Deck 22: Exotic Options and Other Non-Standard Products

Question 1

A five-year interest rate swap that can be cancelled at the two year point is: choose one)

A) The difference between two plain vanilla interest rate swaps
B) The difference between a plain vanilla interest rate swap and a forward start swap
C) A regular interest rate swap plus a European swap option
D) A regular interest rate swap plus a Bermudan swap option

Answer 1

C

Question 2

A floating lookback put option pays off: choose one)

A) The amount by which the final stock price exceeds the minimum stock price
B) The amount by which the maximum stock price exceeds the final stock price
C) The amount by which the strike price exceeds the minimum stock price
D) The amount by which the maximum stock price exceeds the strike price

Answer 2

B

Question 3

In a BBSW-in-arrears swap, the following is true: choose one)

A) The floating payment made on a date is the BBSW rate on the previous payment date.
B) The floating payment on a date is the BBSW rate two payment dates ago.
C) The floating payment on a date is the BBSW rate on that date.
D) The floating payment on a date is the BBSW rate on that date only when it is higher than the BBSW rate on the previous payment date.

Answer 3

C

Question 4

The probability of a regular put option closing in-the-money is, with our usual notation: choose one)

A) Nd₁)
B) Nd₂)
C) N−d₁)
D) N−d₂)

Question 5

In a shout call option, the strike price is $30. The holder shouts when the asset price is $40. What is the payoff from the option if the final asset price is $35? choose one)

A) $0
B) $5
C) $10
D) $15

Question 6

As the barrier is observed more frequently, a knock-out option becomes: choose one)

A) More valuable
B) Less valuable
C) There is no effect on value
D) May become more valuable or less valuable

Question 7

An Asian option is a term used to describe: choose one)

A) An option where the payoff depends on whether a barrier is hit
B) An option where the payoff depends on the average value of a variable over a period of time
C) An option that trades on an exchange in the Far East
D) An option with a non-standard payoff

Question 8

There are two types of regular options calls and puts). How many types of compound options are there? choose one)

A) Two
B) Four
C) Six
D) Eight

Question 9

Which of the following would be referred to as an equity swap? choose one)

A) An exchange of the return from an equity index for a fixed or floating rate of interest.
B) An exchange of a long position in one stock for a long position in another stock.
C) An exchange of a short position in one stock for a short position in another stock.
D) None of the above.

Question 10

A PO is a 'principal only' MBS and an IO is an 'interest only' MBS. As prepayments increase, the following happens: choose one)

A) Both the PO and IO become more valuable.
B) The PO becomes more valuable and the IO becomes less valuable.
C) The PO becomes less valuable and the IO becomes more valuable.
D) Both the PO and IO become less valuable.