Risk Latte - Quiz #3

All questions have been designed after talking to or having been referenced from the work of traders and market practitioners (quants, risk managers, etc.) who have either worked at Goldman Sachs or are as smart, if not more, than those who work at Goldman Sachs. Forget FRM, PRM, QRM, GRM, CFA, MFA, TFA and all the other crap on which you spend so much money and time. If you get these following questions right, you are there, mate!

So, are you better than a Goldman Sachs trader? Answer these questions and find out. If you get less than 80% then you better go back and waste yourself with all those shitty exams.

1) Volga/Vanna is consistent with:

(a) Black-Scholes model
(b) Stochastic Volatility mode
(c) Jump Diffusion model;
(d) Constant Elasticity of Variance (CEV) model

2) The concept of “pairs trading” in which an equity trader assumes that two stocks
never deviate too far away from each other is based on the simple statistical concept
of:

(a) Correlation
(b) Co-integration
(c) Discriminant analysis
(d) None of the above;

3) Which of the following is a solution to the Black-Scholes Partial Differential Equation
(PDE)?

(a) Cash
(b) Equity
(c) Call Option
(d) All the above;

4) Traders use closed form solution of SABR model to value options on the forward rate
(interest rate). For such closed form solutions to exist the assumption is that:

(a) the volatility of the volatility (vvol) of the forward rate is small;
(b) the volatility of the volatility (vvol) of the forward rate is large
(c) the vvol is zero
(d) the vvol is infinite

5) Trader A’s valuation model is based on “risk”. Trader B’s valuation model is based
on “uncertainty”. The difference between the two is:

(a) A’s model has randomness with known probabilities whereas B’s model has
randomness with unknown probabilities;
(b) A’s model has randomness with unknown probabilities whereas B’s model has
randomness with known probabilities;
(c) B has a Bayesian model of probabilities in his model;
(d) A has a Bayesian model of probabilities in his model;

6) Of all the following mathematical models of the short / forward rate (interest rate)
which one(s) is / are definitely not solvable by the finite difference method:

(a) Libor Market Model (LMM)
(b) Generalized Heath, Jarrow and Morton (HJM) model
(c) Cox-Ingersoll-Ross (CIR) model
(d) All the above;

7) Low Discrepancy Numbers are mostly and primarily used in:

(a) Monte Carlo Simulation
(b) Numerical Integration
(c) Finite Difference Methods
(d) Trinomial and stochastic parameter trees

8) They say that experienced option traders have “GARCH in their heads”. What is
generally implied by this statement is that:

(a) memory of past variance is built into trading models;
(b) trading models are independent of past variances;
(c) markets display fat tails
(d) None of the above;

9) Of all the statistical distributions which of the following matches the data in the
market (such as fat tails, etc.) most accurately:

(a) Gamma distribution
(b) Pareto-Levy distribution
(c) Exponential distribution
(d) Poisson distribution

10) A certain trading algorithm, developed by a quant, models the extreme value (both
the maxima and the minima) of a large number of random variables. The algorithm
will most likely use:

a) Inverse Normal distribution
b) Cauchy distribution
c) Exponential distribution
d) Gumbell distribution

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