QUESTION 1
1. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net loss (after the cost of the options is taken into account)?
a. $100
b. $200
c. $300
d. $400
QUESTION 2
1. Which of the following is true of a box spread?
a. It is a package consisting of a bull spread and a bear spread
b. It involves two call options and two put options
c. It has a known value at maturity
d. All of the above
QUESTION 3
1. What is the number of different option series used in creating a butterfly spread?
a. 1
b. 2
c. 3
d. 4
QUESTION 4
1. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?
a. $100
b. $200
c. $300
d. $400
QUESTION 5
1. Which of the following creates a bear spread?
a. Buy a low strike price call and sell a high strike price call
b. Buy a high strike price call and sell a low strike price call
c. Buy a low strike price call and sell a high strike price put
d. Buy a low strike price put and sell a high strike price call
QUESTION 6
1. How can a straddle be created?
a. Buy one call and one put with the same strike price and same expiration date
b. Buy one call and one put with different strike prices and same expiration date
c. Buy one call and two puts with the same strike price and expiration date
d. Buy two calls and one put with the same strike price and expiration date
QUESTION 7
1. How can a strip trading strategy be created?
a. Buy one call and one put with the same strike price and same expiration date
b. Buy one call and one put with different strike prices and same expiration date
c. Buy one call and two puts with the same strike price and expiration date
d. Buy two calls and one put with the same strike price and expiration date
QUESTION 8
1. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?
a. $100
b. $200
c. $300
d. $400
QUESTION 9
1. Which of the following describes a protective put?
a. A long put option on a stock plus a long position in the stock
b. A long put option on a stock plus a short position in the stock
c. A short put option on a stock plus a short call option on the stock
d. A short put option on a stock plus a long position in the stock
QUESTION 10
1. When the interest rate is 5% per annum with continuous compounding, which of the following creates a principal protected note worth $1000?
a. A one-year zero-coupon bond plus a one-year call option worth about $59
b. A one-year zero-coupon bond plus a one-year call option worth about $49
c. A one-year zero-coupon bond plus a one-year call option worth about $39
d. A one-year zero-coupon bond plus a one-year call option worth about $29
QUESTION 11
1. Which of the following creates a bear spread?
a. Buy a low strike price put and sell a high strike price put
b. Buy a high strike price put and sell a low strike price put
c. Buy a high strike price call and sell a low strike price put
d. Buy a high strike price put and sell a low strike price call
QUESTION 12
1. Six-month call options with strike prices of $35 and $40 cost $6 and $4, respectively. What is the maximum gain when a bull spread is created by trading a total of 200 options?
a. $100
b. $200
c. $300
d. $400
QUESTION 13
1. What is a description of the trading strategy where an investor sells a 3-month call option and buys a one-year call option, where both options have a strike price of $100 and the underlying stock price is $75?
a. Neutral Calendar Spread
b. Bullish Calendar Spread
c. Bearish Calendar Spread
d. None of the above
QUESTION 14
1. How can a strangle trading strategy be created?
a. Buy one call and one put with the same strike price and same expiration date
b. Buy one call and one put with different strike prices and same expiration date
c. Buy one call and two puts with the same strike price and expiration date
d. Buy two calls and one put with the same strike price and expiration date
QUESTION 15
1. A trader creates a long butterfly spread from options with strike prices $60, $65, and $70 by trading a total of 400 options. The options are worth $11, $14, and $18. What is the maximum net gain (after the cost of the options is taken into account)?
a. $100
b. $200
c. $300
d. $400
QUESTION 16
1. How can a strap trading strategy be created?
a. Buy one call and one put with the same strike price and same expiration date
b. Buy one call and one put with different strike prices and same expiration date
c. Buy one call and two puts with the same strike price and expiration date
d. Buy two calls and one put with the same strike price and expiration date
QUESTION 17
1. A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true?
a. The parameters p and u are the same for both trees
b. The parameter p is the same for both trees but u is not
c. The parameter u is the same for both trees but p is not
d. None of the above
QUESTION 18
1. In a binomial tree created to value an option on a stock, what is the expected return on the option?
a. Zero
b. The return required by the market
c. The risk-free rate
d. It is impossible to know without more information
QUESTION 19
1. In a binomial tree created to value an option on a stock, the expected return on stock is
a. Zero
b. The return required by the market
c. The risk-free rate
d. It is impossible to know without more information
QUESTION 20
1. Which of the following is NOT true in a risk-neutral world?
a. The expected return on a call option is independent of its strike price
b. Investors expect higher returns to compensate for higher risk
c. The expected return on a stock is the risk-free rate
d. The discount rate used for the expected payoff on an option is the risk-free rate
QUESTION 21
1. The current price of a non-dividend-paying stock is $40. Over the next year it is expected to rise to $42 or fall to $37. An investor buys put options with a strike price of $41. What is the value of each option? The risk-free interest rate is 2% per annum with continuous compounding.
a. $3.93
b. $2.93
c. $1.93
d. $0.93
QUESTION 22
1. Which of the following describes how American options can be valued using a binomial tree?
a. Check whether early exercise is optimal at all nodes where the option is in-the-money
b. Check whether early exercise is optimal at the final nodes
c. Check whether early exercise is optimal at the penultimate nodes and the final nodes
d. None of the above
QUESTION 23
1. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36?
a. 0.6
b. 0.5
c. 0.4
d. 0.3
QUESTION 24
1. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. What is the value of each call option?
a. $1.6
b. $2.0
c. $2.4
d. $3.0
QUESTION 25
1. The current price of a non-dividend paying stock is $50. Use a two-step tree to value an American put option on the stock with a strike price of $48 that expires in 12 months. Each step is 6 months, the risk free rate is 5% per annum, and the volatility is 20%. Which of the following is the option price?
a. $1.95
b. $2.00
c. $2.05
d. $2.10
QUESTION 26
1. Which of the following is NOT true in a risk-neutral world?
a. The expected return on a call option is independent of its strike price
b. Investors expect higher returns to compensate for higher risk
c. The expected return on a stock is the risk-free rate
d. The discount rate used for the expected payoff on an option is the risk-free rate
QUESTION 27
1. The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. An investor sells call options with a strike price of $32. Which of the following hedges the position?
a. Buy 0.6 shares for each call option sold
b. Buy 0.4 shares for each call option sold
c. Short 0.6 shares for each call option sold
d. Short 0.6 shares for each call option sold
QUESTION 28
1. A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. Which of the following are true?
a. The parameters p and u are the same for both trees
b. The parameter p is the same for both trees but u is not
c. The parameter u is the same for both trees but p is not
d. None of the above
QUESTION 29
1. The current price of a non-dividend paying stock is $30. Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months. Each step is 3 months, the risk free rate is 8% per annum with continuous compounding. What is the option price when u = 1.1 and d = 0.9.
a. $1.29
b. $1.49
c. $1.69
d. $1.89
QUESTION 30
1. In a binomial tree created to value an option on a stock, the expected return on stock is
a. Zero
b. The return required by the market
c. The risk-free rate
d. It is impossible to know without more information
QUESTION 31
1. If the volatility of a non-dividend-paying stock is 20% per annum and a risk-free rate is 5% per annum, which of the following is closest to the Cox, Ross, Rubinstein parameter p for a tree with a three-month time step?
a. 0.50
b. 0.54
c. 0.58
d. 0.62
QUESTION 32
1. Which of the following describes how American options can be valued using a binomial tree?
a. Check whether early exercise is optimal at all nodes where the option is in-the-money
b. Check whether early exercise is optimal at the final nodes
c. Check whether early exercise is optimal at the penultimate nodes and the final nodes
d. None of the above
QUESTION 33
1. When the non-dividend paying stock price is $20, the strike price is $20, the risk-free rate is 5%, the volatility is 20% and the time to maturity is 3 months which of the following is the price of a European put option on the stock
a. 19.7N(-0.1)-20N(-0.2)
b. 20N(-0.1)-20N(-0.2)
c. 19.7N(-0.2)-20N(-0.1)
d. 20N(-0.2)-20N(-0.1)
QUESTION 34
1. A stock provides an expected return of 10% per year and has a volatility of 20% per year. What is the expected value of the continuously compounded return in one year?
a. 6%
b. 8%
c. 10%
d. 12%
QUESTION 35
1. A stock price is $100. Volatility is estimated to be 20% per year. What is an estimate of the standard deviation of the change in the stock price in one week?
a. $0.38
b. $2.77
c. $3.02
d. $0.76
QUESTION 36
1. A stock price is 20, 22, 19, 21, 24, and 24 on six successive Fridays. Which of the following is closest to the volatility per annum estimated from this data?
a. 50%
b. 60%
c. 70%
d. 80%
QUESTION 37
1. 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
QUESTION 38
1. An investor has earned 2%, 12% and -10% on equity investments in successive years (annually compounded). This is equivalent to earning which of the following annually compounded rates for the three year period.
a. 1.33%
b. 1.23%
c. 1.13%
d. 0.93%
QUESTION 39
1. The volatility of a stock is 18% per year. Which of the following is closest to the volatility per month?
a. 1.5%
b. 3.0%
c. 5.2%
d. 6.3%
QUESTION 40
1. What was the original Black-Scholes-Merton model designed to value?
a. A European option on a stock providing no dividends
b. A European or American option on a stock providing no dividends
c. A European option on any stock
d. A European or American option on any stock
1. 41-Which of the following is NOT true?
a. Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral
b. Options can be valued based on the assumption that investors are risk neutral
c. In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate
d. In risk-neutral valuation the risk-free rate is used to discount expected cash flows
QUESTION 42
1. What is the number of trading days in a year usually assumed for equities?
a. 365
b. 252
c. 262
d. 272
QUESTION 43
1. 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
QUESTION 44
1. 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
QUESTION 45
1. When there are two dividends on a stock, Black's approximation sets the value of an American call option equal to which of the following
a. The value of a European option maturing just before the first dividend
b. The value of a European option maturing just before the second (final) dividend
c. The greater of the values in A and B
d. The greater of the value in B and the value assuming no early exercise
QUESTION 46
1. The original Black-Scholes and Merton papers on stock option pricing were published in which year?
a. 1983
b. 1984
c. 1974
d. 1973
QUESTION 47
1. The risk-free rate is 5% and the expected return on a non-dividend-paying stock is 12%. Which of the following is a way of valuing a derivative?
a. Assume that the expected growth rate for the stock price is 17% and discount the expected payoff at 12%
b. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 12%
c. Assuming that the expected growth rate for the stock price is 5% and discounting the expected payoff at 5%
d. Assuming that the expected growth rate for the stock price is 12% and discounting the expected payoff at 5%
QUESTION 48
1. An investor has earned 2%, 12% and -10% on equity investments in successive years (annually compounded). This is equivalent to earning which of the following annually compounded rates for the three year period.
a. 1.33%
b. 1.23%
c. 1.13%
d. 0.93%
s.