Risk Latte - Quiz # 4

a) volatility of volatility (wol);
b) wol and the correlation of the volatility with the price of the asset;
c) correlation of the volatility with the price of the asset;
d) None of the above.

2) While vega of a single option on an asset depends on the price of the asset there exists a portfolio of options on the asset:

a) whose vega is independent of price of the asset;
b) whose vega is partially dependent on the price of the asset;
c) whose vega is dependent on the price of the asset as well as the return of the asset;
d) None of the above.

3) In a trading situation an early volatility burst pushed the price of the underlying asset away from the initial level and the vega of the option became lower. Subsequent low volatility prevented the price from going back to its initial level and the vega continued to remain low. In such a situation an option writer who wanted to profit from the time decay will experience:

a) relatively high negative vega when the realized volatility is high and relatively low          negative vega when the realized volatility is low;
b) relatively high positive vega when the realized volatility is high and relatively positive          vega when the realized volatility is low;
c) relatively high negative vega when the realized volatility is low and relatively low          negative vega when the realized volatility is high;
d) relatively stable and constant vega throughout.

4) In the original Black-Scholes model of option pricing:

a) volatility was assumed to be constant;
b) volatility was assumed to be time dependent;
c) volatility was assumed to be correlated with the price of the asset;
d) None of the above.

5) Empirical research shows that the ad hoc use of the Black-Scholes model by an options market maker to calculate delta and vega hedges:

a) is at least as good at reducing the variance of the profit and loss as the use of more          sophisticated approaches that model the volatility of volatility (wol).
b) is not good enough to reduce the variance of profit and loss and more sophisticated          approaches using wol modeling should be used;
c) is far more efficient than the sophisticated approaches that model wol superior in          reducing the variance of the profit and loss;
d) is completely incapable of reducing the variance of the profit and loss.

6) The market for 3 month USD/JPY risk reversal is 0.9 favouring JPY calls. This means that:

a) market makers are willing to pay 0.9 vols higher to buy the JPY calls and sell JPY puts;
b) market makers are willing to pay 0.9 vols higher to sell the JPY calls and buy the JPY puts;
c) market makrers are willing to pay 0.9 higher to buy JPY puts and sell JPY calls;
d) None of the above.

7) Risk reversals are generally:

a) gamma neutral trades;
b) directional trades;
c) vega neutral trades;
d) both directional and vega neutral trades;

8) Professor Engle got a Noble prize in Economics for his pioneering work on:

a) asset pricing
b) life cycle theory investing;
c) volatility dynamics;
d) co-integration analysis of asset prices;

9)The generalized Omestein-Uhlenbeck process which is a simple model for random movement towards a concentration point is used in Interest rate modeling where, for an Interest rate "r", volatility of the Interest rate sigma, stochastic process Wand constants a and b , process is:

a) dr = sigma*dW
b) dr = (a-b*r)*dt + sigma*dW
c) dr = (a/b)*r*dt+ sigma *dw
d) None of the above

10) The following persons did not receive a Nobel prize:

a) Fisher Black;
b) Myron Scholes;
c) Robert Merton;
d) william Sharpe.

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