Q&A Hero

Q: In the derivatives markets, the instrument with the longest potential maturity is A. options. B. futures. C. forwards. D. swaps. E. currencies.

Q: In the derivatives markets, the credit risk exposure is greatest for A. options. B. futures. C. forwards. D. swaps. E. currencies.

Q: In the derivatives markets, transactions costs are highest for A. options. B. futures. C. forwards. D. swaps. E. currencies.

Q: The fastest growing type of swap is A. a commodity swap. B. a credit swap. C. a currency swap. D. an equity swap. E. an interest rate swap.

Q: The type of swap that is in the largest segment of the global swap market is A. a commodity swap. B. a credit swap. C. a currency swap. D. an equity swap. E. an interest rate swap.

Q: A swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities is A. a commodity swap. B. a credit swap. C. a currency swap. D. an equity swap. E. an interest rate swap.

Q: Which of the following is an advantage of having swap dealers? A. They serve the function of taking the opposite side of each transaction in order to keep the swap market liquid. B. They reduce the search costs of finding counterparties having mirror image financing requirement. C. They generally guarantee swap payments over the life of the contract. D. They incur any costs associated with the default by replacing the defaulting party on the same terms as the original swap. E. All of the above.

Q: A bank with a strong positive leverage adjusted duration gap can hedge their exposure to interest rate increases by entering into A. a currency swap agreement to receive the fixed rate payment. B. an interest rate swap agreement to make the fixed-rate payment side of the swap. C. a credit swap agreement to receive the floating rate payment. D. a commodity swap agreement to make the fixed-rate payment side of the swap. E. an equity swap agreement to make the floating-rate payment side of the swap.

Q: In terms of valuation, a 12-year interest rate swap can be can be considered in terms of A. a series of option contracts. B. a zero-coupon bond. C. a U.S. Treasury STRIP. D. bond-equivalent valuation. E. securitization of a derivative contract.

Q: An interest rate swap A. involves a swap buyer who agrees to make a number of variable-rate payments on periodic settlement dates. B. involves a swap seller who agrees to make a number of fixed-rate payments on periodic settlement dates. C. is effectively a succession of forward contracts on interest rates. D. involves comparative advantage by the fixed-rate side of the swap, but not the variable-rate side. E. eliminates credit risk.

Q: What is the basic reason that two counterparties enter into a swap agreement? A. Exchange of one specified cash flow in the future based on some underlying index. B. Better management of credit risk by using a fixed or floating rate bond as hedging instrument. C. To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet. D. Exchange of assets for a specific period of time at a specified interval. E. Taking the opposite side of each transaction in order to keep the swap market liquid.

Q: The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC) derivatives including swaps.

Q: Policies established by The International Swaps and Derivatives Association (ISDA) forbid swap contracts to be made between parties of different credit standing.

Q: The credit risk on an interest rate swap is generally much less than on an individual loan.

Q: The Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps.

Q: The secondary market for the trading of swaps is second in liquidity to the U.S. T-bill market.

Q: A commercial bank that acts as a swap dealer must include swap risk exposure when calculating risk-based capital requirements.

Q: A pure credit swap will reduce interest rate risk.

Q: A total return credit swap is eliminates interest rate risk as well as credit risk.

Q: Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.

Q: In recent years, the fastest growing type of swap agreement has been a fixed-fixed currency swap.

Q: By 2008, the insurance company AIG had more than $440 billion in credit default swaps outstanding.

Q: When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.

Q: At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.

Q: The notational value of swaps that are held by commercial banks as of 2012 was over $130 trillion.

Q: One reason for the rapid growth of the OTC interest rate and foreign exchange swap markets is that banks are not required to allocate any capital toward their usage.

Q: In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

Q: A pure credit swap is similar to buying credit insurance.

Q: A total return swap involves exchanging an obligation to pay interest at a specified rate for payments representing the total return on a loan or a bond of a specified amount.

Q: The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.

Q: Currency swaps can be designed to reduce foreign exchange risk.

Q: Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.

Q: Determining the pricing of a swap agreement requires the calculation of expected one-year rates from the Treasury yield curve that is accomplished by calculating the spot or zero-coupon discount yield curve.

Q: The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously issued securities.

Q: Pricing a fixed-floating rate swap agreement to meet no-arbitrage conditions requires that the expected present value of the cash flow payments made by the fixed-rate seller should equal the expected value of the cash flow payments made by the variable-rate buyer.

Q: Whether fixed-rate or floating-rate, a swap arrangement can be designed to be equivalent to a similar maturity bond.

Q: The buyer of an interest rate swap is likely to have a negative duration gap that they would like to reduce.

Q: The party in a swap that receives fixed-rate payments will always have zero basis risk since the fixed-rate swap payments can be structured to cover the fixed-rate liability payments.

Q: One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion of the swap may not be perfectly correlated with changes in the index on the balance sheet portion of the liabilities.

Q: Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.

Q: Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.What should be the net price of a $5,000,000 collar if the bank purchases a three-year 6 percent cap and sells a 5 percent floor, if the current (spot) rates are 6 percent? A. The bank will receive net $2,010.B. The bank will receive net $31,651.C. The bank will pay net $31,651.D. The bank will pay net $2,010.E. price = $0

Q: Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.What should be the price of a three-year 5 percent floor if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two. A. $8,250.B. $10,799.C. $12,550.D. $15,875.E. $17,455.

Q: Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.What should be the price of a three-year 6 percent floor if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two. A. $44,060.B. $66,030.C. $22,462.D. $21,598.E. $25,000.

Q: Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year.What should be the price of a three-year 6 percent cap if the current (spot) rates are also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two. A. $25,000.B. $20,409.C. $22,041.D. $42,450.E. $66,030.

Q: A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below:In addition to purchasing the cap, if the bank also sells a 3-year 6 percent floor and interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the payoffs to the bank? Specifically, the bank A. receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.B. pay $50,000 at the end of year 2 and receive $50,000 at the end of year 3.C. receive $0 at the end of year 2 and pay $50,000 at the end of year 3.D. receive $0 at the end of year 2 and $50,000 at the end of year 3.E. receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

Q: A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below:In addition to purchasing the cap, if the bank also purchases a 3-year 6 percent floor and interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the payoffs to the bank? Specifically, the bank will A. receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.B. receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.C. receive $0 at the end of year 2 and pay $50,000 at the end of year 3.D. receive $0 at the end of year 2 and receive $50,000 at the end of year 3.E. receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

Q: A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below:Instead of a cap, if the bank had purchased a 3-year 6 percent floor and interest rates are 5 percent and 6 percent in years 2 and 3, respectively, what are the payoffs to the bank? A. The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.B. The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.C. The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3.D. The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3.E. The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

Q: A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below:Assume interest rates are 5 percent in year 2 and 7 percent in year 3. Which of the following is true? A. The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.B. The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.C. The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3.D. The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3.E. The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

Q: In April 2012, an FI bought a one-month sterling T-bill paying 100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/1. The bank can buy one-month options on sterling at an exercise price of $1.60/1. Each contract has a size of 31,250, and the contracts currently have a premium of $0.014 per . Alternatively, options on foreign currency futures contracts, which have a size of 62,500, are available for $0.0106 per .If the exchange rate in one month is $1.55/1, what action should the FI take in regards to the hedge? A. Call the 100 million proceeds of the T-bill from the option writer for $160 millionB. Put the 100 million proceeds from the T-bill to the option writer for $160 million.C. Put the 100 million proceeds from the T-bill to the option writer for $155 million.D. Call the 100 million proceeds of the T-bill from the option writer for $155 millionE. Allow the option contracts to expire since they are out of the money.

Q: In April 2012, an FI bought a one-month sterling T-bill paying 100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/1. The bank can buy one-month options on sterling at an exercise price of $1.60/1. Each contract has a size of 31,250, and the contracts currently have a premium of $0.014 per . Alternatively, options on foreign currency futures contracts, which have a size of 62,500, are available for $0.0106 per .How many options should the FI purchase, and what will be the cost? A. 1,600 contracts for $16.96.B. 1,600 contracts for $1,060,000.C. 3,200 contracts for $44.80.D. 3,200 contracts for $1,400,000.E. 3,200 contracts for $2,800,000.

Q: In April 2012, an FI bought a one-month sterling T-bill paying 100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/1. The bank can buy one-month options on sterling at an exercise price of $1.60/1. Each contract has a size of 31,250, and the contracts currently have a premium of $0.014 per . Alternatively, options on foreign currency futures contracts, which have a size of 62,500, are available for $0.0106 per .What is the foreign exchange risk that the FI is facing, and what type of currency option should be purchased to hedge this risk? A. The FI should use put options to hedge the depreciation of the dollar.B. The FI should use call options to hedge the depreciation of the pound sterling.C. The FI should use put options to hedge the depreciation of the pound sterling.D. The FI should use call options to hedge the depreciation of the dollar.E. The FI should use put options to hedge the appreciation of the pound sterling.

Q: An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.What is the net gain or loss to the investment company resulting from the change in rates given that the hedge was placed? A. Lose $2,131.B. Gain $2,131.C. Lose $695,191.D. Gain $695,191.E. Gain $2,382,858.

Q: An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.Using the above information and your answer to the previous question, will the investment company gain or lose on the option position if interest rates decrease 1 percent to 9 percent? A. Lose $4,352,414.B. Gain $4,352,414.C. Lose $2,559,700.D. Gain $3,659,354.E. Lose $3,659,354.

Q: An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.Using the above information, what will happen to the market value of the Eurobonds if market interest rates fall 1 percent to 9 percent? A. Increase $8,018,182.B. Decrease $8,018,182.C. Decrease $4,354,545.D. Increase $6,735,272.E. Increase $4,354,545.

Q: An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84.Given this information, what type of T-bond option, and how many options should be purchased, to hedge this investment? A. 792 put options.B. 792 call options.C. 942 put options.D. 942 call options.E. 554 put options.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.At the time of placement, the premium on the options are quoted at 1. What is the cost to Allright in placing the hedge? A. $1,093,750.B. $782,250.C. $360,500.D. $1,342,500.E. $1,094.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.If rates increase 1 percent, what will be the change in value of the option position? A. -$1,660,525.B. +$1,660,525.C. -$2,430,511.D. -$765,253.E. +$2,430,511.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.On the advice of its chief financial officer, Allright wants to hedge the balance sheet with T-bond option contracts. The underlying bonds currently have a duration of 8.82 years and a market value of $97,000 per $100,000 face value. Further, the delta of the options is 0.5. What type of contract, and how many contracts should Allright use to hedge this balance sheet? A. puts; 447 contracts.B. calls; 625 contracts.C. puts; 625 contracts.D. calls; 447 contracts.E. puts; 206 contracts.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.Market interest rates are expected to increase 1 percent to 11 percent in the next year. If this occurs, what will be the effect on the market value of equity of Allright? A. -$801,818.B. -$2,430,909.C. -$6,529,091.D. +$2,430,909.E. +$2,532,727.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.If Allright wanted to hedge the balance sheet position, what is the interest rate risk exposure and what hedge would be appropriate? A. The balance sheet position is exposed to interest rate increases; use a short hedge.B. The balance sheet position is exposed to interest rate increases; use a long hedge.C. The balance sheet position is exposed to interest rate decreases; use a long hedge.D. The balance sheet position is exposed to interest rate decreases; use a short hedge.E. There is no interest rate risk exposure.

Q: Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds. These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.The duration of the T-notes, Baa bonds, and GICs is 1.93 years, 6.9 years, and 4.5 years respectively. What is the leverage-adjusted duration gap for Allright? A. 1.99 years.B. 5.13 years.C. 0.63 years.D. 1.91 years.E. 1.0 year.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $826.45 per $1,000 for the bond. The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent. Either rate is equally probable.Given the exercise price of the option, what premium should be paid for this option? A. $2.2339 per $1,000 of bond option purchased.B. $4.0275 per $1,000 of bond option purchased.C. $2.2752 per $1,000 of bond option purchased.D. $2.2156 per $1,000 of bond option purchased.E. $3.8211 per $1,000 of bond option purchased.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $826.45 per $1,000 for the bond. The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent. Either rate is equally probable.If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year, what will be the exercise price of the option? A. $862.10.B. $743.23.C. $900.93.D. $811.70.E. $917.36.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $826.45 per $1,000 for the bond. The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent. Either rate is equally probable.Given the expected one-year rates in one year, what are the possible bond prices in one year? A. $912.40 and $922.32.B. $857.27 and $866.93.C. $734.90 and $751.56.D. $896.06 and $905.80.E. $802.92 and $820.47.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $826.45 per $1,000 for the bond. The current yield on a one-year bond of equal risk is 9 percent, and the one-year rate in one year is expected to be either 11.60 percent or 10.40 percent. Either rate is equally probable.What is the yield to maturity for the two-year bond if held to maturity? A. 11.00 percent.B. 10.00 percent.C. 13.54 percent.D. 11.60 percent.E. 10.40 percent.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent. Either rate is equally probable.Given the exercise price of the option, what premium should be paid for this option? A. $0.2143 per $100 of bond option purchased.B. $0.4420 per $100 of bond option purchased.C. $1.2768 per $100 of bond option purchased.D. $0.2321 per $100 of bond option purchased.E. $1.1652 per $100 of bond option purchased.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent. Either rate is equally probable.If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year, what will be the exercise price of the option? A. $84.00.B. $85.99.C. $86.21.D. $85.74.E. $85.96.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent. Either rate is equally probable.Given the expected one-year rates in one year, what are the possible bond prices in one year? A. $85.22 and $86.25.B. $85.73 and $86.69.C. $85.22 and $86.69.D. $85.73 and $86.25.E. $83.35 and $84.65.

Q: An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent. Either rate is equally probable.What is the yield to maturity for the two-year bond if held to maturity? A. 27.99 percent.B. 13.54 percent.C. 29.95 percent.D. 14.00 percent.E. 11.53 percent.

Q: Buying a cap option agreement A. means buying a (or several) call option on interest rates. B. means buying insurance against excessive decreases in interest rates. C. allows more than one exercise date. D. All of the above are correct. E. Answers A and C only.

Q: A digital default option A. always pays the par value of a loan if exercised. B. has a payout that is capped at 80 percent of the par value of the loan. C. will cause the FI never to lose more than the premium paid to purchase the option. D. Answers A and C only. E. Answers A and B only.

Q: An FI concerned that the risk on a loan will increase can A. purchase a credit spread call option B. sell a credit spread call option C. sell a credit spread put option. D. purchase a naked option. E. sell a naked option.

Q: Credit spread call options are useful because A. its value increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread. B. an increase in the value of the call option will tend to offset the decreasing value of an FI's loan and net worth as the credit quality of the borrower decreases. C. they will always cause a loss at least equal to the required premium on the option. D. All of the above. E. Answers A and B only.

Q: KKR issues a $10 million 18-month floating rate note priced at LIBOR plus 400 basis points. What is KKR's interest rate risk exposure and how can it be hedged? A. KKR is exposed to interest rate increases; short hedge by buying put options.B. KKR is exposed to interest rate increases; long hedge by buying call options.C. KKR is exposed to interest rate decreases; long hedge by buying call options.D. KKR is exposed to interest rate decreases; short hedge by buying put options.E. KKR is exposed to interest rate increases; short hedge by buying call options.

Q: For put options, the delta has a negative sign A. since the value of the put option falls when bond prices rise. B. since the value of the put option rises when bond prices rise. C. since the value of the put option falls when bond prices fall. D. since the change in interest rates is equal to the change in the interest rate on the bond underlying the option contract. E. to adjust for basis risk.

Q: Which of the following shows the change in the value of a put option for each $1 change in the underlying bond? A. Open interest. B. Volatility. C. Delta. D. Basis. E. Sigma.

Q: What reflects the degree to which the rate on the option's underlying asset moves relative to the spot rate on the asset or liability that is being hedged? A. Credit risk. B. Basis risk. C. Hedge risk. D. Volatility. E. Open interest.

Q: Contrast the marking to market characteristics of options versus futures contracts. A. Options are marked to market continuously while futures are marked to market at the close of trading each day. B. Options are marked to market at expiration while futures are marked to market at the close of trading each day. C. Options are marked to market daily while futures are marked to market at the close of trading each day. D. Options are marked to market monthly while futures are marked to market at the close of trading each day. E. There is no difference in the marking to market characteristics.

Q: Identify a problem associated with using the Black-Scholes model to value bond options. A. It assumes short-term interest rates are constant. B. It assumes that commissions are charged. C. It assumes fluctuating variance of returns on the underlying asset. D. It assumes that the variance of bond prices is constant over time. E. All of the above.

Q: The combination of being long in the bond and buying a put option on a bond mimics the profit function of A. buying a put option. B. writing a put option. C. writing a call option. D. buying a call option. E. buying a floor.