QUESTION 1

1.

Suppose that each day during July the minimum temperature is 68 degree Fahrenheit
and the maximum temperature is 82 degree Fahrenheit. What is the payoff from a call
option on the cumulative CDD during July with a strike of 250 and a payment rate of $5,000
per degree day?
a $35,000
.
b $30,000
.
c $400,00
. 0
d $300,00
. 0

QUESTION 2
1.

3 points

What is an important unique characteristic of commodity prices?

a Volatility
.
b Negative
. prices
c Randomnes
. s
d Seasonality
.

1.

QUESTION 3

1 points

Expected shortfall is

a the
.

expected loss conditional that the loss is lesser than

the value at risk
b the expected loss conditional that the loss is greater than
.
the value at risk
c the realized loss conditional that the loss is greater than
.
the value at risk
d the realized loss conditional that the loss is lesser than
.
the value at risk

1.

QUESTION 4

A vanilla call option can be replicated by

a Combining
.

an up and out call and down

and out call
b Combining an up and out call and up and
.
in call

2 points

Combining an up and in call and down

and out call
d None of the above
c
.
.

QUESTION 5

1.

3 points

The spread between the yield on a three year corporate bond and the
yield on a similar risk-free bond is 50 basis points. The recovery rate is 30%.
The average default intensity per year over the three year period is
0.71
%
b 0.661
.
%
c 0.75
.
%
d 0.89
.
%
a
.

QUESTION 6

1.

2 points

What adjustment is necessary when we wish to value a

derivative that pays off every quarter the three month LIBOR rate
minus the three month treasury bill rate with the
payoff occurring 90 days after the rates are observed.
Convexity
adjustment
b Timing adjustment
a
.

.
c
.
d
.

Quanto adjustment
No adjustment is
necessary

QUESTION 7
1.

2 points

An unfavorable dependency between credit exposure and counterparty

credit quality is referred to as
a Potential future
. exposure
b Wrong way risk
.
c Exposure at default
.
d Right way risk
.
2 points

QUESTION 8
1.

A company enters into a total return swap where it receives the return on a
corporate bond paying a coupon of 5% and pays LIBOR. What is the difference
between this and a regular swap where 5% is exchanged for LIBOR?
a In
.

the case of the regular swap the company receives/pays the

increase/decrease in the value of the bond, while in a total return swap
this does not happen
b Both are the same
.
c
.

In the case of the total return swap the company receives/pays the
increase/decrease in the value of the bond, while in a regular swap this
does not happen
d None of the above
.

QUESTION 9
1.

2 points

Credit exposure =
a Min(Mark to Market,0)
.
b Mark to Market
.
c Mark to Market*Probability of
. default
d Max(Mark toMarket,0)
.

QUESTION 10
1.

2 points

When a put futures option is exercised, the holder of the put acquires
a None of the above
.
b A long position in the underlying asset
.
c A short position in the futures contract
.
d A long position in the futures contract
.

QUESTION 11
1.

One of the main disadvantage of VaR is that

a It is very subjective
.
b It has mathematical
. assumptions
c That it is error prone
.

1 points

d It does not capture extreme

. loss events
2 points

QUESTION 12
1.

Suppose you enter into an interest rate swap where you are receiving floating
and paying fixed. Which of the following is true?
a Your
.

credit risk
than when it is
b Your credit risk
.
than when it is
c Your credit risk
.
unexpectedly
d Your credit risk
.
or down

is greater when the term structure is upward sloping

downward sloping
is greater when the term structure is downward sloping
upward sloping
exposure increases when interest rates decline
exposure remains the same whether interest rates go up

QUESTION 13

1.

2 points

Calculate the value of a four year european call option on a

bond that will mature five years from today using Black's model.
The five year cash bond price is $105, the cash price of a four year
bond with the same coupon is $102, the strike price is $100, the
four year risk free interest rate is 10% per annum with continuous
compounding and the volatility for the bond price in four years is
2% per annum
$3.
56
b $3.
.
19
c $4.
.
32
d $4.
.
19
a
.

QUESTION 14
1.

4 points

A variance swap is a contract to exchange a fixed variance for what?

aA
.

realized
volatility
b A fixed volatility
.
c
.

A realized
variance
d A floating VIX
.
index
2 points

QUESTION 15

1.

Which of the following swaps needs a convexity adjustment?

a. Libor in-arrears swaps
b. CMS swap
c. Cross currency swap
d. Equity swap
a Only a
.
b Only b
.
c a and b
.
d a,b,
.

and c

QUESTION 16
1.

2 points

What is the payoff from a portoflio consisiting of a lookback call option and a
lookback put option?
a ST - Smin
.
b Smax - ST
.
c Smax .

Smin
d Smin .
Smax

QUESTION 17
1.

3 points

A swap that uses the swap rate as the floating rate is called a
a LIBOR
.

in-arrears

swap

b CMS Swap
.
c CMT Swap
.
d Diff swap
.

1.

QUESTION 18

2 points

The CDS spread should be

a equal
.

to the excess of par yield on a corporate bond over the par yield
on a risk free bond
b equal to the excess of par yield on a risk free bond over the par yield on
.
a corporate bond
c equal to the excess of par coupon on a risk free bond over the par
.

coupon on a corporate bond

d equal to the excess of par coupon on a corporate bond over the par
.
yield on a risk free bond
QUESTION 19
1.

2 points

Suppose that the LIBOR yield curve is flat at 8% with annual compounding. A
swaption gives the holder the right to receive 7.6% in a five-year swap starting in four
years. Payments are made annually. The volatility of the forward swap rate is 25% per
annum and the principal is $1 million. Use Blacks model to price the swaption.
a $38,6
.

50

b $39,5
.

50
c $67,8
.
90
d $45,7
.
80
QUESTION 20
1.

4 points

In a 5x8 electricity contract

a Power is received five days a week all day
.
b Power is received seven days a week during the
. on-peak hours
c Power is received five days a week during the off. peak hours
d Power is received five days a week during the on. peak hours

QUESTION 21
1.

2 points

One of the key regulations affecting risk management and capital

requirements at a large bank is
a BASEL III
.
b SEC 15c
.
c MIFID
.
d Dodd Frank
. Act

QUESTION 22

1 points

1.

The coupons on a standardized Credit Default Contract in North America

are
a 10bps, 50bps
.
b 100bps,
. 500bps
c 250bps,
. 750bps
d 500bps,
. 1000bps
2 points

QUESTION 23
1.

An index currently stands at 1500. European call and put options with a strike price of 1400 and
time to maturity of six months have market prices of 154 and 34.25 respectively. The six-month risk free
rate is 5%. What is the implied dividend yield?
a 2.99
. %
b 2.55
. %
c 1.55
. %
d 1.99
. %
3 points

QUESTION 24

1.

The advantage of the LMM over the HJM is

LMM involves
does not
b LMM involves
.
does not
c LMM involves
.
does not
d LMM involves
.
HJM does not
a
.

observable spot rates while HJM

observable short rates while HJM
observable volatilies while HJM
observable forward rates while

QUESTION 25
1.

What type of option produces the following payoff: St K1 when St > K2

a Cliquet
.

call

option

b Lookback

put

2 points

option
c Gap call option
.

.
d Gap
.

put option

QUESTION 26

1.

2 points

What is the price of a one year european option to give up 100 ounces
of silver in exchange for one ounce of gold. The current prices of gold and
silver are $380 and $4 respectively. the risk free interest rate is 10% per
annum. The volatility of each of the commodity price is 20% and the
correlation between the two prices is 0.7. Ignore storage costs.
$14.
45
b $15.
.
38
c $23.
.
26
d $16.
.
97
a
.

QUESTION 27

1.

The value of a down and out call ________________ as we increase the

frequency with which we observe the asset price in calculating the minimum.
a
.
b
.
c
.

decreases
increases
remains the
same

QUESTION 28

1.

4 points

2 points

Suppose that a financial institution has entered into a swap dependent

on LIBOR with counterparty X and an exactly offsetting swap with
counterparty Y, which of the following is true?
a. The total present value of the cost of defaults is the sum of the present
value of the cost of defaults on the contract with X and the contract with Y
b. The expected exposure in one year on both contracts is the sum of the
expected exposure on the contract with X and the expected exposure on the
contract with Y
c. The 95% upper confidence limit for the exposure in one year on both
contracts is the sum of the 95% upper confidence limit for the exposure in
one year on the contract with X and with Y
a
.

a and c are

true
b a and b are
.
true
c b and c are
.
true
d a, b and c are
.
true
QUESTION 29
1.

2 points

What is mean reversion?

a The tendency of interest rates to move away from a long
. run average rate
b The tendency of interest rates to move towards a long run
. average rate
c The tendency of interest rates to move away from zero
.
d The tendency of interest rates to move randomly
.

1.

QUESTION 30

2 points

Suppose the risk free zero curve is flat at 6% per annum and defaults
can occur at 0.25, 0.75, 1.25 and 1.75 years in a two year credit default
swap with semi-annual payments. Suppose that the recovery rate is 20%
and the probabilities of default are 1% at times 0.25 and 0.75 years and
1.5% at times 1.25 and 1.75 years. What is the credit default swap spread?
263 basis
points
b 258 basis
.
points
c 356 basis
.
points
d 423 basis
.
points
a
.

QUESTION 31
1.

5 points

What is the value of an eight month european put option on a currency with a strike price of 0.50.
THe current exchange rate is 0.52, the volatility is 12%, the domestic risk free rate is 4% per annum, and
the foreign risk free interest rate is 8% per annum.
a 0.01
. 87
b 0.01
. 99

c 0.01
. 43
d 0.01
. 62

QUESTION 32
1.

3 points

Which VaR methodology makes no distributional assumption?

a Historical
. Simulation
b Delta Normal
.
c Analytical
.
d Monte Carlo
. Simulation

QUESTION 33
1.

2 points

What is the value of a five month european put futures option when the futures price is $19, the
strike is $20, the risk free rate is 12% per annum and the volaitlity is 20% per annum?
a $2.5
. 5
b $1.5
. 0
c $1.7
. 5
d $1.5
. 5

QUESTION 34
1.

3 points

What is the value of a down and out put when the barrier is greater than the strike price?
a Same
.

as the value of a
vanilla put
b Zero
.
c Equal
.
d Equal
.

to the strike
to the barrier

QUESTION 35

3 points

1.

Derivatives where the payoff is defined using variables measured in one currency and
paid in another currency need a
a Timing adjustment
.
b Convexity adjustment
.
c Quanto adjustment
.
d Foreign exchange
.

adjustment

QUESTION 36
1.

2 points

The difference between the Ho-Lee model and the Hull-White model is
a Hull White incorporates mean reversion while Ho Lee does not
.
b Ho Lee incorporates mean reversion while Hull White does not
.
c Ho Lee assumes interest rates are normally distributed while
.

Hull White does not

White assumes interest rates are normally distributed while
Ho Lee does not

d Hull
.

1.

QUESTION 37

2 points

Calculate the price of a cap on the 90-day LIBOR rate in nine months time when the
principal amount is $1,000. Use Blacks model and the following information: (a) The quoted ninemonth Eurodollar futures price = 92. (Ignore differences between futures and forward rates.) (b)
The interest-rate volatility implied by a nine-month Eurodollar option = 15% per annum. (c) The
current 12-month interest rate with continuous compounding = 7.5% per annum. (d) The cap rate
= 8% per annum. (Assume an actual/360 day count.)
a $0.9
.

b $1.9
.

7
$0.5
9
d $0.8
.
8
c
.

1.

QUESTION 38

5 points

If the 1 day VaR for a portoflio is $250,000, what is the 10 day VaR

$2,500,
000
$125,32
1
$790,57
0

$854,56
7
QUESTION 39

1.

2 points

Which of these swaps have embedded options?

a. Accrual Swaps
b. Cancellable swaps
c. Cancellable compounding swaps
d. Basis swaps
a Only b
.
b a and b
.
c a,b, and
.

d a,b,c
.

and d

QUESTION 40

1.

2 points

What instrument is the same as a zero cost collar where the strike
price of the cap is the same as the floor?
An interest rate swap to receive float and pay fixed equal
to the strike
b An interest rate swap to pay float and receive fixed equal
.
to the strike
c An interest rate swaption to receive float and pay fixed
.
equal to the strike
d An interest rate swaption to pay float and receive fixed
.
equal to the strike
a
.

QUESTION 41

1.

2 points

Consider a derivative that provides a payoff in 3 yeas equal to the 1

year zero coupon rate (annually compounded) at that time multiplied by
$1000. Suppose that the zero rate for all maturities is 15% per annum with
annual compounding and the volatility of the forward rate applicable to the
time period between year 3 and year 4 is 20%. What is the value of the
derivative applying the convexity adjustment?
$114.
46
b $115.
.
43
c $75.9
.
5
a
.

d
.

$75.1
3

QUESTION 42
1.

4 points

A regular european put option is equivalent to

aA
.
bA
.

down and out put and a up and out put

long position in a cash or nothing put with payoff equal to strike and a
short position in an asset or nothing put
c A short position in a cash or nothing put with payoff equal to strike and
.
a long position in an asset or nothing put
d None of the above
.

1.

QUESTION 43

3 points

In what type of term structure models is today's term structure an output of the model?

a Risk
.

neutral
models
b Arbitrage free
.
models
c Tree models
.
d Equilibrium
.

models

QUESTION 44
1.

2 points

Credit Risk can be mitigated by

a Both a and b
.
b Netting
.
c None of the
. above
d Collateral
.

QUESTION 45

1.

2 points

What default probabilities should be used in computing potential

future exposure?
a
.
b
.
c
.

Real world default probabilities

Risk neutral default probabilities
A mix of risk neutral and real world
probabilities

1.

QUESTION 46

2 points

What is the formula relating the payoff on a CDS to the notional principal (L) and the
recovery rate (R)?
a LR-1
.
b L(1.

R)
L(R1)
d R-LR
c
.
.

1.

QUESTION 47

2 points

One of the limitations of the CIR, Vasicek and Hull white models is

a
.
b
.

They are not consistent with the initial term structure

They do not give complete freedom in choosing the

volatility structure
c They produce negative interest rates
.
d
.

1.

They are difficult to implement

QUESTION 48

2 points

A cap can be treated as

aa
.

portfolio of european call options on zero

coupon bonds
b a portfolio of european put options on zero
.
coupon bonds
c a portfolio of american call options on zero
.
coupon bonds
d a portfolio of american put options on zero
.
coupon bonds
QUESTION 49
1.

2 points

In the model dr = a(b-r)dt+vdz what is the mean reversion rate?

ab
.
ba
.
cv
.
dr
.

QUESTION 50

2 points

1.

If the bank faces more credit risk than the counterparty then the CVA from the bank's
perspective is
a Indetermin
. ate
b Positive
.
c Zero
.
d Negative
.

1.

QUESTION 51

2 points

What is the value of a two year fixed for floating compound swap
where the principal is $100million and payments are made semiannually?
fixed interest rate is received and floating is paid. the fixed rate is 4%
semiannual and it is compounded at 4.15% semiannual. The floating rate is
LIBOR plus 5 basis points semiannual and it is compounded at LIBOR plus 10
basis points semiannual. The LIBOR curve is flat at 4% semiannual.
$151,70
0
b $152,8
.
00
c .
$171,00
0
d $172,9
.
00
a
.

1.

QUESTION 52

The VaR model that assumes a normal distribution is

the historical simulation

model
b the linear model
a
.

.
c
.
d
.

the monte carlo model

None of the above

4 points