Characteristics of ‘factor models’
1. Describe the characteristics of ‘factor models’ of asset pricing and explain the main features of one model of this type.
2. Critically analyse the implications of stock market ‘anomalies’ for the validity of the efficient markets hypothesis.
3. Explain four types of financial market ‘anomalies’ and discuss the implications of this evidence for the efficient markets hypothesis and behavioural finance.
4. Analyse binomial option valuation by comparing the approaches using (i) implied probabilities and (ii) no arbitrage conditions.
5. Using examples from equity and/or foreign exchange markets, explain the differences between speculation, hedging and arbitrage.
6. Explain the covered interest rate parity condition and demonstrate its relevance to the pricing of currency forwards.
7. For option contracts, explain the meanings of ‘time value’, ‘intrinsic value’ and ‘price determinants’.
8. Analyse the pricing of forward contracts and demonstrate the principles of hedging using forward contracts
9. Explain the main propositions of ‘behavioural finance’.
10. Explain the main features and mechanics of the foreign exchange market.
11. Using examples, explain the relevance of arbitrage (or ‘no arbitrage’) in the following contexts:
12. The efficient markets hypothesis;
13. The pricing of currency forwards;
14. The binomial option pricing model.
15. Explain the payoff profiles for the following four option positions:
16. Buying calls; (ii) writing calls; (iii) buying puts; (iv) writing puts.
a. Use an example to compare the relative merits of using options and forward contracts for hedging foreign exchange risk.
b. Explain the key characteristics of trading in the foreign exchange market, according to the BIS (Bank for International Settlements) surveys.
c. Using detailed examples, explain how forwards, futures and options provide different types of opportunities for managing the risk of positions in underlying assets.
d. Analyse binomial option valuation by comparing the approaches using (i) implied probabilities and (ii) no-arbitrage conditions.
e. Explain the covered interest rate parity condition and demonstrate its relevance to the pricing of currency forwards.