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8006 – Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition

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Showing 7–9 of 15 questions

Question 7

The effectiveness of a hedge is determined by which of the following expressions, where x,y is the correlation between the asset being hedged and the hedge position:

A)

B)

C)

D)

Select an option, then click Submit answer.

  • ○

    Option A

  • ○

    Option B

  • ○

    Option C

  • ○

    Option D


Question 8

Which of the following statements are true in respect of a fixed income portfolio:

I. A hedge based on portfolio duration is valid only for small changes in interest rates andneeds periodic readjusting

II. A duration based portfolio hedge can be improved by making a convexity adjustment

III. A long position in bonds benefits from the resulting negative convexity

IV. A duration based hedge makes the implicit assumption that only parallel shifts in theyield curve are possible

Select an option, then click Submit answer.

  • ○

    II and IV

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    I and II

  • ○

    I, II and IV

  • ○

    I and IV

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    A hedge based on portfolio duration is valid only for small changes in interest rates andneeds periodic readjusting

    II. A duration based portfolio hedge can be improved by making a convexity adjustment

    III. A long position in bonds benefits from the resulting negative convexity

    IV. A duration based hedge makes the implicit assumption that only parallel shifts in theyield curve are possible
Question 9

Which of the following assumptions underlie the 'square root of time' rule used for computing volatility estimates over different time horizons?

I. asset returns are independent and identically distributed (i.i.d.)

II. volatility is constant over time

III. no serial correlation in the forward projection of volatility

IV. negative serial correlations exist in the time series of returns

Select an option, then click Submit answer.

  • ○

    I and II

  • ○

    I and III

  • ○

    III and IV

  • ○

    I, II and III


  • ○

    asset returns are independent and identically distributed (i.i.d.)

    II. volatility is constant over time

    III. no serial correlation in the forward projection of volatility

    IV. negative serial correlations exist in the time series of returns