Lepenin Revision Notes

MSM 3G11/MSM4G11

Mathematical Finance

Revision: Term 2

• PROVISIONAL exam date

2pm Tuesday May 8th

Location: To Be Determined

• Exam format

Answer 4 out of 6 questions in 3 hours

Each question has equal weight

3 questions from term 1 - 3 questions from term 2

• MSc Mathematical Finance only

You take MSM4G11a as a 10 Credit Module and MSM4G11b as a

10 Credit Module

You must answer 2 out of 3 questions from Section A

You must answer 2 out of 3 questions from Section B

• 3G11 vs 4G11

All students will be asked the same questions.

There is a slightly different marking scheme for MSM3G11 and

MSM4G11. The marking scheme for MSM4G11 will place extra weight

on the more challenging portion of questions.

• The best way to prepare for this exam is to look at previous exam

papers

1

HINTS

(MSM3G11b/MSM4G11b only)

• There will be no surprise questions

Approximately 60% of the questions are closely related to previous

exam questions. The remaining 40% is closely related to examples from

lecture notes.

2

Definitions

Can you answer each of the following:

• What is an option?

• What is a Payoff function?

• What is a European Option?

• What is an American Option?

• What is a vanilla call?

• What is a vanilla put?

• What is a log normal random walk?

• What is arbitrage?

• What is the Black-Scholes equation?

• What is meant by “a risk-neutral world”?

• What is the binomial method?

• Can you implement the binomial method (p = 1/2 and ud = 1)?

• What is a dividend?

• What is an exotic option?

• What is a binary option?

• What is a Cash-or-nothing call?

• What is a Cash-or-nothing put?

• What is a path dependent option?

• What is the Black-Scholes equation for a path dependent option?

• What is a compound option?

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• What are the four main types of compound options?

• How can compound options be valued?

• What is put-call parity? How many types of put-call parity are there?

• What is a chooser option?

• What is a barrier option?

• What are the four main types of barrier options?

• What is in-out parity?

• Are barrier options more/less expensive then their underlying options?

Why?

• What is a rebate?

• What is an Asian option?

• Why would you buy an Asian option?

• What is continuous sampling?

• What is discrete sampling?

• Do continuous/discretely sampled options have the same value?

• What is a continuous arithmetic average?

• What is a continuous geometric average?

• What is a discrete arithmetic average?

• What is a discrete geometric average?

• What is an Average Strike Call?

• What is an Average Strike Put?

• What is an Average Rate Call?

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• What is an Average Rate Put?

• What is the Black-Scholes equation for Asian options?

• What is a similarity reduction? Why is it important?

• What is a lookback option?

• Why would you buy a lookback option?

• What is a lookback Strike Call?

• What is a lookback Strike Put?

• What is a lookback Rate Call?

• What is a lookback Rate Put?

• What is a perpetual option?

• What is a Russian Option? Why would you buy a Russian option?

• What is a stop-loss option? Why would you buy a stop-loss option?

• What are transaction costs?

• What is a bond?

• Who issues bonds, and why?

• What is a maturity date?

• What is a coupon?

• What is a zero-coupon bond?

• What is a spot interest rate (spot rate)?

• Are interest rates deterministic or stochastic?

• What is the yield curve?

• What is a convertible bond?

5

• What is Delta hedging? How is this related to arbitrage?

• What are transaction costs?

• What is the Black-Scholes Equation including transaction costs?

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