Deri TE9 Test

When valuing a call option using the binomial model, an increase in the probability that the underlying will go up most likely implies that the current price of the call option:

• A. increases.
• B. remains unchanged.
• C. decreases.

Q. For a European call option with two months until expiration, if the spot price is below the exercise price, the call option will most likely have:

• A. zero time value.
• B. positive time value.
• C. positive exercise value.

Q. Stocks BWQ and ZER are each currently priced at $100 per share. Over the next year, stock BWQ is expected to generate significant benefits whereas stock ZER is not expected to generate any benefits. There are no carrying costs associated with holding either stock over the next year. Compared with ZER, the one-year forward price of BWQ is most likely:

• A. lower.
• B. the same.
• C. higher.

Q. An interest rate swap is a derivative contract in which:

• A. two parties agree to exchange a series of cash flows.
• B. the credit seller provides protection to the credit buyer.
• C. the buyer has the right to purchase the underlying from the seller.

Q. Which of the following factors most likely explains why the spot price of a commodity in short supply can be greater than its forward price?

• A. Opportunity cost
• B. Lack of dividends
• C. Convenience yield

Q. Based on the binomial model, an increase in the actual probability of an upward move in the underlying will result in the option price:

• A. decreasing.
• B. remaining the same.
• C. increasing.

Q. The junior and senior tranches of an asset-backed security:

• A. have equivalent expected returns.
• B. have claims on separate underlying portfolios.
• C. may be differentially impacted by prepayments or credit losses.

None

• A. $0 .
• B. $5 .
• C. –$5 .

None

• A. $0 .
• B. $3 .
• C. –$3 .

Q. Which of the following derivatives allows an investor to pay the return on a stock index and receive a fixed rate?

• A. Equity swap
• B. Stock warrant
• C. Index futures contract