Risk Latte - Structured Products Quiz – Quiz #2

Structured Products Quiz – Quiz #2

Team Latte
April 14, 2008


  1. A bank sells a call option on $100 million worth of shares of a company ABC to the Company itself. The bank books an upfront profit on the valuation of the calls, as it feels it got more than the fair premium on the sale. The bank then buys $100 million worth of stock (shares) of the company ABC. The bank will experience a steep loss in the event:

    (a) the company ABC's shares don't move at all;
    (b) the company ABC's shares move down slightly;
    (c) the company ABC's shares drop sharply;
    (d) the company ABC's shares rise sharply;


  2. A particular equity index is trading at and there exists a strike price K1 which is greater than S. An investor wants an exposure on the upside up to a level denoted by K2 such that  K2 > K1 . You design a payoff, VT  in a structured note such that  VT= M * max (0, min (S, K1) - K2 )  where M  is some constant multiplier. This payoff essentially replicates a:

    (a) call spread;
    (b) put spread;
    (c) lookback call;
    (d) none of the above;


  3. The above structure (in question # 2) will exhibit:

    (a) short gamma;
    (b) short vega;
    (c) risk reversal;
    (d) long gamma;


  4. The payoff of an option is given by are where, and are the spot prices of the underlying at time  and , with < and is the maturity of the option. This option is a:

    (a) Napoleon;
    (b) Cliquet;
    (c) Reverse Cliquet;
    (d) Mountain Range;


  5. Which of the following is a highly toxic product:

    (a) Napoleon options;
    (b) Resettable Convertible Bonds;
    (c) Reverse Convertible Bonds;
    (d) Double No touch options;


  6. In most generic target redemption notes (TARN) the following risk is always embedded:

    (a) binary (digital) risk
    (b) Lookback call spread risks
    (c) Interest rate risk
    (d) All the above


  7. A "money back" call option can be synthesized from :

    (a) a vanilla call and a binary call;
    (b) a vanilla call and a binary put;
    (c) a vanilla put and a binary call;
    (d) a vanilla call, a binary put and a long asset;


  8. A Variance swap can be replicated by a:

    (a) a continuum of calls and puts;
    (b) a continuum of calls and puts weighted by the inverse of the square of their
               strike prices;
    (c) a continuum of calls and puts weighted by a function of implied volatilities;
    (d) None of the above;


  9. It is estimated that the probability of an up move in the price of a certain stock is 40%. Then the entropy is:

    (a) 44.50%
    (b) 67.30%
    (c) 85.23%
    (d) 90.38%


  10. "Golden ratio" in mathematics, also denoted by f , can be found as a positive root of the solution of which of the following equations:

    (a) f2 + f + 1 = 0
    (b) f2 - f - 1 = 0
    (c) f2 - 2f - 2 = 0
    (d) None of the above;

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