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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 lognormal 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 inthemoney
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
