Risk Management Exam Review
Course Introduction
Risk Management is a critical course that introduces students to the principles and practices of identifying, analyzing, and responding to risks in organizational and project environments. The course explores frameworks and tools used to assess risk exposure, evaluate potential impacts, and prioritize risk mitigation strategies. Students learn about both qualitative and quantitative risk assessment methods, and examine real-world case studies in various industries. Key topics include risk identification, measurement, risk control techniques, legal and regulatory considerations, and the development of contingency plans to minimize adverse effects on organizational objectives. By the end of the course, students will have practical skills to implement effective risk management processes and adapt to emerging uncertainties in todays dynamic environment.
Recommended Textbook
Derivatives Markets 3rd Edition by Robert L. McDonald
Available Study Resources on Quizplus
27 Chapters
546 Verified Questions
546 Flashcards
Source URL: https://quizplus.com/study-set/1621
Page 2
Chapter 1: Introduction to Derivatives
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32211
Sample Questions
Q1) Why would a corn farmer,who maintains a short futures contract after harvesting and selling her crop,be considered a speculator?
Answer: The farmer was a hedger until she sold her crop.Her perspective then changed since she no longer had an asset to hedge.Her naked contract is now a speculation.
Q2) According to trading volume data tabulated by the Wall Street Journal for April 15,2010,which index futures contact experienced the highest total open interest?
A) DJ Industrial Average
B) S&P 500 Index
C) Mini S&P 500
D) Mini Nasdaq 100
Answer: C
Q3) What would cause the spread between the market rate of interest and the repo rate to be small?
Answer: If there is a low demand to short sell a security or a large supply of the security repo rates will be higher due to lack of demand for short instruments.
To view all questions and flashcards with answers, click on the resource link above.
3
Chapter 2: An Introduction to Forwards and Options
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32212
Sample Questions
Q1) The spot price of the market index is $900.A 3-month forward contract on this index is priced at $930.The annual rate of interest on treasuries is 2.4% (0.2% per month).What annualized rate of interest makes the net payoff zero? (Assume monthly compounding.)
A) 4.8%
B) 8.5% C) 11.2% D) 13.2%
Answer: D
Q2) The premium on a long term call option on the market index with an exercise price of 950 is $12.00 when originally purchased.After 6 months the position is closed,and the index spot price is 965.If interest rates are 0.5% per month,what is the Call Payoff?
A) $2.64
B) $12.00
C) $12.36
D) $15.00
Answer: D
To view all questions and flashcards with answers, click on the resource link above.
4
Chapter 3: Insurance, collars, and Other Strategies
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32213
Sample Questions
Q1) Using option strategy concepts,what is the value of an insured home,if the value of the uninsured home is $220,000,the house was purchased for $180,000 and the house has a casualty policy costing $500 with a $2,000 deductible? Ignore interest costs.
A) $180,000
B) $217,500
C) $220,000
D) $222,500
Answer: B
Q2) At the 6-month point,what is the breakeven index price for a strategy of longing the market index at a price of 830? Interest rates are 0.5% per month.
A) $802.12
B) $830.00
C) $855.21
D) $866.32
Answer: C
Q3) Why is a straddle position considered a speculation on the asset's volatility?
Answer: The strategy loses money if prices stay constant,but benefits from large changes in prices,either up or down.
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Introduction to Risk Management
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/32214
Sample Questions
Q1) A $1.75 strike call option has a $0.14 premium.The $1.75 strike put option premium is $0.12.What is the net cost for Farmer Jayne to create a synthetic short forward contract? (Assume 4.0% interest.)
A) $0.0208
B) -$0.0208
C) $0.000
D) -$0.0424
Q2) Engage the class in a discussion of why firms hedge risks.Steer them towards an understanding that firms manufacture products,they do not speculate in commodity markets.Now,turn the tables and ask why manufacturers do not employ pure hedge strategies with forward contracts.Try to get the class to arrive at the conclusion that since firms are experts in their respective industries,their knowledge may benefit them by implementing creative strategies,while still hedging losses.
Q3) Why are managerial controls over option and forward trading departments vital to proper risk control?
Q4) Explain the relationship between options costs and profits under a put option insurance strategy.
To view all questions and flashcards with answers, click on the resource link above.
6
Chapter 5: Financial Forwards and Futures
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/32215
Sample Questions
Q1) Interest rates on the U.S.dollar are 5.4% and euro rates are 4.6%.Given a dollar per euro spot rate of 0.918,what is the 6-month forward rate ($/E)?
A) 0.912
B) 0.917
C) 0.922
D) 0.934
Q2) The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year.The current price of the S&P 500 Index futures contract is 1200.If the mutual fund has a beta of 1.24,how many contracts will be needed to hedge the fund?
A) 1,083
B) 3,033
C) 242,963
D) 541,666
Q3) Explain the steps necessary to take advantage of an arbitrage opportunity,which may exist between the dollar and yen,when a future yen payment is required.
Q4) Name some advantages that futures contracts have over forward contracts.
Q5) What are some uses for index futures contracts?
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Commodity Forwards and Futures
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32216
Sample Questions
Q1) The spot price of gasoline is 258 cents per gallon and the annualized risk free interest rate is 4.0%.Given a lease rate of 1.0%,a continuously paid storage rate of 0.5%,and a convenience yield of 0.75%,what is the no-arbitrage price range of a 1-year forward contract (in cents)?
A) 265.19 to 267.19
B) 258 to 265.19
C) 258 to 267.19
D) 247.16 to 265.19
Q2) Refer to the table 6.1.What is the approximate annualized lease rate on the 12-month corn forward contract?
A) 0.00%
B) 2.25%
C) 3.92%
D) 7.84%
Q3) Give one example of how price discovery functions in the commodity futures market.
Q4) Why is the cash-and-carry strategy employed in the financial futures market not readily available in the commodity futures market?
Q5) When is it possible for the lease rate to fall below zero?
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Interest Rate Forwards and Futures
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/32217
Sample Questions
Q1) What is the pure yield curve and why is it common to present coupon-based yield curves in practice?
Q2) What is the rationale behind cheapest-to-deliver calculations and why do we perform such calculations?
Q3) How is duration calculated? What is the nature and use of duration? How does duration compare to the linear concept of the bond price and interest rate relationship? Is duration better than convexity or worse? Duration is considered common knowledge in the fixed income world and should be discussed at length.
Q4) You wish to create a synthetic forward rate agreement in which you would lock in a return between 150 and 310 days.The price of a 150-day zero coupon bond is 0.9823 and the price of 310-day zero coupon bond is 0.9634.What are the transactions used to create this instrument?
A) Borrow one 150-day bond and invest in 1.02 of the 310-day bonds
B) Borrow two 150-day bonds and invest in 0.98 of the 310-day bonds
C) Lend one of the 150-day bonds and borrow 1.02 of the 310-day bonds
D) Lend two of the 150-day bonds and borrow 0.98 of the 310-day bonds
Q5) Explain the expectations hypothesis and its ability to accurately forecast interest rates.
Q6) Explain the process of creating a synthetic Forward Rate Agreement.
Page 9
To view all questions and flashcards with answers, click on the resource link above.
Chapter 8: Swaps
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32218
Sample Questions
Q1) IBM and AT&T decide to swap $1 million loans.IBM currently pays 9.0% fixed and AT&T pays 8.5% on a LIBOR + 0.5% loan.What is the net cash flow for IBM if they swap their fixed loan for a LIBOR + 0.5% loan and LIBOR rises to 8.5%?
A) -$50,000
B) $50,000
C) -$90,000
D) 0
Q2) What is the 3-year swap price on corn? Assume interest rates over the next 3 years are 2.0%,2.5%,and 2.8%.The prepaid swap price is given as $15.50.
A) $5.10
B) $5.30
C) $5.43
D) $5.64
Q3) How would a market-maker hedge a swap involving variable price and quantity?
Q4) Why do arbitrage profits rarely exist in interest rate swap pricing?
Q5) Explain a "diff swap" as it relates to currency swaps.
Q6) Under what circumstances would a multinational company elect to enter into a currency swap agreement?
Q7) Describe briefly the nature of a swap and its primary component.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Parity and Other Option Relationships
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32219
Sample Questions
Q1) The spot exchange rate in dollars per euro is $1.31.Dollar denominated interest rates are 4.0% and euro denominated interest rates are 3.0%.What is the difference in call and put option prices given a 2-year option and a $1.34 strike price?
A) -$0.1041
B) -$0.0652
C) $0.1233
D) $0.1546
Q2) Call options with strikes of $30,$35,and $40 have option premiums of $1.50,$1.70,and $2.00,respectively.Using strike price convexity,which option premium,if any,is not possible?
A) C (30)
B) C (35)
C) C (40)
D) All are possible
Q3) Explain in simple terms why a call option on a non-dividend paying stock should never be exercised early.
Q4) Using the synthetic long stock strategy,explain the difference in call and put prices.
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Binomial Option Pricing: Basic Concepts
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/32220
Sample Questions
Q1) Draw the binomial tree listing only the option prices at each node.Assume the following data on a 6-month call option,using 3-month intervals as the time period.K = $40,S = $37.90,r = 5.0%, = 0.35
Q2) A stock is selling for $53.20.Interest rates are 6.0% and the returns on the stock have a standard deviation of 24.0%.What is the forecasted up movement in the stock over a 6-month interval?
A) $64.96
B) $69.69
C) $73.48
D) $76.96
Q3) Using a binomial tree explanation,explain the situation in which an American option would alter the pricing of an option.
Q4) A stock is selling for $32.70.The strike price on a call,maturing in 6 months,is $35.The possible stock prices at the end of 6 months are $39.50 and $28.40.If interest rates are 6.0%,what is the option price?
A) $1.90
B) $2.80
C) $3.40
D) $4.20
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Binomial Option Pricing: Selected Topics
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32221
Sample Questions
Q1) Consider a two-period binomial model,where each period is 6 months.Assume the stock price is $75.00, = 0.35,and r = 0.05.An American call option with a strike price of $80 would be exercised early at what dividend yield?
A) 5.0%
B) 7.0%
C) 9.0%
D) Never exercise early
Q2) What economic concept is central to proving that risk neutral pricing functions in the establishing of option prices?
A) Consumption possibilities
B) Factor analysis
C) Marginal average cost
D) Declining marginal utility
Q3) Under what circumstances should an option be exercised early?
Q4) Ask the class to prove that option pricing is consistent with standard discounted cash flow calculations.Propose that students form groups and develop two binomial trees for the same set of data.One tree should use real probabilities as defined in chapter 11 and the other as defined in chapter 10.
To view all questions and flashcards with answers, click on the resource link above.
Page 13
Chapter 12: The Black-Scholes Formula
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/32222
Sample Questions
Q1) What unique feature about perpetual options makes it possible to derive a valuation formula?
Q2) Suppose the spot exchange rate is $1.43 per British pound and the strike on a dollar denominated pound call is $1.30.Assume r = 0.045,rf = 0.06, = 0.15 and the option expires in 180 days.What is the call option price?
A) $0.133
B) $0.143
C) $0.153
D) $0.163
Q3) What is the difference between a standard bull spread and a calendar bull spread?
Q4) Suppose the spot exchange rate is $1.22 per British pound and the strike on a dollar denominated pound put is $1.20.Assume r = 0.04,rf = 0.05, = 0.20 and the option expires in 270 days.What is the put option price?
A) $0.075
B) $0.085
C) $0.095
D) $0.105
Q5) What is the difference between implied volatility and historical volatility?
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Market-Making and Delta-Hedging
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32223
Sample Questions
Q1) Which of the following is NOT a source of cash while maintaining a delta neutral hedge?
A) Borrowing
B) Purchase or sale of shares
C) Interest
D) Self financing
Q2) What are the two methods by which insurance companies hedge their risk of extreme losses?
Q3) What actions are required to both delta-hedge and gamma-hedge a written option position?
Q4) Since delta of an option changes over the same time period that a stock price is changing,what is the delta used to calculate the approximate change in the option price?
A) Delta at the start of the time period
B) Delta at the end of the time period
C) The average delta over the time period
D) The median delta over the time period
Q5) Discuss the three methods used to reduce the risk of extreme price moves.Ask the class to also elaborate on why simple delta hedging is inadequate to the task.
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Exotic Options: I
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/32224
Sample Questions
Q1) Assume S = $51,K = $50,div = 0.0,r = 0.05, = 0.20,and 55 days until expiration.What is the premium on a knock-in call option with a down-and-in barrier of $48?
A) $0.175
B) $0.185
C) $0.195
D) $0.205
Q2) The value of an Asian call option is computed using the geometric average strike.What is the expected payoff if the observed prices to date are 69,70,72,71,75,and 73,respectively?
A) 1.26
B) 1.36
C) 1.46
D) 1.56
Q3) What is the primary difference between a standard option and an exchange option?
Q4) For a long put position,what benefit is provided by a gap option should prices rise?
Q5) When hedging a foreign currency position,what makes a down-and-out put unattractive?
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Financial Engineering and Security Design
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32225
Sample Questions
Q1) Assume oil prices rise dramatically and the spot price of oil is $230 per barrel and the 3-year forward price is $245.Annualized 1-year,2-year,and 3 year interest rates are 4.2%,4.4%,and 4.6%,respectively.For a commodity-linked note to sell at par,what is the annual coupon?
A) $6.00
B) $16.00
C) $26.00
D) $36.00
Q2) Assume the spot price of gold is $745 per ounce and the 2-year forward price is $773.Annualized 1-year and 2-year forward interest rates are 5.0% and 5.2%,respectively.For a commodity-linked note to sell at par,what is the annual coupon?
A) $23.09
B) $24.09
C) $25.09
D) $26.09
Q3) What is the primary difference between an equity-linked bond and a currency-linked bond?
Q4) How does a coupon bond differ from an equity-linked bond?
Q5) What possible tax advantage exists in equity-linked notes?
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Corporate Applications
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32226
Sample Questions
Q1) What feature of reload options prevents the use of a Black-Scholes valuation?
Q2) James,Inc.has zero-coupon outstanding debt maturing in 8 years.In rank of seniority,each pays at maturity $20 million,$15 million,and $40 million.Assume asset value = $60 million,r = 0.05, = 0.28,and no dividend is paid.What is the yield on the $15 million subordinate debt?
A) 5.72%
B) 6.72%
C) 7.72%
D) 8.72%
Q3) Willco,Inc.issues compensation options with the following terms.Strike = $45,price = $42.00, = 0.48,r = 0.05,div = 0.02.What is the value of the option if it will be repriced at $30? Assume 10 years to expiration.
A) $22.78
B) $24.65
C) $26.22
D) $30.46
Q4) How does a reload option provide additional compensation compared to regular compensation options?
Q5) What three components exist in the value of an "outperform stock option"?
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: Real Options
Available Study Resources on Quizplus for this Chatper
22 Verified Questions
22 Flashcards
Source URL: https://quizplus.com/quiz/32227
Sample Questions
Q1) What is the main difference in pricing R & D options versus most other real options?
Q2) The current price per cord of lumber is $26.00.The effective annual lease rate is 2.0% and the risk free rate is 4.0%.The cost to harvest one cord is $20.00 and constant.What is the trigger price at which we will harvest the lumber?
A) $27.61
B) $31.61
C) $35.61
D) $39.61
Q3) How are call and put options used to value starting,stopping,and restarting commodity extraction projects? Ask students to identify the calls and puts in each situation.
Q4) Use a binomial tree to value the following option.Assume rf = 0.04,r<sub>p</sub> =0.12, = 0.35,E(CF )= $30,and cost = $300.What is the value of this project option?
A) $40.74
B) $50.60
C) $55.32
D) $62.12
To view all questions and flashcards with answers, click on the resource link above.
Page 19
Chapter 18: The Lognormal Distribution
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32228
Sample Questions
Q1) A stock is valued at $28.00.The annual expected return is 9.0% and the standard deviation of annualized returns is 19.0%.If the stock is lognormally distributed,what is the expected median stock price after 4 years?
A) $28.00
B) $32.33
C) $40.13
D) $54.60
Q2) A stock is valued at $28.00.The annual expected return is 9.0% and the standard deviation of annualized returns is 19.0%.If the stock is lognormally distributed,what is the price of the stock given a one standard deviation move up after 4 years?
A) $28.00
B) $32.33
C) $40.13
D) $54.60
Q3) Why might normally distributed returns appear non-normal?
Q4) Why do we assume a lognormal distribution in option pricing? Ask the class to explain the pluses and minuses to this assumption.Once the downfalls are established,probe students to find out if a better alternative exists.
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Monte Carlo Valuation
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32229
Sample Questions
Q1) When a stock price movement occurs and is more than we would expect from a lognormal distribution,we refer to this as:
A) Pull
B) Jump
C) Squat
D) Push
Q2) What statistic is used to determine the accuracy of a Monte Carlo simulation?
A) Mean
B) Standard deviation
C) Covariance
D) Correlation coefficient
Q3) Which distribution is a discrete probability distribution that counts the number of events,such as large stock price moves,that occur over a period of time?
A) Latin hypercube
B) Normal
C) Lognormal
D) Poisson
Q4) What advantage does a variance reduction technique offer?
Q5) Why are covariances and correlations relevant to simulation development?
To view all questions and flashcards with answers, click on the resource link above. Page 21
Chapter 20: Brownian Motion and Itos Lemma
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32230
Sample Questions
Q1) When considering drift and noise,how would you explain price movements over smaller and smaller time intervals?
Q2) Assume the following: LN(S)and LN(Q)have a correlation coefficient of 0.40,S(0)= 60,Q(0)= 60,r = 0.05, s = 0.30 Q = 0.25,and dividend = 0.Using formula 20.39,what is the price of a claim that pays \( \sqrt[5]{Q} \) ?
A) $243.96
B) $322.96
C) $479.96
D) $532.96
Q3) A Brownian motion is a stochastic process that can be described as a:
A) Pattern of movements with continuous movements
B) Pattern of movements with discrete movements
C) Random walk with continuous movements
D) Random walk with discrete movements
Q4) Provide a definition of Brownian motion.
Q5) Define the term drift.
Q6) Why is Brownian motion the foundation for modern derivatives pricing models? Attempt to elicit responses that understand the shortcomings of using this motion for just asset pricing and the advantages in risk measurement.
Page 22
To view all questions and flashcards with answers, click on the resource link above.
Chapter 21: The Black-Scholes-Merton Equation
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32231
Sample Questions
Q1) Assume S = $60,K = $65, = 0.15,r = 0.05,T - t = 122 days,div = 0.015,and a jump probability = 0.003.What is the value of a call?
A) $0.67
B) $1.67
C) $2.67
D) $3.67
Q2) Lapel Inc.stock price is $32.00.Joe bets Sarah that the price will be above $35.00 in 6 months (180 days).The standard deviation of the stock is 0.25 and the risk free interest rate is 5.0%.If Joe wins the bet,he wishes to be paid with one share of stock.If Sarah agrees to the bet,what is the value of her wager?
A) $3.00
B) $9.65
C) $12.44
D) $19.58
Q3) Explain the relationship between strike prices and implied volatilities under a price jump scenario.
Q4) Define a power option.
Q5) Briefly define a terminal boundary condition.
Q6) How does a dividend payment impact the option price?
Page 23
To view all questions and flashcards with answers, click on the resource link above.
Chapter 22: Risk-Neutral and Martingale Pricing
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/32232
Sample Questions
Q1) The case where the zero coupon bond is selected as the numeraire under a risky asset method results in a measure called the:
A) Drift measure
B) Forward measure
C) Money market measure
D) Spread measure
Q2) Which of the following is not commonly used as a numeraire?
A) Futures contract
B) Money market account
C) Risky asset
D) Zero coupon bond
Q3) The risk-neutral measure arises when we select ________ as the numeraire.
A) Asset portfolio
B) Corporate bond
C) Treasury bond
D) Money market account
Q4) How do asset values differ between using a traditional DCF approach and a stochastic discount factor approach?
Q5) What does Girsanov's theorem tell us about drift and Brownian motion?
Q6) What aspect of risk-neutral pricing valuation links it to portfolio selection?
Page 24
To view all questions and flashcards with answers, click on the resource link above.
Chapter 23: Exotic Options: 2
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/32233
Sample Questions
Q1) What is the risk a U.S.investor faces when investing in foreign index securities,besides index fluctuations?
Q2) The Nikkei index is 22,550,K = 21,000, = 0.19,rf = 0.04,S = 0.10,r = 0.08 and ?div = 0.01.The yen to dollar spot rate is 104 and the correlation coefficient is 0.30.What would be the dollar price of a 2-year equity-linked foreign exchange call?
A) $45.02
B) $35.02
C) $25.01
D) $15.02
Q3) The concept created by Hakannson in 1976 to describe the exotic option like payoffs that could result without the need for a delta hedging requirement is known as:
A) Exotics
B) Multioptions
C) Quantos
D) Supershares
Q4) What is the characteristic that makes options,like quantos,multivariate options?
Q5) What purpose do currency linked options serve?
To view all questions and flashcards with answers, click on the resource link above.
Page 25
Chapter 24: Volatility
Available Study Resources on Quizplus for this Chatper
18 Verified Questions
18 Flashcards
Source URL: https://quizplus.com/quiz/32234
Sample Questions
Q1) Plotting the volatility of a security in a three dimensional graph,using time to maturity on one axis and strike price on another,is referred to as volatility:
A) Skew
B) Smile
C) Smirk
D) Surface
Q2) The sum of the squared,continuously compounded returns used to calculate a volatility is referred to as:
A) ARCH
B) EWMA
C) GARCH
D) Realized quadratic variation
Q3) Explain the pattern of implied volatility that is often referred to as a smirk.(Use a call as your example.)
Q4) Ask students to provide a definition of forecasted volatility and market efficiency.Begin a discussion of the consistency or inconsistency that may exist between these two concepts.Is it possible that markets are inefficient if volatility can be forecasted? If so,how can someone take advantage of this inefficiency to make excess returns?
To view all questions and flashcards with answers, click on the resource link above. Page 26
Chapter 25: Interest Rate and Bond Derivatives
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/32235
Sample Questions
Q1) A series of 1-year interest rate caplets for 4 years have values of $0.05,$0.07,$0.08,and $0.10,respectively.What is the value of a 3-year interest rate cap?
A) $0.08
B) $0.12
C) $0.20
D) $0.30
Q2) Bonds maturing in 1,2,and 3 years have prices of 0.9020,0.8320,and 0.7620,respectively.What is the price of a put option that expires in 1 year that gives you the right to sell a 1-year bond for a price of 0.9200? Assume = 0.18.
A) $0.35
B) $0.25
C) $0.15
D) $0.05
Q3) What is calibration?
Q4) Describe the effectiveness of duration as a tool in hedging bonds.
Q5) Under what conditions does delta-gamma-theta approximate the exact bond price change?
Q6) How does the node configuration in interest rates and bonds differ from stocks?
To view all questions and flashcards with answers, click on the resource link above. Page 27
Chapter 26: Value at Risk
Available Study Resources on Quizplus for this Chatper
21 Verified Questions
21 Flashcards
Source URL: https://quizplus.com/quiz/32236
Sample Questions
Q1) You own $4 million of Jacko Corp.The expected return is 14.0% and = 0.20.What is the value at risk over 4 weeks at a 99% confidence level?
A) $383,000
B) $413,000
C) $453,000
D) $473,000
Q2) Your portfolio is worth $200,000.The standard deviation of its annual returns is 0.20 and the expected return is 11.0%.What is the 2-week value at risk at a 95% confidence level?
A) $12,058
B) $13,058
C) $14,058
D) $15,058
Q3) Why is VaR an important tool in measuring risk? What are some of its shortcomings? Ask the class to explain the rationale for a company to rely heavily on VaR in the absence of other measurement tools.
Q4) What is a default swap and what is its use?
Q5) Why is recent data more relevant than older data when calculating volatility?
Q6) What is implied volatility?
Page 28
To view all questions and flashcards with answers, click on the resource link above.
Chapter 27: Credit Risk
Available Study Resources on Quizplus for this Chatper
18 Verified Questions
18 Flashcards
Source URL: https://quizplus.com/quiz/32237
Sample Questions
Q1) What is the recovery rate?
Q2) A bond has a current value of $950 and promises to pay $1,000 at the end of 4 years.The expected return on the asset is 12% and the risk free rate is 3%.If the actual cash payout in case of default is 0,what is the risk neutral default probability given that the asset has a standard deviation of 18%?
A) 15.2%
B) 21.5%
C) 33.2%
D) 49.6%
Q3) The chance that a counter party may fail to meet a contractual obligation on a debt instrument is referred to as:
A) Credit risk
B) Credit spread
C) Loss given default
D) Recovery rate
Q4) What is meant by the phrase "tranche" when referring to collateralized debt obligations?
Q5) What is a credit default swap and what function does it serve?
Q6) What are the two ways that the payoff conditional on default can be expressed?
Page 29
To view all questions and flashcards with answers, click on the resource link above.