OPTIONS FUTURES AND OTHER DERIVATIVES
GLOBAL EDITION FINAL PAPER 2026 TESTED
QUESTIONS WITH FULL SOLUTION GRADED
A+
◉ Credit Value Adjustment. Answer: Adjustment to value of
derivatives outstanding with a counterparty to reflect the
counterparty's default risk.
◉ Forward Rate Agreement. Answer: Agreement that a certain
interest rate will apply to a certain principal amount for a certain
time period in the future.
◉ Option Series. Answer: All options of a certain class with the same
strike price and expiration date.
◉ Option Class. Answer: All options of the same type (call or put) on
a particular stock.
◉ Recovery Rate. Answer: Amount recovered in the event of a
default as a percent of the face value.
,◉ Deferred Swap. Answer: An agreement to enter into a swap at
some time in the future (also called a forward swap).
◉ Swap. Answer: An agreement to exchange cash flows in the future
according to a prearranged formula.
◉ Principal Components Analysis. Answer: An analysis aimed at
finding a small number of factors that describe most of the variation
in a large number of correlated variables (similar to a factor
analysis).
◉ Factor analysis. Answer: An analysis aimed at finding a small
number of factors that describe most of the variation in a large
number of correlated variables (similar to a principal components
analysis).
◉ Scenario Analysis. Answer: An analysis of the effects of possible
alternative future movements in market variables on the value of a
portfolio.
◉ Black's Approximation. Answer: An approximate procedure
developed by Fischer Black for valuing a call option on a dividend-
paying stock.
,◉ Cornish-Fisher Expansion. Answer: An approximate relationship
between the fractiles of a probability distribution and its moments.
◉ Index Arbitrage. Answer: An arbitrage involving a position in the
stocks comprising a stock index and a position in a futures contract
on the stock index.
◉ Investment Asset. Answer: An asset held by at least some
individuals for investment purposes.
◉ Consumption Asset. Answer: An asset held for consumption
rather than investment.
◉ Stochastic Process. Answer: An equation describing the
probabilistic behavior of a stochastic variable.
◉ Interest Rate Swap. Answer: An exchange of a fixed rate of interest
on a certain notional principal for a floating rate of interest on the
same notional principal.
◉ Black's Model. Answer: An extension of the Black-Scholes model
for valuing European options on futures contracts. As described in
Chapter 26, it is used extensively in practice to value European
options when the distribution of the asset price at maturity is
assumed to be lognormal.
, ◉ Variation Margin. Answer: An extra margin required to bring the
balance in a margin account up to the initial margin when there is a
margin call.
◉ Uptick. Answer: An increase in price.
◉ Stock Index. Answer: An index monitoring the value of a portfolio
of stocks.
◉ Arbitrageur. Answer: An individual engaging in arbitrage.
◉ Specialist. Answer: An individual responsible for managing limit
orders on some exchanges. The specialist does not make the
information on outstanding limit orders available to other traders.
◉ Hedger. Answer: An individual who enters into hedging trades.
◉ Speculator. Answer: An individual who is taking a position in the
market. Usually the individual is betting that the price of an asset
will go up or that the price of an asset will go down.
◉ CDO Squared. Answer: An instrument in which the default risks in
a portfolio of CDO tranches are allocated to new securities.
GLOBAL EDITION FINAL PAPER 2026 TESTED
QUESTIONS WITH FULL SOLUTION GRADED
A+
◉ Credit Value Adjustment. Answer: Adjustment to value of
derivatives outstanding with a counterparty to reflect the
counterparty's default risk.
◉ Forward Rate Agreement. Answer: Agreement that a certain
interest rate will apply to a certain principal amount for a certain
time period in the future.
◉ Option Series. Answer: All options of a certain class with the same
strike price and expiration date.
◉ Option Class. Answer: All options of the same type (call or put) on
a particular stock.
◉ Recovery Rate. Answer: Amount recovered in the event of a
default as a percent of the face value.
,◉ Deferred Swap. Answer: An agreement to enter into a swap at
some time in the future (also called a forward swap).
◉ Swap. Answer: An agreement to exchange cash flows in the future
according to a prearranged formula.
◉ Principal Components Analysis. Answer: An analysis aimed at
finding a small number of factors that describe most of the variation
in a large number of correlated variables (similar to a factor
analysis).
◉ Factor analysis. Answer: An analysis aimed at finding a small
number of factors that describe most of the variation in a large
number of correlated variables (similar to a principal components
analysis).
◉ Scenario Analysis. Answer: An analysis of the effects of possible
alternative future movements in market variables on the value of a
portfolio.
◉ Black's Approximation. Answer: An approximate procedure
developed by Fischer Black for valuing a call option on a dividend-
paying stock.
,◉ Cornish-Fisher Expansion. Answer: An approximate relationship
between the fractiles of a probability distribution and its moments.
◉ Index Arbitrage. Answer: An arbitrage involving a position in the
stocks comprising a stock index and a position in a futures contract
on the stock index.
◉ Investment Asset. Answer: An asset held by at least some
individuals for investment purposes.
◉ Consumption Asset. Answer: An asset held for consumption
rather than investment.
◉ Stochastic Process. Answer: An equation describing the
probabilistic behavior of a stochastic variable.
◉ Interest Rate Swap. Answer: An exchange of a fixed rate of interest
on a certain notional principal for a floating rate of interest on the
same notional principal.
◉ Black's Model. Answer: An extension of the Black-Scholes model
for valuing European options on futures contracts. As described in
Chapter 26, it is used extensively in practice to value European
options when the distribution of the asset price at maturity is
assumed to be lognormal.
, ◉ Variation Margin. Answer: An extra margin required to bring the
balance in a margin account up to the initial margin when there is a
margin call.
◉ Uptick. Answer: An increase in price.
◉ Stock Index. Answer: An index monitoring the value of a portfolio
of stocks.
◉ Arbitrageur. Answer: An individual engaging in arbitrage.
◉ Specialist. Answer: An individual responsible for managing limit
orders on some exchanges. The specialist does not make the
information on outstanding limit orders available to other traders.
◉ Hedger. Answer: An individual who enters into hedging trades.
◉ Speculator. Answer: An individual who is taking a position in the
market. Usually the individual is betting that the price of an asset
will go up or that the price of an asset will go down.
◉ CDO Squared. Answer: An instrument in which the default risks in
a portfolio of CDO tranches are allocated to new securities.
