126. A firm is going to buy 10,000 barrels of West Texas Intermediate Crude Oil. It plans to hedge the purchase using the Brent Crude Oil futures contracts. The correlation between the spot and futures prices is 0.72. The volatility of the spot price is 0.35% per year. The volatility of the Brent Crude Oil futures price is 0.27 per year. What is the hedge ratio for the firm?

a.       0.9333

b.       0.5554

c.       0.8198

d.       1.2099

127. An investor sells a June 2008 call of ABC Limited with a strike price of USD 45 for USD 3 and buys a June 2008 call of ABC Limited with a strike price of USD 40 for USD 5. What is the name of this strategy and the maximum profit and loss the investor could incur?

a.       Bear Spread, Maximum Loss USD 2, Maximum Profit USD 3

b.       Bull Spread, Maximum Loss Unlimited, Maximum Profit USD 3

c.       Bear Spread, Maximum Loss USD 2, Maximum Profit Unlimited

d.       Bull Spread, Maximum Loss USD 2, Maximum Profit USD 3

128. In pricing a derivative using the Monte Carlo method, we need to stimulate a reasonable number of paths for the price of the underlying asset. Suppose we use a simple model for the return of the underlying asset:

        ，and e (t) is distributed ~ N (0,1)

    Where drift and vol are known parameters and ?_t is a step size. The generation of each path requires a number of steps. Which of the following describes the correct procedure?

a.       Generate a random number from a normal distribution N (0,1), use the cumulative normal function to get e (t), which will be fed into the model to get y(t). Repeat the same procedure until you get the full desired path.

b.       Generate a random number from a normal distribution N (0,1), use the inverse normal function to get e (t), which will be fed into the model to get y (t). Repeat the same procedure until you get the full desired path.

c.       Generate a random number from a uniform distribution defined in [0,1], use the cumulative normal function to get e (t), which will be fed into the model to get y(t). Repeat the same procedure until you get the full desired path.

d.       Generate a random number from a uniform distribution defined in [0,1], use the inverse cumulative normal function to get e (t), which will be fed into the model to get y(t). Repeat the same procedure until you get the full desired path.

129. What type of operational risk caused substantial losses to Barings Bank?

a.       Inability to reconcile a new settlement system

b.       Unauthorized trading

c.       Political turmoil

d.       Massive technology failure

130. Which one of the following statements does not apply to the Basel II Advanced Measurement Approach (AMA) for operational risk?

a.       In contrast to the credit risk Internal Ratings Based Approaches, banks using the AMA may estimate the correlation between different types of operational risks if their models satisfy regulatory requirements.

b.       In contrast to credit risk regulatory capital for corporate loans, banks using the AMA may have to set aside capital for both expected and unexpected operational risk losses.

c.       Reporting of operational risk exposure to senior management is a necessary condition for a bank’s ability to use the AMA.

d.       To evaluate exposure to high-severity operational risk events, banks using the AMA may use either scenario analysis of expert opinion or VaR model estimates based on internal data using extreme value theory.