An options trader for a large institutional investor takes a long equity option position. Which of the following risks need to be considered when taking this position?
A. All the risks of underlying equities
II. Perceived volatility changes
III. Future dividends yields
IV. Risk-free interest rates
B. I, II
C. II, III
D. III, IV
E. I, II, III, IV
Which of the following statements describes correctly the objectives of position mapping ?
A. For VaR calculations, mapping converts positions based on their deltas to underlying factor risks.
B. Position mapping models risk factors affecting the value of a position as combination of core risk factors used in the VaR calculations.
C. Position mapping groups similar positions into one group based on the closeness of their respective VaR.
D. Position mapping reduces the possible number of risk factors to a computationally manageable level.
E. I and II
F. II and IV
G. I, II and III
H. II, III, and IV
For which one of the following four reasons do corporate customers use foreign exchange derivatives?
A. To lock in the current value of foreign-denominated receivables II. To lock in the current value of foreign-denominated payables III. To lock in the value of expected future foreign-denominated receivables IV. To lock in the value of expected future foreign-denominated payables
B. II
C. I and IV
D. II and III
E. I, II, III, IV
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected defaultrate of 2%, and loss given default at 50%. In this case, what will the bank's exposure at default (EAD) be?
A. $25,000
B. $50,000
C. $75,000
D. $105,000
Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
A. With increases in perceived future foreign exchange volatility, the value of all foreign exchange
B. As the perceived future foreign exchange volatility decreases, the value of all options increases.
C. As the perceived future foreign exchange volatility increases, the value of all options increases.
D. Option values can only change due to the factors related to the demand for specific options
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?
A. 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
B. I, III
C. II
D. II, III
E. I, II, III
Changes to which one of the following four factors would typically not increase the cost of credit?
A. Increasing inflation rates in a country.
B. Increase in consumption of goods and services.
C. Higher risk premium on a fixed income instrument.
D. Higher return earned on alternative investments.
Which one of the following statements correctly identifies risks in foreign exchange forwards?
A. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most intercountry interest rates differentials are significant, and the effect of compounding is large for short
periods of time.
B. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.
C. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.
D. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.
Which one of the following four model types would assign an obligor to an obligor class based on the risk characteristics of the borrower at the time the loan was originated and estimate the default probability based on the past default rate of the members of that particular class?
A. Dynamic models
B. Causal models
C. Historical frequency models
D. Credit rating models
Which one of the following four statements correctly defines a non-exotic call option?
A. A call option gives the call option buyer the obligation, but not the right, to buy the underlying instrument at a known price in the future.
B. A call option gives the call option buyer the obligation, but not the right, to sell the underlying instrument at a known price in the future
C. A call option gives the call option buyer the right, but not the obligation, to buy the underlying instrument at a known price in the future
D. A call option gives the call option buyer the right, but not the obligation, to sell the underlying instrument at a known price in the future
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