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Chapter Sixteen

Financial Engineering and Risk Management

Multiple Choice

    1. A person holds 10,000 shares of Genuine Parts Company (GPC, NYSE). In order to reduce the GPC position delta, the portfolio manager could do any of the following except

a. write GPC calls.

b. write GPC puts.

c. sell GPC stock.

  1. buy GPC puts.

ANSWER: B

    1. A non profit stock portfolio manager who sold SPX index futures to hedge market risk would be most likely to augment portfolio income by

a. writing SPX futures calls.

b. writing SPX futures puts.

c. buying SPX futures calls.

  1. buying SPX futures puts.

ANSWER: B

    1. Gamma risk is best associated with

      1. rising markets.

      2. falling markets.

      3. fast markets.

      4. slow markets.

ANSWER: C

    1. Delta measures the _____ change in option value associated with a one _____ change in the value of the underlying asset.

a. percent, percent.

b. percent, dollar.

c. dollar, percent.

  1. dollar, dollar.

ANSWER: D

    1. Constructing asset portfolios that have precise technical characteristics is commonly called

a. synthetic purchases.

b. financial engineering.

c. swapping.

  1. delta management.

ANSWER: B

    1. A mathematical technique useful in financial engineering applications is

a. linear programming.

b. Markov chains.

c. law of sines.

  1. parsing.

ANSWER: A

    1. Which of the following terms does not belong?

a. prime

b. score

c. unit

  1. warrant

ANSWER: D

True/False

    1. Delta for any option ranges from 0 to 1.0.

ANSWER: F

2. Call options have positive deltas.

ANSWER: T

        1. Index option deltas range from  2 to +2.

ANSWER: F

        1. The concept of gamma in option pricing is similar to the concept of convexity in bond pricing.

ANSWER: T

        1. Writing a call option provides limited downside protection.

ANSWER: T

        1. In providing protection against declining prices, the purchase of puts provides more reliable protection than does the writing of covered calls.

ANSWER: T

        1. A disadvantage of buying puts is that you lose most upside profit potential.

ANSWER: F

        1. Owning a SCORE was like owning a long term call option.

ANSWER: T

        1. Owning a PRIME was like a covered call position.

ANSWER: T

Short Answer/Problem

    1. You are involved in a portfolio insurance strategy, and are interested in replicating a particular put option with a delta of  0.4889. You would combine this put with your stock position to effectively form a protective put. If you own 100,000 shares of the under­lying stock how many shares should you sell short in your short account to leave you with the synthetic protective put?

ANSWER: 100,000 (1 .4889) = 51,100



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