Asset Pricing
Chapter Exam Questions
Course Introduction
Asset Pricing explores the fundamental principles and models used to determine the value of financial assets, such as stocks, bonds, and derivatives. The course covers topics including valuation under uncertainty, risk and return, portfolio theory, arbitrage pricing theory, and the Capital Asset Pricing Model (CAPM). Students will learn how market factors, investor behavior, and macroeconomic conditions influence asset prices, and will analyze empirical evidence supporting various asset pricing theories. The course blends theoretical frameworks with practical applications, equipping students with the analytical tools necessary for pricing financial assets and managing investment portfolios.
Recommended Textbook
Fundamentals of Futures and Options Markets 9th Edition by John C. Hull
Available Study Resources on Quizplus
24 Chapters
477 Verified Questions
477 Flashcards
Source URL: https://quizplus.com/study-set/1398 Page 2
Chapter 1: Introduction
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27843
Sample Questions
Q1) A one-year forward contract is an agreement where
A) One side has the right to buy an asset for a certain price in one year's time.
B) One side has the obligation to buy an asset for a certain price in one year's time.
C) One side has the obligation to buy an asset for a certain price at some time during the next year.
D) One side has the obligation to buy an asset for the market price in one year's time.
Answer: B
Q2) A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contract trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should
A) Buy 16 contracts
B) Sell 16 contracts
C) Buy 20 contracts
D) Sell 20 contracts
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
3
Chapter 2: Futures Markets and Central Counterparties
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/27854
Sample Questions
Q1) Which of the following are cash settled
A) All futures contracts
B) All option contracts
C) Futures on commodities
D) Futures on stock indices
Answer: D
Q2) A limit order
A) Is an order to trade up to a certain number of futures contracts at a certain price
B) Is an order that can be executed at a specified price or one more favorable to the investor
C) Is an order that must be executed within a specified period of time
D) None of the above
Answer: B
Q3) Margin accounts have the effect of
A) Reducing the risk of one party regretting the deal and backing out
B) Ensuring funds are available to pay traders when they make a profit
C) Reducing systemic risk due to collapse of futures markets
D) All of the above
Answer: D
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Hedging Strategies Using Futures
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/27860
Sample Questions
Q1) Which of the following is true?
A) The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis).
B) The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis).
C) The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis).
D) The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).
Answer: C
Q2) Which of the following best describes the capital asset pricing model?
A) Determines the amount of capital that is needed in particular situations
B) Is used to determine the price of futures contracts
C) Relates the return on an asset to the return on a stock index
D) Is used to determine the volatility of a stock index
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Interest Rates
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27861
Sample Questions
Q1) A repo rate is
A) An uncollateralized rate
B) A rate where the credit risk is relative high
C) The rate implicit in a transaction where securities are sold and bought back at a higher price
D) None of the above
Q2) The six-month zero rate is 8% per annum with semiannual compounding. The price of a one-year bond that provides a coupon of 6% per annum semiannually is 97. What is the one-year continuously compounded zero rate?
A) 8.02%
B) 8.52%
C) 9.02%
D) 9.52%
Q3) An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding?
A) 5.79%
B) 6.21%
C) 5.83%
D) 6.18%
To view all questions and flashcards with answers, click on the resource link above.
Page 6
Chapter 5: Determination of Forward and Futures Prices
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/27862
Sample Questions
Q1) Which of the following is a consumption asset?
A) The S&P 500 index
B) The Canadian dollar
C) Copper
D) IBM stock
Q2) What should a trader do when the one-year forward price of an asset is too low?
Assume that the asset provides no income.
A) The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.
B) The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.
C) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year
D) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Interest Rate Futures
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27863
Sample Questions
Q1) The time-to-maturity of a Eurodollars futures contract is 4 years, and the time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the short term interest rate, \(\sigma\) = 0.011. What is the difference between the futures and the forward interest rate.
A) 0.105%
B) 0.103%
C) 0.098%
D) 0.093%
Q2) The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?
A) Quoted bond price = 110; conversion factor = 1.0400.
B) Quoted bond price = 160; conversion factor = 1.5200.
C) Quoted bond price = 131; conversion factor = 1.2500.
D) Quoted bond price = 143; conversion factor = 1.3500.
Q3) Which of following is applicable to corporate bonds in the United States?
A) Actual/360
B) Actual/Actual
C) 30/360
D) Actual/365
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Swaps
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27864
Sample Questions
Q1) Which of the following is a use of a currency swap?
A) To exchange an investment in one currency for an investment in another currency
B) To exchange borrowing in one currency for borrowings in another currency
C) To take advantage situations where the tax rates in two countries are different
D) All of the above
Q2) Which of the following describes the five-year swap rate?
A) The rate on a five-year loan to a AA-rated company
B) The rate on a five-year loan to an A-rated company
C) The rate that can be earned over five years from a series of short-term loans to AA-rated companies
D) The rate that can be earned over five years from a series of short-term loans to A-rated companies
Q3) A fixed-for-fixed currency swap
A) Is equivalent to a portfolio of FRAs
B) Is equivalent to a long position in one bond and a short position in another bond
C) Is worth the same whether or not principals are exchanged
D) Involves no exchange of principals at the beginning of its life
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: Securitization and the Credit Crisis of 2007
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27865
Sample Questions
Q1) Which of the following describes a subprime mortgage?
A) The rate of interest is less than the prime rate of interest
B) The loan-to-value ratio is below average
C) The life of the mortgage is less than 25 years
D) The credit risk is high
Q2) Which of the following tends to lead to an increase in house prices?
A) An increase in interest rates
B) Regulators specifying a maximum level for the loan-to-value ratio on mortgages
C) Banks reducing the minimum FICO score that borrowers are required to have
D) An increase in foreclosures
Q3) Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?
A) Bear Stearns
B) Morgan Stanley
C) Lehman Brothers
D) Merrill Lynch
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Mechanics of Options Markets
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27866
Sample Questions
Q1) Which of the following are true for CBOE stock options?
A) There are no margin requirements
B) The initial margin and maintenance margin are determined by formulas and are equal
C) The initial margin and maintenance margin are determined by formulas and are different
D) The maintenance margin is usually about 75% of the initial margin
Q2) When a six-month option is purchased
A) The price must be paid in full
B) Up to 25% of the option price can be borrowed using a margin account
C) Up to 50% of the option price can be borrowed using a margin account
D) Up to 75% of the option price can be borrowed using a margin account
Q3) Which of the following must post margin?
A) The seller of an option
B) The buyer of an option
C) The seller and the buyer of an option
D) Neither the seller nor the buyer of an option
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Properties of Stock Options
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27844
Sample Questions
Q1) Which of the following is true when dividends are expected?
A) Put-call parity does not hold
B) The basic put-call parity formula can be adjusted by subtracting the present value of expected dividends from the stock price
C) The basic put-call parity formula can be adjusted by adding the present value of expected dividends to the stock price
D) The basic put-call parity formula can be adjusted by subtracting the dividend yield from the interest rate
Q2) A stock price (which pays no dividends) is $50 and the strike price of a two year European put option is $54. The risk-free rate is 3% (continuously compounded). Which of the following is a lower bound for the option such that there are arbitrage opportunities if the price is below the lower bound and no arbitrage opportunities if it is above the lower bound?
A) $4.00
B) $3.86
C) $2.86
D) $0.86
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Trading Strategies Involving Options
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27845
Sample Questions
Q1) Which of the following is correct?
A) A calendar spread can be created by buying a call and selling a put when the strike prices are the same and the times to maturity are different
B) A calendar spread can be created by buying a put and selling a call when the strike prices are the same and the times to maturity are different
C) A calendar spread can be created by buying a call and selling a call when the strike prices are different and the times to maturity are different
D) A calendar spread can be created by buying a call and selling a call when the strike prices are the same and the times to maturity are different
Q2) 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
To view all questions and flashcards with answers, click on the resource link above.
13
Chapter 12: Introduction to Binomial Trees
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27846
Sample Questions
Q1) 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. Which of the following is necessary to hedge the position?
A) Buy 0.2 shares for each option purchased
B) Sell 0.2 shares for each option purchased
C) Buy 0.8 shares for each option purchased
D) Sell 0.8 shares for each option purchased
Q2) When moving from valuing an option on a non-dividend paying stock to an option on a currency which of the following is true?
A) The risk-free rate is replaced by the excess of the domestic risk-free rate over the foreign risk-free rate in all calculations
B) The formula for u changes
C) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate for discounting
D) The risk-free rate be replaced by the excess of the domestic risk-free rate over the foreign risk-free rate when p is calculated
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Valuing Stock Options: the Bsm Model
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27847
Sample Questions
Q1) Which of the following is a way of extending the Black-Scholes-Merton formula to value a European call option on a stock paying a single dividend?
A) Reduce the maturity of the option so that it equals the time of the dividend
B) Subtract the dividend from the stock price
C) Add the dividend to the stock price
D) Subtract the present value of the dividend from the stock price
Q2) 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%
Q3) 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
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Employee Stock Options
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27848
Sample Questions
Q1) Which of the following is true about employee stock options after they have been issued?
A) They have to be revalued every year
B) They have to be revalued every quarter
C) They have to be revalued every day like other derivatives
D) They never have to be revalued
Q2) Which of the following strategies makes no sense?
A) An employee exercises stock options early and sells the stock. No dividends are expected
B) An employee exercises stock options early and keeps the stock. No dividends are expected
C) An employee exercises stock options early and sells the stock. Dividends are expected
D) An employee exercises stock options early and keeps the stock. Dividends are expected.
Q3) Which of the following increases the expected life of employee stock options?
A) An increase in the vesting period
B) An increase in employee turnover
C) A fast growth rate for the stock price
D) A tendency for employees to exercise earlier than in the past
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Options on Stock Indices and Currencies
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27849
Sample Questions
Q1) 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
Q2) 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
To view all questions and flashcards with answers, click on the resource link above.
Chapter 16: Futures Options and Blacks Model
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27850
Sample Questions
Q1) When Black's model used to value a European option on the spot price of an asset, which of the following is NOT true?
A) It is necessary to know the futures or forward price for a contract maturing at the same time as the option
B) It is not necessary to estimate income on the underlying asset
C) It is not necessary to know the risk-free rate
D) The underlying asset can be an investment or a consumption asset
Q2) Consider a European one-year call futures option and a European one-year put futures options when the futures price equals the strike price. Which of the following is true?
A) The call futures option is worth more than the put futures option
B) The put futures option is worth more than the call futures option
C) The call futures option is sometimes worth more and sometimes worth less than the put futures option
D) The call futures option is worth the same as the put futures option
To view all questions and flashcards with answers, click on the resource link above.
18
Chapter 17: The Greek Letters
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27851
Sample Questions
Q1) The risk-free rate is 5% and the dividend yield on an index is 2%. Which of the following is the delta with respect to the index of a one-year futures on the index?
A) 0.98
B) 1.05
C) 1.03
D) 1.02
Q2) Vega tends to be high for which of the following
A) At-the money options
B) Out-of-the money options
C) In-the-money options
D) Options with a short time to maturity
Q3) What does rho measure?
A) The rate of change of delta with the asset price
B) The rate of change of the portfolio value with the passage of time
C) The sensitivity of a portfolio value to interest rate changes
D) None of the above
To view all questions and flashcards with answers, click on the resource link above.
Chapter 18: Binomial Trees in Practice
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27852
Sample Questions
Q1) When the volatility of an option increases from 30% to 32% the value of the option increases from $2.00 to $2.40. What is the vega of the option
A) 0.20 dollars per %
B) 0.50 dollars per %
C) 0.80 dollars per %
D) 2.00 dollars per %
Q2) A European option on a stock with known dollar dividend is valued by setting the stock price variable equal to the stock price minus the present value of the dividend in the Black-Scholes-Merton formula. A second price can be obtained using the tree building procedure in the chapter. Which of the following is true when a very large number of time steps are used in the tree?
A) The first price is higher than the second price
B) The first price is lower than the second price
C) The first price is sometimes higher and sometimes lower than the second price
D) The two prices are almost exactly the same
To view all questions and flashcards with answers, click on the resource link above.
Chapter 19: Volatility Smiles
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27853
Sample Questions
Q1) Which of the following is true for European call and put options?
A) If they have the same strike price, they have the same implied volatility
B) If they have the same time to maturity, they have the same implied volatility
C) If they have the same strike price and time to maturity, they have the same implied volatility
D) None of the above
Q2) Which of the following is true?
A) The volatility skew for equities is much more pronounced now than it was in 1985.
B) The volatility skew for equities has a positive gradient
C) The volatility skew for equities is consistent with the Black-Scholes-Merton model.
D) The volatility skew for equities is similar to that for foreign currencies.
Q3) Which of the following could be a result of "crashophobia"?
A) High volatilities for in-the-money calls
B) High volatilities for in-the-money puts
C) High volatilities for at-the-money calls
D) Low volatilities for at-the-money puts
To view all questions and flashcards with answers, click on the resource link above.
21
Chapter 20: Value at Risk and Expected Shortfall
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27855
Sample Questions
Q1) Which of the following is true?
A) Cash flow mapping is a way of calculating the present value of cash flows
B) Cash flow mapping is used to handle interest rate exposures in the model building approach
C) Cash flow mapping is used to handle interest rate exposures in the historical simulation approach
D) None of the above
Q2) Which of the following is true of a covariance matrix?
A) The numbers on the diagonal are variances
B) The numbers on the diagonal are standard deviations
C) The numbers on the diagonal are all one
D) The numbers on the diagonal are all zero
Q3) Which of the following is true when delta, but not gamma, is used in calculating VaR for option positions?
A) VaR for a long call is too low and VaR for a long put is too low
B) VaR for a long call is too low and VaR for a long put is too high
C) VaR for a long call is too high and VaR for a long put is too low
D) VaR for a long call is too high and VaR for a long put is too high
To view all questions and flashcards with answers, click on the resource link above. Page 22
Chapter 21: Interest Rate Options
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27856
Sample Questions
Q1) Which of the following is assumed to be lognormal when a swap option is valued?
A) A future bond price
B) A future swap rate
C) A future short-term rate
D) A future bond yield
Q2) Which of the following is assumed to be lognormal when a caplet is valued?
A) A future bond price
B) A future swap rate
C) A future short-term rate
D) A future long-term rate
Q3) In a cap with quarterly reset dates, the cap rate is 3.5% per annum and the notional principal is $1 million. Suppose that the LIBOR rate is 4.0% per annum for a particular 3-month period. What is the approximate payoff at the end of the 3 months?
A) $10,000
B) $5,000
C) $2,500
D) $1,250
To view all questions and flashcards with answers, click on the resource link above.
Chapter 22: Exotic Options and Other Nonstandard Products
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27857
Sample Questions
Q1) When can Bermudan options be exercised?
A) Any time during the life of the options
B) Any time after a certain date up to the end of the life of the life
C) Any time before a certain date or at the end of the option's life
D) On dates specified at the start of the option
Q2) An employer has promised that it will grant employees three year options in one year's time and that the options will be at the money at the time they are granted. What describes these options?
A) Chooser options
B) Forward start options
C) Compound options
D) Shout options
Q3) An Asian option is a term used to describe which of the following
A) An option where the payoff depends on whether a barrier is hit
B) An option where the payoff depends on the average value of a variable over a period of time
C) An option that trades on an exchange in the Far East
D) Any option with a nonstandard payoff
To view all questions and flashcards with answers, click on the resource link above. Page 24
Chapter 23: Credit Derivatives
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27858
Sample Questions
Q1) What is the number of companies underlying the CDX NA IG index?
A) 50
B) 75
C) 100
D) 125
Q2) Which of the following best describes a total return swap?
A) It exchanges the realized return on an asset, including both income and capital gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset
B) It exchanges the promised return on an asset, including both income and capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
C) It exchanges the realized return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
D) It exchanges the promised return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset
To view all questions and flashcards with answers, click on the resource link above. Page 25
Chapter 24: Weather, Energy, and Insurance Derivatives
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/27859
Sample Questions
Q1) An August CDD weather option is offered on the cumulative monthly CDD at an Atlanta weather station. An investor has a long call with a strike price of 375 and a short call with a strike price of 400. The payment is $10,000 per degree day. What is the maximum payoff?
A) $500,000
B) $250,000
C) $100,000
D) $50,000
Q2) Which of the following might we expect to be the result of global warming?
A) An decrease in observed CDDs
B) An increase in observed CDDs
C) An increase in observed HDDs
D) None of the above
Q3) Which of the following describes a CAT bond?
A) Has a great deal of systematic risk
B) Has very little systematic risk
C) Has a moderate amount of systematic risk
D) Has negative systematic risk
To view all questions and flashcards with answers, click on the resource link above.