Likely increase probability of future derivative mishaps

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Reference no: EM132065847

1. A non-dividend paying stock price is currently valued at $20 while the risk free rate is 5.0% per annum.

A European put option written on the stock expires in 3 months, has a strike price of $20, and an implied volatility is 20%.

Using the BSM model, which of the following is the price of a European put option:

A. 20N(-0.1)-20N(-0.2)

B. 20N(-0.2)-20N(-0.1)

C. 20N(0.2)-20N(0.1)

D. 19.7N(-0.2)-20N(-0.1)

E. 19.7N(-0.1)-20N(-0.2)

2. All else equal, which of the following options would be most sensitive the passage of time?

A. An out of the money put option.

B. An at the money put option.

C. An out of the money call option.

D. An at the money call option.

E. An in the money call option.

3. Which of the following would most likely increase the probability of future derivative mishaps at a company:

A. Due to a lack of historical bond data for a frontier market, bond data from an emerging market economy with similar capital controls is used to test possible scenarios.

B. A company chooses not to invest in an overvalued asset despite the fact the asset has been consistently outperforming the market over the past several years.

C. When back testing a trading strategy, a traded chooses to use a wider bid-ask spread when the VIX is hitting new highs

D. To keep traders from taking too much risk, the head of a company's risk department is appointed the head of trading floor as well.

E. After trailing the benchmark for the first three quarters of 2017, a portfolio manager chooses not to leverage up in the fourth quarter to try to make up ground.

Reference no: EM132065847

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