MSM 3G11/MSM4G11 Mathematical Finance Revision: Term 2 PROVISIONAL exam date 2pm Tuesday May 8th Location: To Be Determined

d 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 dierent 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

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.

Denitions Can you answer each of the following: What is an option? What is a Payo 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?

 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?

 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?

 What is Delta hedging? How is this related to arbitrage? What are transaction costs? What is the Black-Scholes Equation including transaction costs?