1.Vega is the sensitivity of an option's price to changes in volatility. Increases in an underlying instrument's volatility， will usual increase the value of options since increases in volatility produce a greater probability that an option will find its way into the money. Of the four options listed below, which investment has the potential to produce a negative vega measure?
　　A. Shout option.
　　B. Call option.
　　C. Put option.
　　D. Barrier option.
　　2.The potential future credit exposure profile peaks at maturity for which of the following instruments:
　　I. FX forwards
　　II. Interest rate swaps
　　III. Cross currency swaps with final exchange
　　A. I only
　　B. II only
　　C. I and III
　　D. I, II and III
　　3.A cash-or-nothing call with strike = $30 and payoff (Q) = $30 is equivalent to a short.European call option (same strike) plus:
　　A. Long asset-or-nothing call
　　B. Short asset-or-nothing call
　　C. Long cash-or-nothing call
　　D. Short cash-or-nothing call
　　Answer:
　　1.D
　　Increased volatility on down-and-out and up-and-out barrier options does not increase value because the closer the underlying instrument gets to the barrier price, the greate,r the chance the option will expire. Therefore, Vega may be negative for a barrier option.
　　2.C
　　FX forwards and cross currency swaps with final exchange involves exchanging two currencies at rates fixed at inception. Because of this feature, the potential future credit exposure profile peaks at maturity for both these instruments. In case of interest rate swaps, there is no exchange 0 notional amounts. Therefore, the profile tends to peak well before maturity.
　　3.A
　　Combining a long asset-or-nothing call and a short cash-or-nothing call is equivalent to a long European call option.