Which one of the following four parameters is NOT a required input in the Black-Scholes model to price a foreign exchange option?

A. Underlying exchange rates

B. Underlying interest rates

C. Discrete future stock prices

D. Option exercise price

Which one of the four following statements about back testing the VaR models is correct? Back testing requires

A. Plotting VaR forecasts against the proportion of daily losses exceeding the average loss.

B. Comparing the predictive ability of VaR on a daily basis to the realized daily profits and losses.

C. Plotting the daily profit and losses along with the ranges predicted by VaR models

D. Determining the proportion of daily profits exceeding those predicted by VaR.

Which of the following risk measures are based on the underlying assumption that interest rates across all maturities change by exactly the same amount?

A. Present value of a basis point.

II. Yield volatility.

III. Macaulay's duration.

IV. Modified duration.

B. I and II

C. I, II, and III

D. I, III, and IV

E. I, II, III, and IV

Banks duration match their assets and liabilities to manage their interest risk in their banking book. A bank has $100 million in interest rate sensitive assets and $100 million in interest rate sensitive liabilities. Currently the bank's assets have a duration of 5 and its liabilities have a duration of 2. The asset-liability management committee of the bank is in the process of duration-matching. Which of the following actions would best match the durations?

A. Increase the duration of liabilities by 2 and increase the duration of assets by 1.

B. Increase the duration of liabilities by 2 and decrease the duration of assets by 1.

C. Decrease the duration of liabilities by 1 and increase the duration of assets by 1.

D. Decrease the duration of liabilities by 1 and decrease the duration of assets by 1.

A trader for EtaBank wants to take a leveraged position in Collateralized Debt Obligations. These CDOs can be used in a repurchase transaction at a 20% haircut. Starting with $100 worth of CDOs, which one of the following four positions would completely utilize the available leverage?

A. The trader can buy $100 in CDO's, and repo the CDO's to get back $100, less interest.

B. The trader can buy $100 in CDO's, and repo the CDO's to get back $80, less interest.

C. The trader can buy $100 in CDO's, and repo the CDO's to get back $60, plus interest.

D. The trader can buy $100 in CDO's, and repo the CDO's to get back $20, plus interest.