Question 1

A floating lookback call option pays off which of the following

Accepted Answer

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 
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 B

Question 2

When can Bermudan options be exercised?

Accepted Answer

A) Any time during the life of the options 
B) Any time after a certain date up to the end of the life 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 
A) Any time during the life of the options 
B) Any time after a certain date up to the end of the life 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 D

Question 3

A binary option pays of $100 if a non-dividend-paying 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?

Accepted Answer

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

Question 4

Which of the following is true of a gap option

Accepted Answer

A) The strike price determining whether a payoff is made is not the same as the strike price determining the size of the payoff 
B) There is a straightforward valuation formula similar to Black-Scholes-Merton 
C) It describes an option where there is a cost to exercising 
D) All of the above 
A) The strike price determining whether a payoff is made is not the same as the strike price determining the size of the payoff 
B) There is a straightforward valuation formula similar to Black-Scholes-Merton 
C) It describes an option where there is a cost to exercising 
D) All of the above

Question 5

A fixed lookback put option pays off which of the following

Accepted Answer

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 
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 6

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

Accepted Answer

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 
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 7

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

Accepted Answer

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

Question 8

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

Accepted Answer

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

Question 9

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?

Accepted Answer

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

Question 10

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

Accepted Answer

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 
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 11

Which of the following describes a cliquet option

Accepted Answer

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 
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

Question 12

A volatility swap is

Accepted Answer

A) An instrument that swaps the change in the value of a market variable for a fixed amount 
B) A swap involving an asset whose volatility is greater than a certain level 
C) An exchange of the implied volatility of an option at a future time for a fixed volatility 
D) An exchange of the realized volatility of an asset for a fixed volatility 
A) An instrument that swaps the change in the value of a market variable for a fixed amount 
B) A swap involving an asset whose volatility is greater than a certain level 
C) An exchange of the implied volatility of an option at a future time for a fixed volatility 
D) An exchange of the realized volatility of an asset for a fixed volatility

Question 13

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

Accepted Answer

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 
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 14

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

Accepted Answer

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 
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 15

Static options replication for a portfolio of American options on a stock involves

Accepted Answer

A) Finding a hedge portfolio to match daily changes 
B) Finding a hedge portfolio to match values on a boundary that is certain to be reached 
C) Finding a hedge portfolio to match values at one particular time 
D) Constructing a hedge taking both gamma and delta into account 
A) Finding a hedge portfolio to match daily changes 
B) Finding a hedge portfolio to match values on a boundary that is certain to be reached 
C) Finding a hedge portfolio to match values at one particular time 
D) Constructing a hedge taking both gamma and delta into account

Question 16

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?

Accepted Answer

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

Question 17

As the barrier is observed more frequently,which of the following is true of a knock-out option

Accepted Answer

A) It becomes more valuable 
B) It becomes less valuable 
C) There is no effect on value 
D) It may become more valuable or less valuable 
A) It becomes more valuable 
B) It becomes less valuable 
C) There is no effect on value 
D) It may become more valuable or less valuable

Question 18

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

Accepted Answer

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 
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 19

Exotic options

Accepted Answer

A) Can always be hedged just as easily as regular options 
B) Are easier to hedge than regular options 
C) Are more difficult to hedge than regular options 
D) Are sometimes easier and sometimes more difficult to hedge than regular options. 
A) Can always be hedged just as easily as regular options 
B) Are easier to hedge than regular options 
C) Are more difficult to hedge than regular options 
D) Are sometimes easier and sometimes more difficult to hedge than regular options.

Question 20

Which of the following is true

Accepted Answer

A) A variance swap is worth the square of a volatility swap 
B) The payments on a variance swap are the square of the payments on a volatility swap 
C) Variance swaps can be valued in terms of European call and put options. 
D) None of the above 
A) A variance swap is worth the square of a volatility swap 
B) The payments on a variance swap are the square of the payments on a volatility swap 
C) Variance swaps can be valued in terms of European call and put options. 
D) None of the above

Exam 26: Exotic Options

A floating lookback call option pays off which of the following

When can Bermudan options be exercised?

A binary option pays of $100 if a non-dividend-paying 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?

Which of the following is true of a gap option

A fixed lookback put option pays off which of the following

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

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

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

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?

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

Which of the following describes a cliquet option

A volatility swap is

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

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

Static options replication for a portfolio of American options on a stock involves

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?

As the barrier is observed more frequently,which of the following is true of a knock-out option

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

Exotic options

Which of the following is true

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

OIS Discounting, Credit Issues, and Funding Costs

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Ito’s Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk

Estimating Volatilities and Correlations

Credit Risk

Credit Derivatives

Filters