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2.5 Computer quiz

- Can the random future price of a share be modeled mathematically?

- Yes, with a normal random walk where up/down increments have equal chances.
- Yes, with a log-normal walk where multiplication/division have equal chances.
- Not exact values, only likely outcomes to reach a certain value.
- No, it is only possible to model derivatives such as put and calls.

- Selling short the underlying and buying a put deep in-the-money
differ in that

- if the share rises, you win with the share and loose with the option.
- if the share rises, you loose with the share and win with the option.
- a much larger gearing is achieved with the option.
- the potential losses are limited with the option, but not with the share.

- The holder of a European call has the possibility of

- making arbitrarily large profits and limited losses.
- making arbitrarily large losses and limited profits.
- selling his option on the market before it expires.
- exercising the option before it expires.

- Exotic options are generally

- created by a broker OTC for two clients independently of the rest of the market.
- valued using mathematical models in the absence of an efficient market.
- available to small individual investors.

- An exponential decrease of discount function
corresponds to a

- linear rise of the spot rate in time.
- constant spot rate in time.
- linear drop of the spot rate in time.

- The projected forward rates

- can always be calculated from the spot rate.
- can always be calculated from the yield curve.
- are upward sloping when the spot rate is high.
- are upward sloping when the spot rate is low.

- To hedge a long position in a discount bond you can

- buy the same type of bond with a different maturity.
- sell the same type of bond with a different maturity.
- make an offer for a swap.
- buy a caplet.

- The value of a portfolio having positive
, Vega and

- does not change in a crash and rises smoothly afterwards.
- drops in a crash and remains constant afterwards.
- rises in a crash and decays smoothly afterwards.

**SYLLABUS** ** Previous:** 2.4 Hedging parameters, portfolio
**Up:** 2 A VARIETY OF
**Next:** 2.6 Exercises