Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?
A. 8%
B. 9%
C. 10%
D. 12%
Which one of the following four statements correctly defines an option's delta?
A. Delta measures the expected decline in option with time and is usually expressed in years.
B. Delta measures the effect of 1 bp in interest rate change on the option price.
C. Delta is the multiplier that best approximates the short-term change in the value of an option.
D. Delta measures the impact of volatility on the price of an option.
Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?
A. Spread options
B. Chooser options
C. Binary options
D. Compound options
In the United States, Which one of the following four options represents the largest component of securitized debt?
A. Education loans
B. Credit card loans
C. Real estate loans
D. Lines of credit
A risk manager is considering how to best quantify option price dynamics using mathematical option pricing models. Which of the following variables would most likely serve as an input in these models?
I. Implicit parameter estimate based on observed market prices
II. Estimates of sensitivity of option prices to parameter changes
III.
Theoretical option determination based on assumptions
A.
I, III
B.
II
C.
II, III
D.
I, II, III
Which of the following statements about the interest rates and option prices is correct?
A. If rho is positive, rising interest rates increase option prices.
B. If rho is positive, rising interest rates decrease option prices.
C. As interest rates rise, all options will rise in value.
D. As interest rates fall, all options will rise in value.
To safeguard its capital and obtain insurance if the borrowers cannot repay their loans, Gamma Bank accepts financial collateral to manage its credit risk and mitigate the effect of the borrowers' defaults. Gamma Bank will typically accept all of the following instruments as financial collateral EXCEPT?
A. Unrated bonds issued and traded on a recognized exchange
B. Equities and convertible bonds included in a main market index
C. Commercial debts owed to a company in a form of receivables
D. Mutual fund shares and similar unit investment vehicles subject to daily quotes
A large energy company has a recurring foreign currency demands, and seeks to use options with a payoff based on the average price of the underlying asset on either a few specific chosen dates or all dates within a specific pricing window. Which one of the following four option types would most likely meet these specific foreign currency demands?
A. American options
B. European options
C. Asian options
D. Chooser options
Which one of the following statements about futures contracts is correct?
I. Futures contracts are subject to the same risks as the underlying instruments.
II. Futures contracts have additional interest rate risk die to the future delivery date.
III.
Futures contracts traded in a clearinghouse system are exposed to credit risk with numerous counterparties.
A.
I
B.
I, III
C.
II, III
D.
I, II, III
A risk manager analyzes a long position with a USD 10 million value. To hedge the portfolio, it seeks to use options that decrease JPY 0.50 in value for every JPY 1 increase in the long position. At first approximation, what is the overall exposure to USD depreciation?
A. His overall portfolio has the same exposure to USD as a portfolio that is long USD 5 million.
B. His overall portfolio has the same exposure to USD as a portfolio that is long USD 10 million.
C. His overall portfolio has the same exposure to USD as a portfolio that is short USD 5 million.
D. His overall portfolio has the same exposure to USD as a portfolio that is short USD 10 million.
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