock price.if positive

Question 17

Which of the following is a five-year interest rate swap that can be canceled at the two year point?

A)The difference between two plain vanilla interest rate swaps
B)The difference between a plain vanilla interest rate swap and a forward start swap
C)A regular interest rate swap plus a European swap option
D)A regular interest rate swap plus a Bermudan swap option

Question 18

Which of the following is equivalent to a short position in a European put option?

A)A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option
B)A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option
C)A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option
D)A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option

Question 19

Which of the following is the payoff from an average strike put option?

A)The excess of the strike price over the average stock price.if positive
B)The excess of the final stock price over the average stock price.if positive
C)The excess of the average stock price over the strike price.if positive
D)The excess of the average stock price over the final stock price.if positive

Question 20

Which of the following describes a cliquet option?

A)An option to exchange one asset for another
B)An instrument when the holder can choose between several alternative options
C)An option on an option with predetermined strike prices for the two options
D)A series of options with rules for determining strike prices