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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?
3
• 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?
4
• 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?
6