Name:___________________________________________ ID:______________________________________

No Question Choice 1 Choice 2 Choice 3 Choice 4 Ans

1 Which of the following statements is true? The CIR (1985) model The CIR (1985) model The CIR (1985) model The CIR (1985) model 3
has the advantage of has the advantage of has the advantage of has the advantage of
non-negative rates and negative rates and non-negative rates and negative rates and
allowing for less allowing for less allowing for greater allowing for greater
variability at times of variability at times of variability at times of variability at times of
high interest rates and high interest rates and high interest rates and high interest rates and
greater variability when greater variability when less variability when less variability when
rates are low. rates are low. rates are low. rates are low.
 marketi - modeli ( σ ) M  marketi - modeli ( σ ) M  marketi - modeli ( σ ) M  modeli ( σ ) − market
2 Ho & Lee 1986 were the first to develop a 4
M

model consistent with the initial yield curve.
∑ 
i =1  σ ∑  
modeli ( σ )
∑   ∑  
market i 3 
Or i 
i marketi
Supposing we have a series of options on =1  i =1  i =1 
discount bonds where the price of these options
is denoted by
marketi where i=1,…,M
One way to calibrate our model is to minimise
which of the following with respect to σ?
3 What is the correct value for the array tree after 0 0 3 0 0 4 1 2 4 1 0 0 1
the following code has been run? 0 0 2 0 2 5 0 3 5 0 3 0
N=3; 0 0 1 1 3 6 0 0 6 0 0 6
tree=zeros(N,N);
counter = 0;
for i=N:N
for j=N:-1:N-(i-1)
counter = counter+1;
tree(j,i) = counter;
end
end
4 Let P(i+1) represent the price of a pure 1.000 0.000 0.1000 0.1013 4
discount bond that matures at time (i+1)∆t. The
following values are given:
P(0) = 1, P(1) = 0.9753 and P(2) is 0.9512.
Given the following information:
1
P ( i +1) = ∑Qi , j
j [
1 + U ( i )eσj ∆t
]∆t
Q0,0 = 1, Q1,-1 = Q1,1 = 0.495, ∆t = 0.25 and σ =
10%, what is the value of U(0)?
5 Using the same details defined in Q5, what is 0.086 0.096 0.106 0.116 2
the value of U(1) to 3 decimal places?
6 What is the most likely purpose of the variable It contains an option It contains an option It contains an option It contains an option rho 1
“qVar”? delta gamma vega
for j=1:noSimulations
stockPrices(j,2) =
stockPrices(j,1)*exp(mudt+randn*sigdt);
if (stockPrices(j,2)<strike)
payOff(j,1) = exp(mudt+randn*sigdt);
else
payOff(j,1) = 0;
end
stdDevCalc(j,1) = payOff(j,1)^2;
end
qVar =
-exp(-intRate*T)*mean(payOff(:,1))
7 A montecarlo 2-factor model has a stock Decrease Increase No change Not possible to say 2
process driven by the SDE
dS = Sµdt +σSdz S
And a volatility driven by
( )
dV = α V −V dt + ξ V dz V
Where dzs and dzv have a correlation ρ
All other variables being equal, if V is
increased, what will happen the price of a
vanilla put option?
8 Given the details in Q7, all other variables Decrease Increase No change Not possible to say 2
being equal, if ξ is increased, what will
happen the price of a vanilla call option?
9 A hedged option can closely resemble the Cash flows from The strategy cash flows The difference between The hedging error 4
payoff on the option as given by the following rebalancing the hedge implied and actual delta
equation
C t0 e r (T −t0 ) = CT −
 N −1 ∂C ti 
∑ ( [ ])
S ti +1 − E S ti e r (T −ti +1 )  + η
 i =0 ∂S 
What does η represent?
10 The floating strike Asian option has a payoff PT = max( AT − S T ,0) PT = max( S T − AT ,0) PT = min( AT − S T ,0) PT = min( S T − AT ,0)1
based on the difference between the underlying
at expiration , and the average of the underlying
prior to expiration. What formula best describes
the payoff on an asian put option where AT is
the average of n samples of the asset?
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