FINC306 COMPREHENSIVE EXAM QUESTIONS AND
SOLUTIONS 2025/2026 ALL GRADED A+
✔✔What is the maximum loss and maximum gain in a long put position? - ✔✔-
FV(premium); strike price - FV(premium)
✔✔What is the maximum loss and maximum gain in a short put position? -
✔✔FV(premium - strike price); FV premium
✔✔European Option - ✔✔Can be exercised only at expiration date
✔✔American Option - ✔✔Can be exercised at any time before expiration
✔✔Bermudan Option - ✔✔Can be exercised during specified periods
✔✔Compound option - ✔✔An option on an option
✔✔Binary/digital option - ✔✔An all or nothing option
✔✔Barrier option - ✔✔Where the underlying security's price must pass a certain level
before it can be exercised.
✔✔Up-and-out option - ✔✔Move up for the option to be knocked out (cannot be
exercised). The writer gets more benefits.
✔✔Down-and-out option - ✔✔Move down for the option to be knocked out (cannot be
exercised).
✔✔Up-and-in option - ✔✔Move up for the option to become activated.
✔✔Down-and-in option - ✔✔Move down for the option to become activated.
✔✔Asian option - ✔✔An option whose payoff is determined by the average underlying
price over a certain period of time.
✔✔Lookback option - ✔✔An option whose payoff is based on the underlying asset's
optimal value.
✔✔Floors are insurance against a ______ position - ✔✔Long position
✔✔A floor combines what two positions? - ✔✔A long position in the underlying and a
long put
✔✔Caps are insurance against a _______ position - ✔✔Short position
, ✔✔A floor combines what two positions? - ✔✔A short position in the underlying and a
long call
✔✔Writing an option where there is a corresponding long position in the underlying
asset is called - ✔✔Covered writing
✔✔When the writer of an option does not have a position in the asset, it is called
______ - ✔✔Naked writing
✔✔A covered call combines what two positions? - ✔✔A long position in the underlying
and a short call
✔✔When would you write a covered call? - ✔✔When you think the price will appreciate,
but not by huge amounts, so you write a call option to pocket a premium and receive a
small capital gain from the long position.
✔✔A payoff with limited profit for price increases and potentially large losses for price
decreases sounds like a - ✔✔Written put
✔✔A position where you have a constant payoff below the strike and increasing losses
above the strike sounds like a - ✔✔Written call
✔✔A covered put combines what two positions? - ✔✔A short position in the underlying
and writing a put option
✔✔When would you write a covered put? - ✔✔You would enter a covered put if you
think the price will decrease, but not by that much, so that you can pocket the premium
as well as get a small capital gain through your short position.
✔✔How do you create a synthetic long forward? - ✔✔Long a call and short a put
✔✔How do you create a synthetic short forward? - ✔✔Short a call and long a put
✔✔What is the difference between a synthetic and actual forward? - ✔✔The forward
contract has a zero premium, whereas we pay the net option premium with the synthetic
forward
✔✔Static replication - ✔✔The units of securities and replicating derivatives will not be
changed at any time before maturity date
✔✔Dynamic replication - ✔✔The units will have to be changed dynamically
SOLUTIONS 2025/2026 ALL GRADED A+
✔✔What is the maximum loss and maximum gain in a long put position? - ✔✔-
FV(premium); strike price - FV(premium)
✔✔What is the maximum loss and maximum gain in a short put position? -
✔✔FV(premium - strike price); FV premium
✔✔European Option - ✔✔Can be exercised only at expiration date
✔✔American Option - ✔✔Can be exercised at any time before expiration
✔✔Bermudan Option - ✔✔Can be exercised during specified periods
✔✔Compound option - ✔✔An option on an option
✔✔Binary/digital option - ✔✔An all or nothing option
✔✔Barrier option - ✔✔Where the underlying security's price must pass a certain level
before it can be exercised.
✔✔Up-and-out option - ✔✔Move up for the option to be knocked out (cannot be
exercised). The writer gets more benefits.
✔✔Down-and-out option - ✔✔Move down for the option to be knocked out (cannot be
exercised).
✔✔Up-and-in option - ✔✔Move up for the option to become activated.
✔✔Down-and-in option - ✔✔Move down for the option to become activated.
✔✔Asian option - ✔✔An option whose payoff is determined by the average underlying
price over a certain period of time.
✔✔Lookback option - ✔✔An option whose payoff is based on the underlying asset's
optimal value.
✔✔Floors are insurance against a ______ position - ✔✔Long position
✔✔A floor combines what two positions? - ✔✔A long position in the underlying and a
long put
✔✔Caps are insurance against a _______ position - ✔✔Short position
, ✔✔A floor combines what two positions? - ✔✔A short position in the underlying and a
long call
✔✔Writing an option where there is a corresponding long position in the underlying
asset is called - ✔✔Covered writing
✔✔When the writer of an option does not have a position in the asset, it is called
______ - ✔✔Naked writing
✔✔A covered call combines what two positions? - ✔✔A long position in the underlying
and a short call
✔✔When would you write a covered call? - ✔✔When you think the price will appreciate,
but not by huge amounts, so you write a call option to pocket a premium and receive a
small capital gain from the long position.
✔✔A payoff with limited profit for price increases and potentially large losses for price
decreases sounds like a - ✔✔Written put
✔✔A position where you have a constant payoff below the strike and increasing losses
above the strike sounds like a - ✔✔Written call
✔✔A covered put combines what two positions? - ✔✔A short position in the underlying
and writing a put option
✔✔When would you write a covered put? - ✔✔You would enter a covered put if you
think the price will decrease, but not by that much, so that you can pocket the premium
as well as get a small capital gain through your short position.
✔✔How do you create a synthetic long forward? - ✔✔Long a call and short a put
✔✔How do you create a synthetic short forward? - ✔✔Short a call and long a put
✔✔What is the difference between a synthetic and actual forward? - ✔✔The forward
contract has a zero premium, whereas we pay the net option premium with the synthetic
forward
✔✔Static replication - ✔✔The units of securities and replicating derivatives will not be
changed at any time before maturity date
✔✔Dynamic replication - ✔✔The units will have to be changed dynamically
