Risk Latte - Options Trading Quiz: Quiz # 10

Options Trading Quiz – Quiz #10

Team Latte
December 7, 2010


  1. An FX options trader wants to buy a 6 month 25 delta call on a currency pair where the forward is trading at 101 and the drift (domestic rate less foreign rate) is 2%.The strike of the call will be:

    a) 90
    b) 94
    c) 97
    d) None of the above

  2. The following conversation took place between two traders (A is the buyer and B is the seller) dealing FX options:

    Trader A > 1M EUR/USD ATM straddle in 100, please
    Trader B > 9.10 / 9.40
    Trader A > 9.40, spot ref 1.3815

    In the above conversation, 9.40 refers to:

    a) Trader B’s bid volatility for the straddle at 9.40%
    b) Trader B’s asking volatility for the straddle at 9.40%
    c) Trader B’s bidding price of the straddle at 9.40 EUR per 100 EUR;
    d) Trader B’s asking price of the straddle at 9.40 EUR per 100 EUR

  3. The following conversation took place between two traders (A is the buyer and B is the seller) dealing FX options:

    Trader A > Dollar-Yen 6M 25D RR in 200
    Trader B > 1.45 / 1.55 P
    Trader A > 1.45 please, spot ref 102.50
    Trader B > OK, vols 10.35 / 8.90

    In the above if a deal is struck between A and B then the deal size will be:

    a) USD200 million
    b) USD100 million
    c) JPY100 million
    d) JPY200 million

  4. In the above problem (problem # 3) the deal size will comprise:

    a) 100 million USD call JPY put against 100 million USD put JPY call
    b) 200 million USD call JPY put against 100 million USD put JPY call
    c) 100 million JPY call USD put against 100 million JPY put USD call
    d) 200 million JPY call USD put against 100 million JPY put USD call

  5. In the above problem (problem # 3) the deal gets struck at:

    a) 1.45% premium of USD/JPY spot rate (spot reference)
    b) 1.45% of the risk reversal volatility
    c) 1.45% of the deal size
    d) 1.45 JPY per 100 JPY

  6. For which of the following options no analytic solutions is possible?

    a) Contingent Premium Options
    b) Flexible Strike Asian (arithmetic average) option
    c) Shout options
    d) Madonna options

  7. For a one year up and out (knock out) option with 252 trading days assume that there are 252 barrier monitoring points. If the spot is at 100, the barrier is at 102 and the volatility is 20% then the modified barrier (discretely monitored barrier) will be at:

    a) 102.50
    b) 102.75
    c) 103.15
    d) 103.50

  8. You are pricing a squared power call option (asset price raised to the power of 2) on a certain stock where the payoff of the option is:. The volatility of the stock is 15%. The volatility that you’ll input in your model for valuing this option would be:

    a) 7.5%
    b) 15%
    c) 22.25%
    d) 30%

  9. Local Volatility can best be conceptualized as:

    a) a model of how volatilities actually evolve
    b) an average over all possible instantaneous volatilities in a stochastic
              volatility world
    c) change in implied volatility due to changes in option prices
    d) a model of implied volatility surface

  10. An investor buys a “best of option” on two indices, S&P500 (SP) and Nikkei225 (NK). The payoff of the option is given by:


    The best way to understand the correlation risk of this option is to view the above payoff as:

    a) At the money (ATM) call on S&P500 plus an out-performance option of
              Nikkei225 over S&P500
    b) ATM call on S&P500 plus an ATM call on Nikkei225
    c) A forward on the ration of S&P500 and Nikkei225 plus a ATM call on
              Nikkei225
    d) None of the above

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