7. All of the following are forms of options except a. convertible bonds b. call

ID: 2733603 • Letter: 7

Question

7. All of the following are forms of options except

a. convertible bonds b. callable bonds c. puttable bonds

c. mutual funds e. none of the above

8. What is the lowest possible value of a European put?

a. Max(0, X-S0) b. X(1+r)-T c. Max[0, S0-X(1+r)-T]

d. Max[0, X(1+r)-T-S0)] e. none of the above

9. A security that is sub-divided into securities called tranches is called a

a. principal-only strip b. Asian lookback option c. range mortgage strip

d. collateralized mortgage obligation e. none of the above

10. Which of the following is the lowest possible value of an America call on a stock with no dividends?

a. Max[0, S0-X(1+r)-T] b. S0 c. Max(0, S0-X) d. Max[0, S0(1+r)-T-X)]

e. none of the above

11. The effect of volatility on a call/put’s price is

a. decreased price due to decreased possible losses

b. nominal volatility will not noticeably effect a call/put’s price.

c. increased price due to increased possible gains

d. decreased price due to increased possible losses

e. none of the above.

12. A portfolio that combines the underlying stock and a short position in an option is called

a. a risk arbitrage portfolio b. a hedge portfolio c. a ratio portfolio

d. a two-state portfolio e. none of the above

13. The values of u and d are which of the following?

a. the return on the stock if it goes up and down, respectively.

b. the inverse of the ratio of the up and down probabilities, respectively, and the risk-free rate.

c. the normal probabilities of up and down movements respectively.

d. one plus the return on the return on the stock if it goes up and down, respectively

e. none of the above

Answer:7 d. mutual funds

Because a. b. and c. choices all allow one party an option to make a trade at a fixed price.

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