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principles of risk management

Questions and Answers of Principles Of Risk Management

24. On December 9 of a particular year, a January Swiss franc call option with an exer- cise price of 46 had a price of 1.63. The January 46 put was at 0.14. The spot rate was 47.28. All prices are
23. Suppose that the current stock price is $90, the exercise price is $100, the annually compounded interest rate is 5 percent, the stock pays a $1 dividend in the next in- stant, and the quoted put
22. (Concept Problem) Put-call parity is a powerful formula that can be used to create equivalent combinations of options, risk-free bonds, and stock. Suppose that there are options available on the
20. Suppose that the current stock price is $100, the exercise price is $100, the annually compounded interest rate is 5 percent, the stock pays a $1 dividend in the next instant, and the quoted call
19. Repeat Question 18 using American put-call parity, but do not suggest a strategy.
15. Examine the following pairs of calls, which differ only by exercise price. Deter- mine whether any violate the rules regarding relationships between American op- tions that differ only by
14. Examine the following pairs of puts, which differ only by exercise price. Deter- mine if any violate the rules regarding relationships between American options that differ only by exercise
13. Suppose a European put price exceeds the value predicted by put-call parity. How could an investor profit? Demonstrate that your strategy is correct by constructing a payoff table showing the
12. Why might two calls or puts alike in all respects but exercise price have approxi- mately the same price?
11. Why might two calls or puts alike in all respects but time to expiration have ap- proximately the same price?
10. In this chapter, we did not learn how to obtain the exact price of a call without knowing the price of the put and using put-call parity. In one special case, how- ever, we can obtain an exact
9. Why does the justification for exercising an American call early not hold up when considering an American put?
7. The value Max [0, X(1+r)-T-S,] was shown to be the lowest possible value of a European put. Why is this value irrelevant for an American put?
5. Consider an option that expires in 68 days. The bid and ask discounts on the Trea- sury bill maturing in 67 days are 8.20 and 8.24, respectively. Find the approximate risk-free rate.
4. What would happen in the options market if the price of an American call were less than the value Max (0, S, X)? Would your answer differ if the option were European?
1. Suppose that you observe a European call option that is priced at less than the value Max [0, S, X(1+r)]. What type of transaction should you execute to achieve the maximum benefit? Demonstrate
16. Explain how the CBOE's order book official (OBO) handles public limit orders.
14. Suppose you are an individual investor with an options account at a brokerage firm. You purchase 20 call contracts at a price of $2.25 each. Explain how your premium ends up at the clearinghouse.
12. Explain how real options are similar to, but different from, ordinary options.
10. Explain the major difference between the regulation of exchange-traded options and over-the-counter options.
8. Explain the difference between an American option and a European option. What do they have in common?
4. Determine whether each of the following arrangements is an option. If so, decide whether it is a call or a put and identify the premium.a. You purchase homeowner's insurance for your house.b. You
2. Contrast the market maker system of the CBOE and Pacific Stock Exchange with the specialist system of the AMEX and Philadelphia Stock Exchange. What advan- tages and disadvantages do you see in
16. What are the major functions of derivative markets in an economy?
15. What are the three ways in which derivatives can be misused?
13. What is storage? Why is it risky? What role does it play in the economy?
10. What are the components of the expected return?
9. Explain the concept of a risk-return trade-off.
8. Distinguish between real assets and financial assets.
7. What is the difference between an investor who is risk neutral and one who is risk averse?
6. Distinguish between business risk and financial risk.
4. Define arbitrage and the law of one price. What role do they play in our market system? What do we call the "one price" of an asset?
17. Discuss the three possible ways in which an open option position can be terminated. Is your answer different if the option is created in the over-the-counter market?
16. Explain how the CBOE's order book official (OBO) handles public limit orders.
15. Compare and contrast the roles of market maker and floor broker. Why do you think an individual cannot generally be both?
14. Suppose you are an individual investor with an options account at a brokerage firm. You purchase 20 call contracts at a price of $2.25 each. Explain how your premium ends up at the clearinghouse.
13. Consider the January, February, and March stock option exercise cycles discussed in the chapter. For each of the following dates, indicate which expirations in each cycle would be listed for
12. Explain how real options are similar to, but different from, ordinary options.
11. Identify and briefly discuss the various types of option transaction costs. How do these costs differ for market makers, floor brokers, and firms trading in the over- the-counter market?
10. Explain the major difference between the regulation of exchange-traded options and over-the-counter options.
9. Explain each of the terms in the following description of an option: AT&T January 65 call.
8. Explain the difference between an American option and a European option. What do they have in common?
7. What adjustments to the contract terms of CBOE options would be made in the following situations?a. An option has an exercise price of 60. The company declares a 10 percent stock dividend.b. An
6. Name and briefly describe at least two other instruments that are very similar to options.
5. Discuss the limitations of prices obtained from newspapers such as The Wall Street Journal and the advantages of quotes obtained from Web sites of the exchanges.
4. Determine whether each of the following arrangements is an option. If so, decide whether it is a call or a put and identify the premium.a. You purchase homeowner's insurance for your house.b. You
3. Why are short puts and long calls grouped together when considering position limits?
2. Contrast the market maker system of the CBOE and Pacific Stock Exchange with the specialist system of the AMEX and Philadelphia Stock Exchange. What advan- tages and disadvantages do you see in
1. Compare and contrast the exercise procedure for stock options with that for index options. What major advantage does exercising an index option have over exer- cising a stock option?
16. What are the major functions of derivative markets in an economy?
15. What are the three ways in which derivatives can be misused?
14. Assume that you have an opportunity to visit a civilization in outer space. Its soci ety is at roughly the same stage of development as U.S. society is now. Its economic system is virtually
13. What is storage? Why is it risky? What role does it play in the economy?
12. Contrast dollar return and percentage return. Be sure to identify which return is more useful when comparing investments.
11. An option dealer needs to finance the purchase of a security and holds an inven- tory of U.S. Treasury bills. Explain how the dealer can use the repo market for financing the security purchase.
10. What are the components of the expected return?
9. Explain the concept of a risk-return trade-off.
8. Distinguish between real assets and financial assets.
7. What is the difference between an investor who is risk neutral and one who is risk averse?
6. Distinguish between business risk and financial risk.
5. Why is speculation controversial? How does it differ from gambling?
4. Define arbitrage and the law of one price. What role do they play in our market system? What do we call the "one price" of an asset?
3. What is an efficient market? Why do efficient markets benefit society?
2. Suppose you are shopping for a new automobile. You find the same car at two deal- ers but at different prices. Is the law of one price being violated? Why or why not?
1. Why is delivery important if so few futures contracts end in delivery?
17. Discuss the three possible ways in which an open option position can be terminated. Is your answer different if the option is created in the over-the-counter market?
16. Explain how the CBOE's order book official (OBO) handles public limit orders.
15. Compare and contrast the roles of market maker and floor broker. Why do you think an individual cannot generally be both?
14. Suppose you are an individual investor with an options account at a brokerage firm. You purchase 20 call contracts at a price of $2.25 each. Explain how your premium ends up at the clearinghouse.
13. Consider the January, February, and March stock option exercise cycles discussed in the chapter. For each of the following dates, indicate which expirations in each cycle would be listed for
12. Explain how real options are similar to, but different from, ordinary options.
11. Identify and briefly discuss the various types of option transaction costs. How do these costs differ for market makers, floor brokers, and firms trading in the over- the-counter market?
10. Explain the major difference between the regulation of exchange-traded options and over-the-counter options.
9. Explain each of the terms in the following description of an option: AT&T January 65 call.
8. Explain the difference between an American option and a European option. What do they have in common?
company declares a two-for-one stock split.c. An option has an exercise price of 85. The company declares a four-for-three stock split.d. An option has an exercise price of 50. The company declares a
7. What adjustments to the contract terms of CBOE options would be made in the following situations?a. An option has an exercise price of 60. The company declares a 10 percent stock dividend.b. An
6. Name and briefly describe at least two other instruments that are very similar to options.
5. Discuss the limitations of prices obtained from newspapers such as The Wall Street Journal and the advantages of quotes obtained from Web sites of the exchanges.
4. Determine whether each of the following arrangements is an option. If so, decide whether it is a call or a put and identify the premium.a. You purchase homeowner's insurance for your house.b. You
3. Why are short puts and long calls grouped together when considering position limits?
2. Contrast the market maker system of the CBOE and Pacific Stock Exchange with the specialist system of the AMEX and Philadelphia Stock Exchange. What advan- tages and disadvantages do you see in
1. Compare and contrast the exercise procedure for stock options with that for index options. What major advantage does exercising an index option have over exer- cising a stock option?
What recommendations were made by the decision gate review board? ◾
What are the key fi ndings of the risk report prepared by the Project Curiosity team?
▪ What are the what‐if scenarios used to further investigate project uncertainty exposure?
▪ What are the main templates used for preparing input data to probabilistic modes?
▪ What is the probabilistic uncertainty assessment approach adopted by Project Curiosity?
▪ What is the deterministic uncertainty management approach adopted by Project Curiosity?
▪ What are the objectives and baselines of the project discussed in the case study?
▪ Are we ready for construction, turnaround, and logistics windows?
▪ Why do we need sensitivity analysis and what‐if scenarios?
▪ How may criteria for project reserve be selected?
▪ What are confi dence levels of Cost and Schedule baselines and what are ways to make things better?
▪ Do we really need Association for Advancement of Cost Engineering(AACE) classes of base estimates in risk management?
▪ What is the primary accuracy range of a base estimate?
▪ How may the overall project cost and schedule uncertainty be assessed?
▪ What is the anatomy of output distributions?
▪ “Probabilistic analysis? What do you mean by that?
▪ Why must correlations never be forgotten?

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