Question 1

An exotic option is

Accepted Answer

A)  Any option written on an unusual or rare underlying asset. 
B)  An option that is traded only by boutique organizations. 
C)  Any option that is not a plain vanilla put or call. 
D)  Any option with very complex payoff patterns. 
A)  Any option written on an unusual or rare underlying asset. 
B)  An option that is traded only by boutique organizations. 
C)  Any option that is not a plain vanilla put or call. 
D)  Any option with very complex payoff patterns. C

Question 2

A three-month at-the-money call option on a stock index is trading at $5; the index is trading at $50. A forward start option on the index that comes to life in one month, has a life of three months from that point and that will be at-the-money when it comes to life, is trading at $4.98. The one-month rate of interest is 2% in continuously-compounded and annualized terms. What is the one-month forward price of the index?

Accepted Answer

A)  $50.00 
B)  $50.05 
C)  $50.25 
D)  $50.45 
A)  $50.00 
B)  $50.05 
C)  $50.25 
D)  $50.45 B

Question 3

The gamma of a cash-or-nothing binary call option and the theta of such an option

Accepted Answer

A)  is always positive; is always negative. 
B)  is always positive; can be positive or negative. 
C)  can be positive or negative; is always negative. 
D)  can be positive or negative; can be positive or negative. 
A)  is always positive; is always negative. 
B)  is always positive; can be positive or negative. 
C)  can be positive or negative; is always negative. 
D)  can be positive or negative; can be positive or negative. D

Question 4

You are long a portfolio of vanilla call options. Which of the following will help you hedge away your vega risk?

Accepted Answer

A)  Buying a portfolio of in-the-money vanilla put options. 
B)  Buying a portfolio of out-of-the money vanilla put options. 
C)  Buying a portfolio of in-the-money cash-or-nothing put options. 
D)  Buying a portfolio of out-of-the money cash-or-nothing put options. 
A)  Buying a portfolio of in-the-money vanilla put options. 
B)  Buying a portfolio of out-of-the money vanilla put options. 
C)  Buying a portfolio of in-the-money cash-or-nothing put options. 
D)  Buying a portfolio of out-of-the money cash-or-nothing put options.

Question 5

A cash-or-nothing call option written on a stock

Accepted Answer

A)  Pays the value of the stock in cash if the option finishes in-the-money and nothing otherwise. 
B)  Pays a fixed amount of cash if the option finishes in-the-money and nothing otherwise. 
C)  Is any cash-settled standard call option. 
D)  Pays the difference between the stock price and strike price in cash to the option holder if the option should finish in-the-money and nothing otherwise. 
A)  Pays the value of the stock in cash if the option finishes in-the-money and nothing otherwise. 
B)  Pays a fixed amount of cash if the option finishes in-the-money and nothing otherwise. 
C)  Is any cash-settled standard call option. 
D)  Pays the difference between the stock price and strike price in cash to the option holder if the option should finish in-the-money and nothing otherwise.

Question 6

As maturity approaches, the delta of an at-the-money cash-or-nothing digital call option

Accepted Answer

A)  Increases. 
B)  Decreases. 
C)  Remains constant. 
D)  Converges to a value of $1 / 2$ . 
A)  Increases. 
B)  Decreases. 
C)  Remains constant. 
D)  Converges to a value of $1 / 2$ .

Question 7

Consider pricing an exchange option on two stocks. Assume the usual lognormal returns distributions on the stock prices as in Magrabe's formula. Which of the following input variables does NOT affect the probability of the option being in-the-money at maturity?

Accepted Answer

A)  The volatility of the assets' returns. 
B)  The risk-free rate. 
C)  The correlation between the two assets' returns. 
D)  The time to maturity of the option. 
A)  The volatility of the assets' returns. 
B)  The risk-free rate. 
C)  The correlation between the two assets' returns. 
D)  The time to maturity of the option.

Question 8

You buy an at-the-money chooser option. Immediately after you buy it, the price of the underlying increases very sharply. Other things remaining the same, the value of your chooser likely

Accepted Answer

A)  Increases. 
B)  Decreases (the put now has no value). 
C)  Remains constant (the increase in call value is canceled out by the decrease in put value). 
D)  Goes to zero. 
A)  Increases. 
B)  Decreases (the put now has no value). 
C)  Remains constant (the increase in call value is canceled out by the decrease in put value). 
D)  Goes to zero.

Question 9

Which of the following compound options has a non-monotone delta function?

Accepted Answer

A)  A call on a call. 
B)  A put on a put. 
C)  Both (a) and (b). 
D)  Neither (a) nor (b). 
A)  A call on a call. 
B)  A put on a put. 
C)  Both (a) and (b). 
D)  Neither (a) nor (b).

Question 10

A chooser option gives the holder the right, on the choice date,

Accepted Answer

A)  To choose the strike price of the option. 
B)  To choose the maturity date of the option. 
C)  To choose whether the option is to be a call or a put. 
D)  To choose whether to buy the option or take a premium refund. 
A)  To choose the strike price of the option. 
B)  To choose the maturity date of the option. 
C)  To choose whether the option is to be a call or a put. 
D)  To choose whether to buy the option or take a premium refund.

Question 11

A forward-start option may be viewed as path-independent because

Accepted Answer

A)  The features of the option when it comes to life depend on the price of the underlying at that point but not on the path taken to reach that price. 
B)  The payoff of the forward-start on its maturity date does not depend on any features of the price path of the underlying from the date of purchase of the option. 
C)  A forward start option always starts irrespective of the path taken to the forward start date. 
D)  Only the strike price of the option is unknown at the time of entering into the option. 
A)  The features of the option when it comes to life depend on the price of the underlying at that point but not on the path taken to reach that price. 
B)  The payoff of the forward-start on its maturity date does not depend on any features of the price path of the underlying from the date of purchase of the option. 
C)  A forward start option always starts irrespective of the path taken to the forward start date. 
D)  Only the strike price of the option is unknown at the time of entering into the option.

Question 12

Consider an at-the-money call option on the maximum of two assets. As the correlation between the two assets increases, what happens to the value of this option?

Accepted Answer

A)  It decreases. 
B)  It stays the same. 
C)  It increases. 
D)  There is not enough information to answer this question. 
A)  It decreases. 
B)  It stays the same. 
C)  It increases. 
D)  There is not enough information to answer this question.

Question 13

Which of the following statements most accurately describes the range of possible values of the delta of a cash-or-nothing call option?

Accepted Answer

A)  The delta lies between 0 and $+ 1$ . 
B)  The delta lies between $- 1$ and $+ 1$ . 
C)  The delta is $\geq 0$ . 
D)  The delta can take on any value, positive, negative or zero. 
A)  The delta lies between 0 and $+ 1$ . 
B)  The delta lies between $- 1$ and $+ 1$ . 
C)  The delta is $\geq 0$ . 
D)  The delta can take on any value, positive, negative or zero.

Question 14

You enter into an exchange option contract where you have the right to give up 5 shares of IBM stock in exchange for one share of Google in three months. After three months, IBM is trading at $92 per share while Google is at $430. The payoff at maturity is

Accepted Answer

A)  $- 30$ . 
B)  Zero. 
C)  $+ 6$ . 
D)  $+ 30$ . 
A)  $- 30$ . 
B)  Zero. 
C)  $+ 6$ . 
D)  $+ 30$ .

Question 15

You are a UK-based investor who is interested in investing in options on Japanese stocks. The options are denominated in Japanese yen (JPY), but you are not interested in taking on GBP/JPY exchange-rate risk. The most suitable alternative for you is to

Accepted Answer

A)  Combine the options on Japanese stock with GBP/JPY foreign currency options. 
B)  Combine the options on Japanese stock with GBP/JPY foreign-currency forwards. 
C)  Buy quanto options on Japanese stocks. 
D)  Move to Japan. 
A)  Combine the options on Japanese stock with GBP/JPY foreign currency options. 
B)  Combine the options on Japanese stock with GBP/JPY foreign-currency forwards. 
C)  Buy quanto options on Japanese stocks. 
D)  Move to Japan.

Question 16

Select the most accurate alternative. The theta of an in-the-money cash-or-nothing call option is

Accepted Answer

A)  Positive, as is the case for any call. 
B)  Positive, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money. 
C)  Negative, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money. 
D)  Negative, as is the case for any call. 
A)  Positive, as is the case for any call. 
B)  Positive, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money. 
C)  Negative, because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money. 
D)  Negative, as is the case for any call.

Question 17

A forward-start option is

Accepted Answer

A)  An option where the strike is determined on a specified date in the future. 
B)  An option where the strike is determined at an uncertain future date. 
C)  An option where the life of the of the option is determined on a specified date in the future. 
D)  An option that is at-the-money when it comes to life. 
A)  An option where the strike is determined on a specified date in the future. 
B)  An option where the strike is determined at an uncertain future date. 
C)  An option where the life of the of the option is determined on a specified date in the future. 
D)  An option that is at-the-money when it comes to life.

Question 18

A three-month at-the-money call option on a stock is trading at $5; the stock is trading at $50. A forward start option that comes to life in one month and has a life of three months from that point and that will be at-the-money when it comes to life is trading at $4.98. You hold a portfolio that is long the three-month call and short the forward start. The gamma of the portfolio is

Accepted Answer

A)  Positive 
B)  Zero 
C)  Negative 
D)  Can be positive, zero, or negative. 
A)  Positive 
B)  Zero 
C)  Negative 
D)  Can be positive, zero, or negative.

Question 19

You have written a put on a call, where the underlying call is written on a stock. To delta hedge yourself you can either go the underlying call or the underlying stock.

Accepted Answer

A)  short; short. 
B)  short; long. 
C)  long; short. 
D)  long; long. 
A)  short; short. 
B)  short; long. 
C)  long; short. 
D)  long; long.

Question 20

You are long a portfolio of vanilla call options. Which of the following will help you hedge away your theta risk?

Accepted Answer

A)  Buying a portfolio of in-the-money cash-or-nothing call options. 
B)  Buying a portfolio of out-of-the money cash-or-nothing call options. 
C)  Buying a portfolio of in-the-money vanilla call options. 
D)  Buying a portfolio of out-of-the money vanilla call options. 
A)  Buying a portfolio of in-the-money cash-or-nothing call options. 
B)  Buying a portfolio of out-of-the money cash-or-nothing call options. 
C)  Buying a portfolio of in-the-money vanilla call options. 
D)  Buying a portfolio of out-of-the money vanilla call options.

Exam 18: Path-Independent Exotic Options

An exotic option is

The gamma of a cash-or-nothing binary call option and the theta of such an option

You are long a portfolio of vanilla call options. Which of the following will help you hedge away your vega risk?

A cash-or-nothing call option written on a stock

As maturity approaches, the delta of an at-the-money cash-or-nothing digital call option

Consider pricing an exchange option on two stocks. Assume the usual lognormal returns distributions on the stock prices as in Magrabe's formula. Which of the following input variables does NOT affect the probability of the option being in-the-money at maturity?

You buy an at-the-money chooser option. Immediately after you buy it, the price of the underlying increases very sharply. Other things remaining the same, the value of your chooser likely

Which of the following compound options has a non-monotone delta function?

A chooser option gives the holder the right, on the choice date,

A forward-start option may be viewed as path-independent because

Consider an at-the-money call option on the maximum of two assets. As the correlation between the two assets increases, what happens to the value of this option?

Which of the following statements most accurately describes the range of possible values of the delta of a cash-or-nothing call option?

You enter into an exchange option contract where you have the right to give up 5 shares of IBM stock in exchange for one share of Google in three months. After three months, IBM is trading at $92 per share while Google is at $430. The payoff at maturity is

You are a UK-based investor who is interested in investing in options on Japanese stocks. The options are denominated in Japanese yen (JPY), but you are not interested in taking on GBP/JPY exchange-rate risk. The most suitable alternative for you is to

Select the most accurate alternative. The theta of an in-the-money cash-or-nothing call option is

A forward-start option is

You have written a put on a call, where the underlying call is written on a stock. To delta hedge yourself you can either go the underlying call or the underlying stock.

You are long a portfolio of vanilla call options. Which of the following will help you hedge away your theta risk?

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

Exotic Options II: Path-Dependent 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

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