Question: 1. Which bond has the greatest associated interest rate risk? A five year zero coupon bond? Or a five year bond that pays coupons?
2. Which is more volatile, a 20-year zero coupon bond or a 20-year 4.5% coupon bond?
3. A stock is selling at $90. A 3-month call with a strike price of $100 is selling for $3.105 with a delta of 0.329. How many call contracts are required to perform a hedge on 1,000 shares of this stock? Would they be bought or sold? What happens if the price of the stock falls to $50?
4. You have two options with the same underlying strike price. One has an exercise date in three months, one has an exercise date in six months. Which comes with the greatest risk?
5. What's the maximum potential loss you could incur by selling a put on a stock?
6. What are the risks inherent in an interest rate swap?