Question 1

If interest rates and spot prices stay the same, an increase in the value of a call option will be accompanied by:

Options :

A : a decrease in the value of the corresponding put option

B : an indeterminate change in the value of the corresponding put option

C : an increase in the value of the corresponding put option

D : no impact in the value of the corresponding put option

Answer: C

Question 2

A bank sells an interest rate swap to its client, with the client agreeing to pay the bank a fixed 4% and receive 3 month LIBOR + 100 basis points, payments due every quarter. After quarter 1, the 3 month LIBOR is 2% pa. Which of the following payments will happen in respect of this swap, assuming the contract notional is $100m, and the rate convention is 30/360.

Options :

A : Bank pays customer $1,000,000 and customer pays the bank $750,000

B : Bank pays customer $250,000

C : Customer pays bank $250,000

D : Bank pays customer $1,000,000

Answer: C

Question 3

Callable corporate bonds:

Options :

A : generally yield less than non-callable bonds due to the call feature

B : need to be priced lower than non-callable bonds to make them attractive to investors

C : are more convex than their non-callable counterparts

D : are generally called when their prices have fallen below the issuance price

Answer: B

Question 4

For a forward contract on a commodity, an increase in carrying costs (all other factors remaining constant) has the effect of:

Options :

A : increasing the forward price

B : decreasing the forward price

C : increasing the spot price

D : decreasing the spot price

Answer: A

Question 5

The gamma of a call option is 0.08. What is the gamma of the corresponding put option?

Options :

A : -0.08

B : 0.92

C : 0.08

D : -0.92

Answer: C

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