Question

Just give the correct answer (no need to explain if you provide an accurate answer)

a. The following input is not needed to solve the option price in the Black-Scholes-Merton framework:

- the asset’s risk premium
- the asset price
- the strike price
- the risk-free rate of interest

b. When volatility is used for____, volatility is the standard deviation of the ____ compounded return per ___.

- option pricing, continuously, year
- option pricing, continuously, day
- risk management, discretely, year
- risk management, discretely, day

c. If the Black–Scholes–Merton model provided an accurate description of the assumptions made by the market, the implied volatility would be ____ for all options and the volatility smile would be ___

- zero, inverted
- zero, flat
- same, flat
- same, upward sloping

d. Market risk is the risk NOT associated with

- Interest rates
- Exchange rates
- Commodity prices
- Tax laws

e. In the CDS world, the protection buyer is known as the ____ and the protection seller is known as the ____.

- writer, short
- owner, long
- short, long
- long, short

f. Any project that expands the firm’s set of opportunities has positive option value.

- True
- False
- Financial engineering is so developed nowadays that we can assert that financial models can never be wrong, rather the interpretation could be wrong.
- True
- False

g. A 3X5 swaption is –

- a swaption that expires in 3 years and the underlying swap matures 5 years after that.
- a swaption that expires in 3 years and the underlying swap matures 2 years after that.
- a swaption that expires in 2 years and the underlying swap matures 5 years after that.
- a swaption that expires in 2 years and the underlying swap matures 3 years after that.

h.The ____________ is calculated by converting the difference between appropriate credit spread for the reference obligation and the standard rate on the CDS to a dollar present value amount.

- annual coupon rate
- upfront premium
- protection premium
- pari passu rate

i. An estimate of VaR(5%) on a dollar basis is interpreted as the dollar ___ in asset value that will only be exceeded ___ of the time.

- loss, 95%
- loss, 5%
- gain, 95%
- gain, 5%

Answer #1

**Answers-**

**a) The correct Option is a. the asset’s risk
premium**

**b) The correct Option is first option. option pricing,
continuously, year**

**c) The correct Option is same, flat**

**d) The correct answer is last option . Tax
laws.**

**e) The correct option is short, long**

**f) The correct Option is True.Any project that expands
the firm’s set of opportunities has positive option
value.**

**The statement is False. Financial models can be
wrong.**

**g) The correct option is last option . a swaption that
expires in 2 years and the underlying swap matures 3 years after
that.**

**h) The correct option is upfront premium**

**i) The correct option is second Option. loss,
5%**

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