Risk Management Final Test
Solutions
Course Introduction
Risk Management introduces students to the principles and practices used to identify, assess, and mitigate potential risks in various organizational contexts. The course covers key concepts such as risk identification, risk analysis, risk control strategies, and risk financing, while exploring methods to minimize the impact of uncertainties on organizational objectives. Through case studies and practical applications, students learn to evaluate different types of risks including financial, operational, strategic, and legal and to develop comprehensive risk management plans that support informed decision-making and promote organizational resilience.
Recommended Textbook
Derivatives 2nd Edition by Rangarajan Sundaram
Available Study Resources on Quizplus
32 Chapters
791 Verified Questions
791 Flashcards
Source URL: https://quizplus.com/study-set/2621
Page 2
Chapter 1: Overview
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52229
Sample Questions
Q1) State which of these statements is false.
A)A futures contract is traded on an exchange.
B)A futures contract involves counterparty credit risk.
C)A futures contract is fully customizable.
D)A futures contract may be reversed unilaterally.
Answer: C
Q2) The following is not a point of difference between futures and forwards.
A)The futures payoff depends on the spot price of the asset at contract maturity.
B)Futures are traded on an exchange.
C)Futures have standardized terms.
D)Default risk in a futures contract is borne by the exchange.
Answer: A
Q3) Which class of derivatives have been blamed most widely for causing the financial crisis of 2008?
A)Equity derivatives.
B)Interest-rate derivatives.
C)Foreign exchange derivatives.
D)Credit derivatives.
Answer: D
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: Futures Markets
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52230
Sample Questions
Q1) Which of the following types of orders does not involve specifying a price limit or trigger price as part of the order?
A)Stop order.
B)Market-if-touched order.
C)A fill-or-kill limit order.
D)A spread order.
Answer: D
Q2) Futures contracts are more likely to be cash-settled when
A)The asset underlying the contract is too costly to deliver physically.
B)There is no "underlying" for the futures contract.
C)There are more futures contracts in notional value than the physical stock of the underlying asset.
D)The maturity date of the futures is not the last day of the month.
Answer: A
Q3) The level of margining in a futures contract takes as an important input
A)The trading volume that underlies the contract.
B)The credit quality of counterparties trading in the futures market.
C)The volatility of the asset underlying the futures contract.
D)The difference between the initial and maintenance margin in the futures.
Answer: C
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Pricing Forwards and Futures I
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52231
Sample Questions
Q1) An investor enters into a forward contract to purchase 100,000 shares of IBM stock in 2 months at prices of $105 per share.After one month,the investor notes that the forward price for the same contract (which now has a one-month maturity)is $103 per share.She also notes that the one-month discount factor is 0.993.The value of the forward contract held by the investor is
A) \(+ \$ 198,600.00\)
B) \(- \$ 198,600.00\)
C) \(+ \$ 200,000.00\)
D) \(+ \$ 201,409.90\)
Answer: B
Q2) A replicating portfolio for a derivative security is
A)A portfolio consisting of long and short positions in the derivative.
B)A portfolio that has the same payoffs as the derivative.
C)A portfolio that has payoffs at least as great as,and in some states greater than,the payoffs from the derivative.
D)A portfolio that combines the derivative with another derivative on the same underlying so as to make the portfolio riskless.
Answer: B
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: Pricing Forwards Futures II
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52232
Sample Questions
Q1) For commodity forwards and futures,which of the following statements is valid?
A)The presence of a convenience yield means that the market will be in contango.
B)Convenience yields may lead to the market being in backwardation.
C)If there are storage costs,the convenience yield is zero-it is no longer convenient to hold the commodity.
D)As supply becomes plentiful,convenience yields will rise.
Q2) If the stock market index is at a level of 1,120 and the one-year forward on the index is 1,210,what is the implied repo rate in continuously-compounded terms (assuming zero dividends on the index)?
A)5.72%
B)6.52%
C)7.72%
D)8.62%
Q3) Forward pricing by replication depends on the following assumption:
A)That the nominal interest rate for the cost of carry is positive.
B)That long positions are easier to take in the forward contract than in the spot asset.
C)That the underlying is a traded asset which is storable.
D)That the spot asset is not a financial security.
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Hedging With Futures Forwards
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52233
Sample Questions
Q1) Refer again to the data in Question 23.The minimum-variance hedge,if EUR were to be used for the hedge,is a forward contract calling for the delivery of
A)EUR 500 million.
B)EUR 90 million.
C)EUR 122.4 million.
D)EUR 367.65 million.
Q2) Suppose you want to hedge a futures contract A with another futures contract B.You calculate the minimum-variance hedge ratio ignoring daily resettlement (for example,by regressing daily changes in Contract A's prices on daily changes in Contract B's prices).Suppose,however,that both contracts are marked-to-market daily.Which of the following statements is always true?
A)The tailed hedge ratio is lower than the untailed one.
B)The tailed hedge ratio is equal to the untailed one.
C)The tailed hedge ratio is greater than the untailed one.
D)None of the above is always true.
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Interest-Rate Forwards Futures
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52234
Sample Questions
Q1) A long position in a eurodollar futures contracts expiring in June may be used to hedge interest-rate exposure resulting from a planned
A)90-day borrowing ending in June.
B)90-day borrowing beginning in June.
C)90-day investment ending in June.
D)90-day investment beginning in June.
Q2) Eurodollar deposits follow the money-market day-count convention.Suppose a deposit is made for 92 days at a Libor rate of 4% on a notional amount of $100.The interest amount is
A)1.0082
B)1.0099
C)1.0101
D)1.0222
Q3) Suppose the duration of a bond portfolio is 2.This means
A)The final cash flow from the portfolio will occur in two years.
B)The weighted-average maturity of the portfolio's cash flows is 2 years.
C)The portfolio is fully equivalent to a 2-year zero-coupon bond.
D)The portfolio is fully equivalent to a 2-year par-coupon bond.
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Options Markets
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52235
Sample Questions
Q1) You hold the following portfolio: a long position in a European call option on gold with a strike of $975 per oz,a short position in a European put option on gold with a strike of $975 per oz,and a short forward position in gold with a delivery price of $1,000 per oz.All three contracts expire in one month.The value of your position is
A)Positive.
B)Negative.
C)Zero.
D)Can be positive,negative,or zero.
Q2) You have $100 to invest.You can invest it in one of two alternatives.The first is to invest it in a stock that is trading for $100.The second is to buy three-month 100-strike calls on the stock that are currently trading at $4 each.You expect the stock price to appreciate with a maximum price after three months of $110.What is the maximum return on investment you can generate using stock and options?
A)10%
B)50%
C)150%
D)250%
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Options: Payoffs Trading Strategies
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52236
Sample Questions
Q1) Consider a position in a long straddle at strike 90 and a short straddle at strike 100,both for the same maturity.which of the following properties is valid for this position?
A)The payoff is increasing in the stock price.
B)The payoff is always positive.
C)The payoff is always negative.
D)The payoff is unbounded.
Q2) A stock is currently trading at $50.A one-year at-the-money put costs $10.The stock price at the end of one year can be equally likely to be one of the following three values: {20,50,80}.What is the expected one-year return of a protective put portfolio?
A) \(- 16.67 \%\)
B) \(0 \%\)
C) \(+ 16.67 \%\)
D) \(+ 50 \%\)
Q3) In a covered call strategy:
A)The gross payoff is greater than the net payoff.
B)The gross payoff is equal to the net payoff.
C)The gross payoff is smaller than the net payoff.
D)None of the above is always true.
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: No-Arbitrage Restrictions
Available Study Resources on Quizplus for this Chatper
19 Verified Questions
19 Flashcards
Source URL: https://quizplus.com/quiz/52237
Sample Questions
Q1) Consider two six-month European calls at strikes 90 and 100.The risk free rate is 2%.Which of the following alternatives best describes the condition that must be met by the difference in prices \(C ( 90 ) - C ( 100 )\) ?
A)It must be strictly less than $10.
B)It must be less than or equal to $10.
C)It must be strictly greater than $10.
D)There is insufficient information to answer this question.
Q2) The 50-strike call on a stock is trading at $13 and a 60-strike call on the same stock with the same maturity is trading at $4.The minimum price of the 100-strike call is
A)$0
B)$1
C)$2
D)$3
Q3) All else the same,when the interest rate rises,the lower bound on a call option
A)Falls or stays the same.
B)Stays the same.
C)Increases or stays the same.
D)May become negative.
To view all questions and flashcards with answers, click on the resource link above.
11
Chapter 10: Early-Exercise/Put-Call Parity
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52238
Sample Questions
Q1) The stock price is $50.The strike price of a three-month European put option is $52.If the put option is equal in price to the call option and the stock pays no dividends,then the rate of interest for three month's maturity is
A)4.61%
B)9.23%
C)12.66%
D)15.69%
Q2) Consider two six-month American calls at strikes 90 and 100 on a non-dividend paying stock.The risk free rate is 2%.The difference between the two call prices at any time before maturity will always be
A)Less than $10.
B)Equal to $10.
C)Greater than $10.
D)One cannot be sure of which of the preceding three choices is valid and more information may be required.
To view all questions and flashcards with answers, click on the resource link above.
12
Chapter 11: Option Pricing: An Introduction
Available Study Resources on Quizplus for this Chatper
26 Verified Questions
26 Flashcards
Source URL: https://quizplus.com/quiz/52239
Sample Questions
Q1) In a portfolio insurance strategy,when stock prices drop,the portfolio is rebalanced by
A)Buying stock and investing at the risk-free rate.
B)Buying stock and borrowing at the risk-free rate.
C)Selling stock and investing at the risk-free rate.
D)Selling stock and borrowing at the risk-free rate.
Q2) In a one-period binomial model,assume that the current stock price is $100,and that it will rise to $110 or fall to $90 after one month.If the risk-free rate is 0.1668% per month in simple terms,which of the following choices best describes the replicating portfolio for one hundred 99-strike one-month call options?
A)Long 50 shares of stock and long 50 units of $1 bonds.
B)Long 55 shares of stock and long 49 units of $1 bonds.
C)Long 55 shares of stock and short 49 units of $1 bonds.
D)Long 55 shares of stock and short 50 units of $1 bonds.
Q3) Pricing options in the risk-neutral world implies that
A)Trading of options is without risk.
B)All assets are risk-free in this world.
C)All assets earn the risk-free rate of return.
D)All investors are risk-neutral.
To view all questions and flashcards with answers, click on the resource link above. Page 13
Chapter 12: Binomial Option Pricing
Available Study Resources on Quizplus for this Chatper
31 Verified Questions
31 Flashcards
Source URL: https://quizplus.com/quiz/52240
Sample Questions
Q1) A stock is currently trading at $100.In each month,the stock will either increase in price by a factor of \(u = 1.10\) or fall by a factor of \(d = 0.90\) .The risk-free rate of interest per month is 0.1668% in simple terms,i.e. ,an investment of $1 at the risk-free rate returns $1.001668 after one month.What is(a)the price of a 100-strike,three-month European put option,and(b)the price of a 100-strike,two-month European put option?
A)$7.20 and $5.41,respectively.
B)$7.20 and $5.08,respectively.
C)$5.08 and $7.70,respectively.
Q2) Consider a binomial tree setting in which in each period the price goes up by \(u = 1.10\) (with probability \(p = 0.60\) )or down by \(d = 0.90\) (with probability \(1 - p = 0.40\) ).The risk-free interest rate per time step is zero,so a dollar invested at the beginning of the period returns a dollar at the end of the period. In this setting,the risk-neutral probability of a two-period call with strike \(K = 95\) finishing in-the-money is
A)0.25
B)0.36.
C)0.75
D)0.84
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Implementing the Binomial Model
Available Study Resources on Quizplus for this Chatper
16 Verified Questions
16 Flashcards
Source URL: https://quizplus.com/quiz/52241
Sample Questions
Q1) Assume that a stock has lognormal returns with mean \(\mu = 0.10\) and standard deviation \(\sigma = 0.20\) .The current stock price is $50.What is a 95% confidence interval for the stock price in six months?
A)37.90,65.97
B)37.81,73.08
C)39.84,69.35
D)40.12,60.24
Q2) As the number of steps in the CRR binomial tree increases (keeping maturity fixed),the solution "converges" to a limit result.Which of the following statements characterizes this convergence best?
A)The solution results in the Black-Scholes formula.
B)The convergence may be oscillatory for even and odd number of steps in the tree.
C)The convergence may be monotonic for even and odd number of steps in the tree.
D)All of the above.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 14: The Black-Scholes Model
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/52242
Sample Questions
Q1) Which of the following is not an assumption underlying the Black-Scholes model?
A)The rate of interest is constant.
B)The dividend rate must be less than the interest rate.
C)Stock volatility is constant.
D)There are no taxes and transactions costs.
Q2) The current price of a stock is $100.Consider the Black-Scholes model price of a six-month call option at strike $101,given an interest rate of 2% and a dividend rate of 1%? The volatility is 25%.What is the real-world (physical)probability of the option ending up in the money if the growth rate of the stock is expected to be 5% per year?
A)0.45
B)0.48
C)0.49
D)0.50
Q3) The Black-Scholes model differs from the binomial in that
A)The mathematics it requires is much simpler.
B)It provides closed-form solutions for option prices,so can price European options faster than the binomial model.
C)It can handle stochastic interest rates more efficiently than the binomial.
D)It was developed after the binomial model and is therefore more current.
To view all questions and flashcards with answers, click on the resource link above.
Page 16
Chapter 15: Mathematics of Black-Scholes
Available Study Resources on Quizplus for this Chatper
15 Verified Questions
15 Flashcards
Source URL: https://quizplus.com/quiz/52243
Sample Questions
Q1) Which of the following is not a characteristic of a price process \(Y _ { t }\) that follows a geometric Brownian motion (GBM)?
A) \(Y _ { t }\)
Is an exponential function of a linear Ito process \(a t + b W _ { t }\) ,where \(\alpha\) And \(b\) Are constants.
B) \(Y _ { t }\) Is normally distributed.
C) \(Y _ { t }\)
Is a continuous process,i.e. ,there are no market "gaps."
D) \(Y _ { t }\) Is non-negative.
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Beyond Black-Scholes
Available Study Resources on Quizplus for this Chatper
27 Verified Questions
27 Flashcards
Source URL: https://quizplus.com/quiz/52244
Sample Questions
Q1) If the implied volatility surface is flat (i.e. ,all options have the same implied volatility),then
A)Derman-Kani implied binomial trees cannot be constructed because of the lack of variability in the data.
B)The Derman-Kani tree may price away-from-the-money options inaccurately.
C)The Derman-Kani implied binomial tree coincides with the Cox-Ross-Rubinstein binomial tree.
D)The Derman-Kani implied binomial tree may still differ from the Cox-Ross-Rubinstein (CRR)tree because implied binomial trees are a form of stochastic volatility models whereas CRR trees assume constant volatility.
Q2) A Wall Street trading firm is using the Merton (1976)jump-diffusion model to price their index options.They are pricing European calls and then using put-call parity to compute the prices of puts.The problem with this is
A)Put-call parity is not valid for models with jumps.
B)Put-call parity works only if jumps are symmetric.
C)Put-call parity works with jumps only if there are no dividends.
D)Nothing---there is no problem with using put-call parity even if there are jumps in the stock price.
To view all questions and flashcards with answers, click on the resource link above. Page 18
Chapter 17: The Option Greeks
Available Study Resources on Quizplus for this Chatper
35 Verified Questions
35 Flashcards
Source URL: https://quizplus.com/quiz/52245
Sample Questions
Q1) A stock is trading at $24.A three-month European put option with a strike of $35 costs $10.855 and has a theta of 1.735.The passage of one trading day ( \(\approx 0.004\) years)causes the value of the put to,approximately,
A)Fall by \(0.004\) )
B)Fall by \(0.007\)
C)Fall by \(0.043\)
D)Rise by \(0.007\)
Q2) The current price of a call is $5 and the stock is trading at $50.The delta and gamma of the call are 0.5 and 0.05,respectively.If the stock price increases to $50.50,then approximate the new call price using the information given:
A)$5.24375
B)$5.25
C)$5.25625
D)$5.2625
To view all questions and flashcards with answers, click on the resource link above. Page 19
Chapter 18: Path-Independent Exotic Options
Available Study Resources on Quizplus for this Chatper
40 Verified Questions
40 Flashcards
Source URL: https://quizplus.com/quiz/52246
Sample Questions
Q1) A three-month at-the-money call option on a stock index is trading at $5;the index is trading at $50.A forward start option on the index that comes to life in one month,has a life of three months from that point and that will be at-the-money when it comes to life,is trading at $4.98.The one-month rate of interest is 2% in continuously-compounded and annualized terms.What is the one-month forward price of the index?
A)$50.00
B)$50.05
C)$50.25
D)$50.45
Q2) Select the most accurate alternative.The theta of an in-the-money cash-or-nothing call option is
A)Positive,as is the case for any call.
B)Positive,because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money.
C)Negative,because payoffs are the same once you are in-the-money and more time to maturity only increases the possibility of moving out of the money.
D)Negative,as is the case for any call.
To view all questions and flashcards with answers, click on the resource link above.
Page 20
Chapter 19: Exotic Options II: Path-Dependent Options
Available Study Resources on Quizplus for this Chatper
33 Verified Questions
33 Flashcards
Source URL: https://quizplus.com/quiz/52247
Sample Questions
Q1) A portfolio comprising an up-and-out put and an up-and-in put is equivalent to A)A up-and-out call and a up-and-in call.
B)A vanilla call.
C)A down-and-out put and a down-and-in put.
D)A vanilla put
Q2) In one type of a lookback option,
A)You can decide to change the option from a call to a put or vice versa at the last minute.
B)You can take any observed price prior to maturity as the strike of the option.
C)You can take the average observed price of the underlying in determining the option payoff.
D)The initial price of the underlying acts as the strike price of the option.
Q3) The most valid relationship between the values of European calls ( \(C _ { E }\) ),American calls ( \(C _ { A }\) ),shout call options ( \(C _ { S }\) ),and lookback calls ( \(C _ { L }\) )is as follows:
A) \(C _ { A } \leq C _ { S } \leq C _ { L }\)
B) \(C _ { E } \leq C _ { L } \leq C _ { S }\)
C) \(C _ { S } \leq C _ {E } \leq C _ { A }\)
D) \(C _ { A } \leq C _ { L } \leq C _ { S }\)
To view all questions and flashcards with answers, click on the resource link above.
Page 21
Chapter 20: Value at Risk
Available Study Resources on Quizplus for this Chatper
34 Verified Questions
34 Flashcards
Source URL: https://quizplus.com/quiz/52248
Sample Questions
Q1) You invest $100 each in two bonds.Each bond will pay you $110 at the end of the year with probability 0.98 and nothing with probability 0.02.The correlation between the bonds is zero.In this scenario,the 98%-VaR of your portfolio is
A) \(- 20\)
)
B)Zero.
C)$90
D)$200
Q2) VaR as a risk measure has the following deficiency:
A)It does not consider the shape of losses in the left tail of the P&L distribution.
B)It does not consider the shape of losses outside the left tail of the P&L distribution.
C)Neither of the above.
D)Both of the above.
To view all questions and flashcards with answers, click on the resource link above. Page 22
Chapter 21: Swaps and Floating Rate Products
Available Study Resources on Quizplus for this Chatper
34 Verified Questions
34 Flashcards
Source URL: https://quizplus.com/quiz/52249
Sample Questions
Q1) Consider the following table of prices of five-year semi-annual pay caps and floors:
\[\begin{array} { | c | c | c | }
\hline \text { Strike (\%/9) } & \text { Cap price } & \text { Floor price } \\
\hline 4 \% & 2.50 & 0.50 \\
\hline 5 \% & 1.50 & 1.50 \\
\hline 6 \% & 0.50 & 2.50 \\
\hline
\end{array}\] Assume that the caps and floors also include the first payment in 6 months,so there are 10 payment dates in each instrument.The quoted prices of the caps and floors includes this first payment for which the floating leg has already been set.What is the fixed-rate on a five-year fairly priced swap?
A)4%
B)5%
C)6%
D)Not possible to determine from the available information.
To view all questions and flashcards with answers, click on the resource link above.
23
Chapter 22: Equity Swaps
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52250
Sample Questions
Q1) Which of the following factors does affect the valuation of a fixed notional equity swap that pays the equity return in exchange for a fixed interest rate payment?
A)Expected equity price growth.
B)Interest rate volatility structure.
C)Interest-rate term structure.
D)All of the above.
Q2) Consider a $100 notional equity-for-equity swap on two stocks where the price of the stocks at inception was $40 and $50,respectively.At the present time,sixty-one days after inception,the two stock prices are $39 and $51,respectively.If you pay the return on the first stock and receive the return on the second stock,what is your valuation of the equity swap after sixty-one days? Assume that the Libor interest rate on an ACT/360 basis from now till the next settlement date is 10% for the remaining 122 days.
A) \(- \$ 2.00\)
B)Zero
C) \(+ \$ 4.35\)
D) \(+ \$ 4.50\)
To view all questions and flashcards with answers, click on the resource link above.
24
Chapter 23: Currency and Commodity Swaps
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52251
Sample Questions
Q1) The price of a two-year oil commodity swap is $85.The spot price of oil is $80.If the one-year forward price of oil is $83,what is the best estimate of the two-year forward price of oil? Assume that convenience yields and other costs and benefits of storing oil are zero.
A)$86.00
B)$87.00
C)$88.50
D)$90.00
Q2) A currency swap is an agreement in which
A)One currency is exchanged for another at a future date.
B)Principal and interest payments in one currency are exchanged for principal and interest payments in another currency.
C)An equity holding in a foreign currency is exchanged for one in the domestic currency at a future date.
D)The return on an equity holding in a foreign currency is exchanged for the return on the domestic equity index.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 24: Term Structure of Interest Rates: Concepts
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52252
Sample Questions
Q1) The "rule of 72" states that invested money doubles in value if the product of the interest rate (in percentage form)and time invested (in years)equals 72.Assuming continuous compounding,what exactly must the product be for money to double?
A)69
B)71
C)73
D)75
Q2) Find the yield-to-maturity of a 5% two-year bond that has a price of $102.Assume coupons are paid quarterly.
A)4.33%
B)4.44%
C)4.55%
D)4.66%
Q3) If the ytm of a bond falls,which of the following is most valid?
A)The bond price rises.
B)The bond price falls.
C)The bond price may rise or fall,depending on the maturity of the bond.
D)Not enough information to answer the question.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 25: Estimating the Yield Curve
Available Study Resources on Quizplus for this Chatper
18 Verified Questions
18 Flashcards
Source URL: https://quizplus.com/quiz/52253
Sample Questions
Q1) Which of the following is a required property of the cubic spline approach to estimating the yield curve and discount functions \(d ( t )\) ? Recall that the approach fits functions \(d _ { k } ( t )\) to \(k\) regions between \(( k + 1 )\) knot points.
A) \(d ( 0 ) > 1\)
B) \(d _ { k } \left( T _ { k + 1 } \right) = d _ { k + 1 } \left( T _ { k + 1 } \right)\)
C) \(d _ { k } ^ { \prime } \left( T _ { k + 1 } \right) > d _ { k + 1 } ^ { t } \left( T _ { k + 1 } \right)\)
D) \(d _ { k } ^ { \prime \prime } \left( T _ { k + 1 } \right) < d _ { k + 1 } ^ { \prime \prime } \left( T _ { k + 1 } \right)\)Where \(d ^ { \prime } ( t )\)And
\(d ^ { \prime \prime } ( t )\)Denote first and second derivatives of the function \(d ( t )\)With respect to\(t\)
To view all questions and flashcards with answers, click on the resource link above.
Chapter 26: Modeling Term Structure Movements
Available Study Resources on Quizplus for this Chatper
13 Verified Questions
13 Flashcards
Source URL: https://quizplus.com/quiz/52254
Sample Questions
Q1) Suppose that the one-year and two-year zero-coupon rates are 6% and 7%,respectively (assume continuous compounding).After one year,let the one-year zero-coupon rate move down to 4% or up to 9%.What must be the probability of the up move for the rates to be arbitrage-free?
A)0.20
B)0.25
C)0.50
D)0.60
Q2) Which of the following is not sufficient for a pricing tree for risky bonds to be free of arbitrage?
A)The existence of a risk-neutral pricing probability measure.
B)The existence of a general equilibrium in the asset markets.
C)All normalized (discounted)assets are martingales.
D)On the tree,the gross risk-free one-period return is straddled by the return when rates move up and when rates move down.
To view all questions and flashcards with answers, click on the resource link above.
Chapter 27: Factor Models of the Term Structure
Available Study Resources on Quizplus for this Chatper
22 Verified Questions
22 Flashcards
Source URL: https://quizplus.com/quiz/52255
Sample Questions
Q1) In the Ho & Lee (1986)model,the parameter \(\delta\) plays a crucial role.Which of the following statements best describes this parameter?
A) \(\delta > 1\) )
B)As \(\delta\)
Increases the volatility of interest rates increases.
C)As \(\delta\)
Increases the volatility of interest rates decreases.
D) \(\delta < 0\) )
Q2) In the Ho & Lee (1986)model,assume that the initial curve of zero-coupon discount bond prices for one and two years is \(0.9434\) and \(0.8734\) ,respectively.Assume that the probability of an upshift in discount functions is equal to that of a downshift.If the parameter \(\delta = 0.95\) ,then the price of a one-year zero-coupon bond in the up node after one year will be
A)0.9282
B)0.9496
C)0.9563
D)0.9678
To view all questions and flashcards with answers, click on the resource link above. Page 29
Chapter 28: The Heath-Jarrow-Morton Hjmand Libor
Market Model LMM
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/52256
Sample Questions
Q1) Consider a two-factor HJM model where the initial forward curve is given as 6% for one year and 7% between one and two years.The evolution of continuously-compounded one-year forward rates beginning at time \[T\] ,is given by the following binomial process with two shock terms: \(f ( t + 1 , T ) = f ( t , T ) + \alpha \pm 0.01 \pm 0.01\) ,where the forward rate movements are equiprobable.What this means is that the forward rate may move up by either 0.02 with probability 1/4,or move down by 0.02 with probability 1/4,or remain the same with probability 1/2.What is the risk-neutral drift ( \(\alpha\) )for \(f ( 1,1 )\) ?
A) \(- 0.0002\)
B) \[- 0.0001\]
C) \[+ 0.0001\]
D) \(+ 0.0002\)
Q2) Swap rates in the SMM are,under the risk-neutral forward measure
A)Normal.
B)Lognormal.
C)Exponential.
D)None of the above.
To view all questions and flashcards with answers, click on the resource link above. Page 30
Chapter 29: Credit Derivative Products
Available Study Resources on Quizplus for this Chatper
32 Verified Questions
32 Flashcards
Source URL: https://quizplus.com/quiz/52257
Sample Questions
Q1) Credit risk in bonds involves uncertainty about whether the bond will default (default risk),and uncertainty about the value of the bonds when they default (recovery risk).In order to profit from a view that recovery risk will worsen,you would
A)Buy a credit default swap (CDS)and sell a digital default swap (DDS).
B)Sell a credit default swap (CDS)and buy a digital default swap (DDS).
C)Buy a credit default swap (CDS)and buy a digital default swap (DDS).
D)Sell a credit default swap (CDS)and sell a digital default swap (DDS).
Q2) Bank A holds a credit risky asset on its balance sheet.It enters into a total return swap (TRS)referenced to this asset with hedge fund B to pay the total return to B and receive Libor in return.Under what scenario does bank A bear credit risk on the reference asset this contract?
A)When the issuer of the reference asset defaults.
B)When hedge fund B defaults.
C)Only when the issuer of the reference asset and hedge fund B default.
D)All of the above.
To view all questions and flashcards with answers, click on the resource link above.
31
Chapter 30: Structural Models of Default Risk
Available Study Resources on Quizplus for this Chatper
25 Verified Questions
25 Flashcards
Source URL: https://quizplus.com/quiz/52258
Sample Questions
Q1) Suppose that the asset value of a firm evolves according to a lognormal diffusion,as in Merton (1974).The current value of the firm's assets is $100 million,and its volatility is 24.24%.Suppose too that the firm has only one issue of debt outstanding: zero-coupon debt with a maturity of three years,and a face value of $70 million.Finally,suppose that the risk-free rate of interest is 4% (continuously-compounded terms)for all maturities.What is the risk-neutral probability of the firm defaulting at maturity of the debt?
A)17.12%
B)19.23%
C)20.02%
D)21.22%
Q2) Given a firm value of \(V = 100\) ,debt face value of \(D = 60\) ,asset volatility of \(\sigma = 30 \%\) ,and a risk free rate of \(r = 3 \%\) ,conditional on default,the expected recovery rate in the Merton model for debt of maturity five years will be:
A)40%
B)50%
C)60%
D)70%
To view all questions and flashcards with answers, click on the resource link above. Page 32
Chapter 31: Reduced-Form Models of Default Risk
Available Study Resources on Quizplus for this Chatper
23 Verified Questions
23 Flashcards
Source URL: https://quizplus.com/quiz/52259
Sample Questions
Q1) The average default rate in the economy is 1.5% of the face value of outstanding debt defaults per year.What is the average time between defaults if there are 1000 firms alive on average?
A)20 days
B)24 days
C)38 days
D)41 days
Q2) The average default rate in the economy is 1.5% of the face value of outstanding debt defaults per year.How many years will it be on average before half the firms are no longer in existence if no new firms enter the economy?
A)44 years
B)45 years
C)46 years
D)47 years
To view all questions and flashcards with answers, click on the resource link above. Page 33
Chapter 32: Modeling Correlated Default
Available Study Resources on Quizplus for this Chatper
24 Verified Questions
24 Flashcards
Source URL: https://quizplus.com/quiz/52260
Sample Questions
Q1) Which of the following is an Archimedean copula over two distribution functions
A) \[C \left( F _ { 1 } , F _ { 2 } \right) = \ln \left\{ - \left[ \left( \ln \frac { 1 } { F _ { 1 } } \right) ^ { a } + \left( \ln \frac { 1 } { F _ { 2 } } \right) ^ { a } \right] ^ { 1 / a } \right\}\]
B) \[C \left( F _ { 1 } , F _ { 2 } \right) = \exp \left\{ - \left[ \left( \ln \frac { 1 } { F _ { 1 } } \right) ^ { a } + \left( \ln \frac { 1 } { F _ { 2 } } \right) ^ { a } \right] ^ { a } \right\}\]
C) \[C \left( F _ { 1 } , F _ { 2 } \right) = \exp \left\{ - \left[ \left( \ln \frac { 1 } { F _ { 1 } } \right) ^ { a } + \left( \ln \frac { 1 } { F _ { 2 } } \right) ^ { a } \right] ^ { 1 / a } \right\}\]
D)None of the above.
Q2) Consider two firms,each of which has a distance-to-default of 1.The correlation of default of the two firms is \[\rho = 0.5\] .Assuming bivariate normality,what is the probability that both firms default?
A)4.50%
B)6.25%
C)8.75%
D)10.25%
To view all questions and flashcards with answers, click on the resource link above.
34