All of them are MCQ questions.

Question 6

Assume that an exotic option payoff is described as max[max(St)-K, 0], where t belongs in time interval [0, T].Which of the following statement isfalse?

A.The option holder can exercise or forfeit the option only at the maturity T.

B.The option cannot be priced using Binomial tree.

C.The option holder can exercise or forfeit the option at any time t.

D.The option payoff is path dependent.

Question 7

A there-step binomial tree with terminal stock prices being 1.103, 0.875, 0.695, and 0.552.At time 0, if you have insider information that at the maturity the stock price will be 0.875. Then, which is not a possible sample path?

A.Up-up-down

B.Up-down-up

C.Down-up-up

D.Down-down-up

Question 8

A three-step binomial tree with terminal stock prices being 1.103, 0.875, 0.695, and 0.552.At time 0, if you have the insider information that at the maturity the stock price will be 0.875. Then, will the option premium at time 0 still be same as if you don't have this information, please choose from the answers below?

A.Yes. Option premium is irrelevant to the private information (about the underlying) that option holder possesses.

B.No. As in that case, the risk neutral probability of the impossible sample paths become zero.

Question 9

If volatility increases, will the option premium increase or decrease?

A.It depends on the option type - call or put.

B.Option premium will increase, because the greater the volatility, the greater the time value of the option.

C.Decrease. Because the greater the volatility, the greater the risk, as investors are risk averse and they will value the option less.

D.None of the above

Question 10

Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early? Hint: early exercise is more likely to happen with reduced time value

A. Volatility decreases

B. Expected dividends increase

C. Interest rates decrease

D. All of the above