True or False: (please justify your answer) 1. There does not exist a financial

Question

True or False: (please justify your answer)

1. There does not exist a financial instrument to insure against the default of bonds or asset-backed debt securities.

2. In the case of two random variables, X and Y , that are independent, the variance of X + Y is simply the sum of the variances of both X and Y .

3. The forward rate is the future spot rate

4. At high levels of interest rates, the price of a callable bond and a regular bond is roughly the same.

5. Unlike for a call option, the premium paid to purchase a put option increases in value as the volatility of the underlying asset decreases because it becomes more likely the put option will end in the money

6. The Black-Scholes formula assumes the stock price is constant over the life of the option.

7. A long-term investor will not invest in a short-term bond unless there is a positive liquidity premium.

8. Portfolio variance can be reduced to zero with diversification in an Index Model

Explanation / Answer

1. False

In a derivative market,  Derivatives can be used for a number of purposes, including insuring against default of bonds or asset-backed debt securities.

2.True,if the variables are uncorrelated then the variance of the sum is the sum of the variances, but converse is not true in general.

3.True,The forward rate is the future spot rate.

6. True ,The Black-Scholes formula assumes the stock price is constant over the life of the option

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