OPTIONS, FUTURES AND OTHER
DERIVATIVES COMPREHENSIVE REVIEW
2026 VERIFIED QUESTIONS AND
SOLUTIONS
◉Implicit Finite Difference Method. Answer: A method for valuing a
derivative by solving the underlying differential equation. The value
of the derivative at time t þ t is related to three values at time t.
◉Cholesky Decomposition. Answer: A method of sampling from a
multivariate normal distribution.
◉Numerical Procedure. Answer: A method of valuing an option
when no formula is available.
◉Adaptive Mesh Model. Answer: A model developed by Figlewski
and Gao that grafts a high-resolution tree on to a low-resolution tree
so that there is more detailed modeling of the asset price in critical
regions.
◉Gaussian Copula Model. Answer: A model for defining a
correlation structure between two or more variables. In some credit
,derivatives models, it is used to define a correlation structure for
times to default.
◉GARCH Model. Answer: A model for forecasting volatility where
the variance rate follows a mean-reverting process.
◉Black-Scholes-Merton Model. Answer: A model for pricing
European options on stocks, developed by Fischer Black, Myron
Scholes, and Robert Merton.
◉Equilibrium Model. Answer: A model for the behavior of interest
rates derived from a model of the economy.
◉No-Arbitrage Interest Rate Model. Answer: A model for the
behavior of interest rates that is exactly consistent with the initial
term structure of interest rates.
◉Market Model. Answer: A model most commonly used by traders.
◉Capital Asset Pricing Model. Answer: A model relating the
expected return on an asset to its beta.
◉Exponentially Weighted Moving Average Model. Answer: A model
where exponential weighting is used to provide forecasts for a
,variable from historical data. It is sometimes applied to variances
and covariances in value at risk calculations.
◉Binomial Model. Answer: A model where the price of an asset is
monitored over successive short periods of time. In each short
period it is assumed that only two price movements are possible.
◉Nonstationary Model. Answer: A model where the volatility
parameters are a function of time.
◉Modified Duration. Answer: A modification to the standard
duration measure so that it more accurately describes the
relationship between proportional changes in a bond price and
actual changes in its yield. The modification takes account of the
compounding frequency with which the yield is quoted.
◉Collateralized Mortgage Obligation. Answer: A mortgage-backed
security where investors are divided into classes and there are rules
for determining how principal repayments are channeled to the
classes.
◉Interest Only. Answer: A mortgage-backed security where the
holder receives only interest cash flows on the underlying mortgage
pool.
, ◉Principal Only. Answer: A mortgage-backed security where the
holder receives only principal cash flows on the underlying
mortgage pool.
◉Parallel Shift. Answer: A movement in the yield curve where each
point on the curve changes by the same amount.
◉Exotic Option. Answer: A nonstandard option.
◉Zero-Coupon Yield Curve. Answer: A plot of the zero-coupon
interest rate against time to maturity.
◉Delta-Neutral Portfolio. Answer: A portfolio with a delta of zero so
that there is no sensitivity to small changes in the price of the
underlying asset.
◉Gamma-Neutral Portfolio. Answer: A portfolio with a gamma of
zero.
◉Vega-Neutral Portfolio. Answer: A portfolio with a vega of zero.
◉Short Position. Answer: A position assumed when traders sell
shares they do not own.
DERIVATIVES COMPREHENSIVE REVIEW
2026 VERIFIED QUESTIONS AND
SOLUTIONS
◉Implicit Finite Difference Method. Answer: A method for valuing a
derivative by solving the underlying differential equation. The value
of the derivative at time t þ t is related to three values at time t.
◉Cholesky Decomposition. Answer: A method of sampling from a
multivariate normal distribution.
◉Numerical Procedure. Answer: A method of valuing an option
when no formula is available.
◉Adaptive Mesh Model. Answer: A model developed by Figlewski
and Gao that grafts a high-resolution tree on to a low-resolution tree
so that there is more detailed modeling of the asset price in critical
regions.
◉Gaussian Copula Model. Answer: A model for defining a
correlation structure between two or more variables. In some credit
,derivatives models, it is used to define a correlation structure for
times to default.
◉GARCH Model. Answer: A model for forecasting volatility where
the variance rate follows a mean-reverting process.
◉Black-Scholes-Merton Model. Answer: A model for pricing
European options on stocks, developed by Fischer Black, Myron
Scholes, and Robert Merton.
◉Equilibrium Model. Answer: A model for the behavior of interest
rates derived from a model of the economy.
◉No-Arbitrage Interest Rate Model. Answer: A model for the
behavior of interest rates that is exactly consistent with the initial
term structure of interest rates.
◉Market Model. Answer: A model most commonly used by traders.
◉Capital Asset Pricing Model. Answer: A model relating the
expected return on an asset to its beta.
◉Exponentially Weighted Moving Average Model. Answer: A model
where exponential weighting is used to provide forecasts for a
,variable from historical data. It is sometimes applied to variances
and covariances in value at risk calculations.
◉Binomial Model. Answer: A model where the price of an asset is
monitored over successive short periods of time. In each short
period it is assumed that only two price movements are possible.
◉Nonstationary Model. Answer: A model where the volatility
parameters are a function of time.
◉Modified Duration. Answer: A modification to the standard
duration measure so that it more accurately describes the
relationship between proportional changes in a bond price and
actual changes in its yield. The modification takes account of the
compounding frequency with which the yield is quoted.
◉Collateralized Mortgage Obligation. Answer: A mortgage-backed
security where investors are divided into classes and there are rules
for determining how principal repayments are channeled to the
classes.
◉Interest Only. Answer: A mortgage-backed security where the
holder receives only interest cash flows on the underlying mortgage
pool.
, ◉Principal Only. Answer: A mortgage-backed security where the
holder receives only principal cash flows on the underlying
mortgage pool.
◉Parallel Shift. Answer: A movement in the yield curve where each
point on the curve changes by the same amount.
◉Exotic Option. Answer: A nonstandard option.
◉Zero-Coupon Yield Curve. Answer: A plot of the zero-coupon
interest rate against time to maturity.
◉Delta-Neutral Portfolio. Answer: A portfolio with a delta of zero so
that there is no sensitivity to small changes in the price of the
underlying asset.
◉Gamma-Neutral Portfolio. Answer: A portfolio with a gamma of
zero.
◉Vega-Neutral Portfolio. Answer: A portfolio with a vega of zero.
◉Short Position. Answer: A position assumed when traders sell
shares they do not own.
