1 Which of the following is NOT true about a range forward contract?

A.It ensures that the exchange rate for a future transaction will lie between two values

B.It can be structured so that it costs nothing to set up

C.It requires a forward contract as well as two options

D.It can be used to hedge either a future inflow or a future outflow of a foreign currency

2 The risk-free rate is 5% and the dividend yield on the S&P 500 index is 2%. Which of the following is
correct when a futures option on the index is being valued?

The futures price of the S&P 500 is treated like a stock paying a dividend yield of 5%.

The futures price of the S&P 500 is treated like a stock paying a dividend yield of 2%.

The futures price of the S&P 500 is treated like a stock paying a dividend yield of 3%.

The futures price of the S&P 500 is treated like a non-dividend-paying stock.

3 The spot 1 year libor rate is 1% (annualy), the yield curve is negatively inclined (-0.5% per year), the strike
rate is 2 %, the notional 100 and number of payments per year is 1. Calculate the equivalent forward rate
for a swaption with 1 year maturity that gives the right to enter in a swap with 3 years maturity.

4 What does vega measure?

5 Which of the following is true for a long position in an option

A.Both gamma and vega are negative

B.Gamma is negative and vega is positive

C.Gamma is positive and vega is negative

D.Both gamma and vega are positive

6 For a European call option on a currency,the exchange rate is 1.0000,the strike price is 0.9100,the time to
maturity is one year,the domestic risk-free rate is 5% per annum,and the foreign risk-free rate is 3% per
annum.How low can the option price be without there being an arbitrage opportunity?

A) 0.1048

B) 0.0900

C) 0.1344

D) 0.121

7 The domestic risk-free rate is 3%.The foreign risk-free rate is 5%.What is the risk-neutral growth rate of
the exchange rate?

A) +2%

B) -2%

C) +5%

D) +3%
8 A portfolio manager in charge of a portfolio worth $10 million is concerned that stock prices might decline
rapidly during the next six months and would like to use put options on an index to provide protection
against the portfolio falling below $9.5 million.The index is currently standing at 500 and each contract is on
100 times the index.What position is required if the portfolio has a beta of 1?

A) Short 200 contracts

B) Long 200 contracts

C) Short 100 contracts

D) Long 100 contracts

9 A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might decline
rapidly during the next six months and would like to use put options on an index to provide protection
against the portfolio falling below $9.5 million.The index is currently standing at 500 and each contract is on
100 times the index.What should the strike price of options on the index be the portfolio has a beta of 1?

A) 425

B) 450

C) 475

D) 500

10 A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might
decline rapidly during the next six months and would like to use put options on an index to provide
protection against the portfolio falling below $9.5 million.The index is currently standing at 500 and each
contract is on 100 times the index.What position is required if the portfolio has a beta of 0.5?

A) Short 200 contracts

B) Long 200 contracts

C) Short 100 contracts

D) Long 100 contracts

11 A portfolio manager in charge of a portfolio worth $10 million is concerned that the market might
decline rapidly during the next six months and would like to use put options on an index to provide
protection against the portfolio falling below $9.5 million.The index is currently standing at 500 and each
contract is on 100 times the index.What should the strike price of options on the index be the portfolio has
a beta of 0.5? Assume that the risk-free rate is 10% per annum and there are no dividends.

A) 400

B) 410

C) 420

D) 425

12 Which of the following describes what a company should do to create a range forward contract in order
to hedge foreign currency that will be received?

A) Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

B) Buy a put and sell a call on the currency with the strike price of the put lower than that of the call
C) Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

D) Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

13 Which of the following describes what a company should do to create a range forward contract in order
to hedge foreign currency that will be paid?

A) Buy a put and sell a call on the currency with the strike price of the put higher than that of the call

B) Buy a put and sell a call on the currency with the strike price of the put lower than that of the call

C) Buy a call and sell a put on the currency with the strike price of the put higher than that of the call

D) Buy a call and sell a put on the currency with the strike price of the put lower than that of the call

14 What should the continuous dividend yield be replaced by when options on an exchange rate are valued
using the formula for an option on a stock paying a continuous dividend yield?

A) The domestic risk-free rate

B) The foreign risk-free rate

C) The foreign risk-free rate minus the domestic risk-free rate

D) None of the above

15 Suppose that the domestic risk free rate is r and dividend yield on an index is q.How should the put-call
parity formula for options on a non-dividend-paying stock be changed to provide a put-call parity formula
for options on a stock index? Assume the options last T years.

A) The stock price is replaced by the value of the index multiplied by exp(qT)

B) The stock price is replaced by the value of the index multiplied by exp(rT)

C) The stock price is replaced by the value of the index multiplied by exp(-qT)

D) The stock price is replaced by the value of the index multiplied by exp(-rT)

16 A binomial tree with three-month time steps is used to value a currency option.The domestic and
foreign risk-free rates are 4% and 6% respectively.The volatility of the exchange rate is 12%.What is the
probability of an up movement?

A) 0.4435

B) 0.5267

C) 0.5565

D) 0.5771

17 A binomial tree with one-month time steps is used to value an index option.The interest rate is 3% per
annum and the dividend yield is 1% per annum.The volatility of the index is 16%.What is the probability of
an up movement?

A) 0.4704

B) 0.5065

C) 0.5592
D) 0.5833

18 A European at-the-money call option on a currency has four years until maturity.The exchange rate
volatility is 10%,the domestic risk-free rate is 2% and the foreign risk-free rate is 5%.The current exchange
rate is 1.2000.What is the value of the option?

A) 0.98N(0.25)-1.11(0.05)

B) 0.98N(-0.3)-1.11N(-0.5)

C) 0.98N(-0.5)-1.11N(-0.7)

D) 0.98N(0.10)-1.11N(0.06)

19 A European at-the-money put option on a currency has four years until maturity.The exchange rate
volatility is 10%,the domestic risk-free rate is 2% and the foreign risk-free rate is 5%.The current exchange
rate is 1.2000.What is the value of the option?

A) 1.11N(0.7)-0.98N(0.5)

B) 1.11N(-0.7)-0.98N(-0.5)

C) 1.11N(0.7)-0.98N(0.4)

D) 1.11N(-0.06)-0.98N(-0.10)

20 Which of the following is true when a European currency option is valued using forward exchange rates?

A) It is not necessary to know the domestic interest rate or the spot exchange rate

B) It is not necessary to know either the foreign or domestic interest rate

C) It is necessary to know the difference between the foreign and domestic interest rates but not the rates
themselves

D) It is not necessary to know the foreign interest rate or the spot exchange rate

21 What is the size of one option contract on the S&P 500?

A) 250 times the index

B) 100 times the index

C) 50 times the index

D) 25 times the index

22 The domestic risk-free rate is 3%.The foreign risk-free rate is 5%.What is the risk-neutral growth rate of
the exchange rate?

A) +2%

B) -2%

C) +5%

D) +3%

23 Consider a stock price equal to So=50$, the risk free rate is 5% (cont comp) and volatility is 15%
 1) Calculate the price for an option paying the difference between the underlying asset and the strike
price X1=40 only when the underlying asset has a value greater than X2=50$. Zero otherwise
2) Price of a plain vanilla option paying St-X2 when St>X2 and zero otherwise
3) Compare results and explain why the options have different prices

24 Assume that the hazard rate for an issuer is 2% pa; defaults always happen halfway through a year;
payments are made once a year, at the end; the rf is 4% pa cont comp, RR=30%

1) Spread for a 4 year CDS

2) Spread for a 4 year binary CDS
3) Mkt-to-mkt

25 The spot 1 year libor Annualy comp is 2 %, the yield curve is positively inclined (+1% per year), the strike
rate is 2%, notional 100, one payment per year. Calculate the equivalent fwd rate for a swaption with 1
year maturity that gives the right to enter in a swap with 3 year maturity.

26 Which of the following is true?

A) The delta of a European put equals minus the delta of a European call

B) The delta of a European put equals the delta of a European call

C) The gamma of a European put equals minus the gamma of a European call

D) The gamma of a European put equals the gamma of a European call

27 What does N(x)denote?

A) The area under a normal distribution from zero to x

B) The area under a normal distribution up to x

C) The area under a normal distribution beyond x

D) The area under the normal distribution between -x and x

28 Which of the following is NOT true?

A) Black's model can be used to value an American-style option on futures

B) Black's model can be used to value a European-style option on futures

C) Black's model can be used to value a European-style option on spot

D) Black's model is widely used by practitioners

29 What is the value of a European call futures option where the futures price is 50,the strike price is 50,the
risk-free rate is 5%,the volatility is 20% and the time to maturity is three months?

A) 49.38N(0.05)-49.38N(-0.05)

B) 50N(0.05)-50N(-0.05)

C) 49.38N(0.1)-49.38N(-0.1)

D) 50N(0.1)-49.38N(-0.1)

30 Which of the following defines an Ito process?

A) A process where the drift is non-constant and can be stochastic

B) A process where the coefficient of dz is non-constant and can be stochastic

C) A process where either the drift or the coefficient of dz or both are non-constant and can be stochastic

D) A process where proportional changes follow a generalized Wiener process

31 Which of the following is true for a one-year call option on a stock that pays dividends every three
months?

A) It is never optimal to exercise the option early

B) It can be optimal to exercise the option at any time

C) It is only ever optimal to exercise the option immediately after an ex-dividend date

D) None of the above

32 The libor rate is 2% (annualy), the yield curve is flat, the strike rate is 3%, notional =100, n of payments 1
per year. Calculate the Annuity for a swaption with maturity 2 years (T) that gives the right to enter in a
swap with 3 years maturity (N).

33 Consider a stock with price So=40$, the riskfree is 9% pa (cont comp), volatility is 30% and dividend=1$ is
distributed in 1 month.

1) Price a European put option with K=40 that expires in 2 months using the Binomial tree with 2 steps
2) Price an American put option with K=40$ that expires in 2 months using the binomial tree “’’

34 Which of the following is measured by the VIX index

A) Implied volatilities for stock options trading on the CBOE

B) Historical volatilities for stock options trading on CBOE

C) Implied volatilities for options trading on the S&P 500 index

D) Historical volatilities for options trading on the S&P 500 index