Risk Latte - Interview Questions # 10:Option Pricing Applications

Interview Questions # 10:Option Pricing Applications

Team Latte
Nov 14, 2007


  1. In the Black-Scholes formula for a vanilla call option the probability of being in the money almost equals the delta of the option when:

    1. the volatility is very low ;
    2. the volatility is very high;
    3. the volatility is very high and the risk free rate is low;
    4. the risk free rate is very low;


  2. In an arithmetic average (asian) option, is the strike price and only one fixing is left out of a total of fixings. If is the average value of the underlying (spot) of all fixings until that point (here ) then the value of the asian option is equal to:

    1. times the value of the vanilla call with a strike of
    2. times the value of the vanilla call with a strike of
    3. times the value of the vanilla call with a strike of
    4. times the value of the vanilla call with a strike of


  3. The supposedly absurd negative risk neutral probabilities can occur in a Cox-Ross-Rubenstein (CRR) binomial tree when:

    1. the volatility of the asset price is considerably less than the absolute value of the cost of carry times the square root of time step;
    2. the volatility of the asset price is considerably higher than the absolute value of the cost of carry times the square root of time step;
    3. the volatility of the asset price is equal to the cost of carry;
    4. Risk neutral probabilities can never become negative in a CRR tree;


  4. The sum of a digital call option and a digital put option (with the same strike price) is equal to:

    1. One
    2. the discount factor;
    3. the probability of being in the money for a vanilla call
    4. none of the above


  5. An asset is said to be in a "degenerate" state when:

    1. the volatility is zero;
    2. the volatility is infinite;
    3. the volatility is negative;
    4. none of the above
  6.  

    Answers:

    1 (a)
    2 (a)
    3 (a)
    4 (b)
    5 (a)



Any comments and queries can be sent through our web-based form.

More on Job Interviews >>

back to top