1) An off-market interest rate swap has:

Select one:

a. a floating rate payment that is greater than the current fixed rate payment.

b. a fixed rate payment that is greater than the current floating rate payment.

c. fixed rate payments with an initial value equal to the initial value of the expected floating rate payments.

d. fixed rate payments with an initial value greater than the initial value of the expected floating rate payments.

e. fixed rate payments with an initial value less than the initial value of the expected floating rate payments.

2) A swap dealer is a net floating-rate payer and net fixed-rate receiver. The dealer can hedge this position by:

Select one:

a. unwinding some positions where the dealer is fixed-rate payer.

b. unwinding some positions where the dealer is floating-rate receiver.

c. finding another counterparty that wishes to receive floating-rate and pay fixed-rate.

d. taking a short position in a strip of interest rate futures.

e. taking a long position in a strip of interest rate futures.

3) In an interest rate swap, the risk of the fixed-rate receiver defaulting:

Select one:

a. decreases as interest rates rise.

b. is unaffected by changes in interest rates.

c. is lower when the yield curve is upward sloping compared to when it is downward sloping.

d. is greater when the yield curve is upward sloping compared to when it is downward sloping.

e. is unaffected by the slope of the yield curve.

4) Firm A can borrow at the floating rate of LIBOR+0.5% p.a. or at the fixed rate of 4.0% p.a. Firm B can borrow at LIBOR+1.0% p.a. floating or at 5.25% p.a. fixed. Which of the following statements is false?

Select one:

a. Firm A has an absolute advantage in borrowing floating rate.

b. Firm B has an absolute disadvantage in borrowing fixed rate.

c. Firm A has a comparative advantage in borrowing floating rate.

d. Firm B has a comparative advantage in borrowing floating rate.

e. Firm A has a comparative advantage in borrowing fixed rate.

5) Fred holds 1000 call options on a firms shares with an exercise price of $10.00 before the firm makes a 1 for 4 bonus issue. After the bonus issue, Fred holds:

Select one:

a. 800 options with an exercise price of $12.50

b. 1000 options with an exercise price of $10.00

c. 800 options with an exercise price of $8.00

d. 1250 options with an exercise price of $8.00

e. None of the above.

6) A necessary condition for the early exercise of an American put option is that:

Select one:

a. the value of the American call greater than the exercise price.

b. the value of the American call greater than the corresponding European put option.

c. the value of the American put is greater than the corresponding European put option.

d. the value of the American put is less than the corresponding European put option.

e. the value of the American put is less than the corresponding European call option.

7)With reference to the no-arbitrage approach to valuing a European option using a one-step binomial we:

Select one:

a. choose probabilities for the branches of the tree so that the expected return on the stock equals the risk-free rate.

b. calculate probabilities for the branches of the tree using the formula .

c. set up a portfolio consisting of a position in the option and the stock that is riskless.

d. set up two portfolios consisting of a loan and positions in a stock, put and call options with the same payoffs.

e. all of the above.

8) Along with other required inputs used to price an option, historical volatility is calculated from:

Select one:

a. the most recent 20 weeks of call option prices

b. the most recent 20 weeks of prices of the underlying share

c. the previous five years of returns of the underlying share

d. current stock and option prices using the put-call parity equation

e. current stock and option prices using an option pricing model

9) What is the same as 100 call options to buy one unit of currency A with currency B at a strike price of 1.25?

Select one:

a. 100 call options to buy one unit of currency B with currency A at a strike price of 0.8

b. 125 call options to buy one unit of currency B with currency A at a strike price of 0.8

c. 100 put options to sell one unit of currency B for currency A at a strike price of 0.8

d. 125 put options to sell one unit of currency B for currency A at a strike price of 0.8

10) An options gamma is:

Select one:

a. the rate of change of the options price as underlying share price changes.

b. the rate of change of the options price as underlying delta changes.

c. the rate of change of the options vega as underlying share price changes.

d. the rate of change of the options delta as underlying share price changes.

e. the rate of change of the options price as underlying vega changes.

11) In relation to call options, the hedge ratio:

Select one:

a. is the number of shares to buy for each call option purchased.

b. is called the delta.

c. is a number between zero and one.

d. B & C.

e. all of the above are correct.

12) The delta of a call option is:

Select one:

a. constant for each step in a multi-period binomial tree.

b. the number of put options required to construct a one-step binomial riskless portfolio.

c. negative for all long positions in the call option.

d. the ratio of the change in the call option price to the change in the price of the underlying stock.

e. the first derivative of call price with respect to the volatility of the stock.