Derivatives Instruments Quiz
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Questions and Answers

Which derivative instrument does not require an initial payment?

  • Futures
  • Forward (correct)
  • Options
  • Swap

    • Which type of derivative allows execution at any time before the expiry date?

  • Swap
  • Forward
  • Options (correct)
  • Futures

    • What is a characteristic of Futures contracts compared to Forwards?

  • Futures have no counterparty risk.
  • Futures are always tradeable on a central exchange. (correct)
  • Futures are always OTC.
  • Futures payments are not regulated.

    • Which derivative instrument generally has low counterparty risk?

    <p>Futures (C)</p> Signup and view all the answers

    What term describes the risk associated with parties defaulting on their contractual obligations?

    <p>Counterparty risk (B)</p> Signup and view all the answers

    Which of the following is true regarding the payment structure for Swaps?

    <p>Swaps involve periodic payments as agreed in the contract. (A)</p> Signup and view all the answers

    Which derivative instruments typically have a custom-made price?

    <p>Forwards and Swaps (D)</p> Signup and view all the answers

    Which statement accurately reflects a benefit of using Options compared to other derivatives?

    <p>Allows for potential unlimited gains in favorable conditions. (B)</p> Signup and view all the answers

    What is the primary reason companies issue bonds instead of making bank loans?

    <p>To directly fund their projects (D)</p> Signup and view all the answers

    Which of the following best describes the relationship between derivative instruments and their underlying assets?

    <p>The value of derivative instruments is affected by changes in the underlying asset's value. (B)</p> Signup and view all the answers

    What distinguishes a futures contract from a forward contract?

    <p>Futures contracts are standardized and traded on exchanges, while forward contracts are customized. (D)</p> Signup and view all the answers

    What is a defining feature of options in derivative instruments?

    <p>They provide a right, but not an obligation, to buy or sell at a specific price. (C)</p> Signup and view all the answers

    In a swap agreement, what do the participating parties primarily exchange?

    <p>Financial instruments such as cash flows and interest rates (A)</p> Signup and view all the answers

    Which statement accurately describes the obligation in forward contracts?

    <p>Both parties are obligated to buy and sell the asset at the agreed price. (A)</p> Signup and view all the answers

    How do interest payments on bonds compare to returns from equity-based securities?

    <p>Bond interest payments are fixed, while returns from equity may vary. (B)</p> Signup and view all the answers

    What are the two main types of securities that companies can issue to raise capital?

    <p>Equity-based and debt-based securities (C)</p> Signup and view all the answers

    What kind of currency transaction is mentioned as being executed to ensure the money is received the next day?

    <p>Spot currency transaction (A)</p> Signup and view all the answers

    What is the primary purpose of an outright forward contract in currency exchange?

    <p>To lock in the currency rate for future transactions (A)</p> Signup and view all the answers

    Which currency is specifically mentioned in the context of a transaction between the US and Japan?

    <p>JPY (D)</p> Signup and view all the answers

    What is the benefit of using a forward contract for the parties involved in currency transactions?

    <p>It protects against fluctuations in currency rates. (B)</p> Signup and view all the answers

    What type of loans does the Project Dungganon offer?

    <p>Group-based, collateral-free loans (C)</p> Signup and view all the answers

    What is the main objective of providing training in the Project Dungganon initiative?

    <p>To help women start their own business and become self-dependent (D)</p> Signup and view all the answers

    Which term describes why certain financial instruments like forward contracts are called 'derivatives'?

    <p>They derive their value from the underlying asset or agreement. (B)</p> Signup and view all the answers

    What is the target group of Project Dungganon and its financial support?

    <p>Deprived women from rural communities (A)</p> Signup and view all the answers

    What is the primary purpose of ION Company entering into a futures contract with Mines Company?

    <p>To guarantee a fixed price for gold in the future (B)</p> Signup and view all the answers

    Which statement accurately describes a futures contract?

    <p>An obligation for the buyer to purchase and the seller to sell specified goods (D)</p> Signup and view all the answers

    How are Forex transactions regulated?

    <p>By the Securities and Exchange Commission (SEC) (C)</p> Signup and view all the answers

    What is the main characteristic of a Spot Currency transaction?

    <p>It involves immediate exchange of currency (C)</p> Signup and view all the answers

    What does an Outright Forward transaction involve?

    <p>Locking in an exchange rate for a future date (D)</p> Signup and view all the answers

    What does a Currency Swap allow two foreign parties to do?

    <p>Exchange currencies along with interest payments (D)</p> Signup and view all the answers

    What should a customer consider when buying items online in USD currency?

    <p>The timing of currency conversion rates (A)</p> Signup and view all the answers

    What is the benefit of entering a futures contract for companies like ION Company?

    <p>It mitigates the risk of price volatility (D)</p> Signup and view all the answers

    Which organization provides microfinance institutions to aid the Dungganon project?

    <p>Microfinance Council of the Philippines, Inc. (A)</p> Signup and view all the answers

    What is the primary target group for the financing solutions discussed in the case study?

    <p>Low-income families (C)</p> Signup and view all the answers

    What type of solutions does the NWTF work with finance institutions to offer?

    <p>Financing solutions for housing units (C)</p> Signup and view all the answers

    What aspect of housing does the study primarily focus on?

    <p>Improving access to housing microfinance solutions (A)</p> Signup and view all the answers

    Which of the following best describes the main benefit for individuals as mentioned in the study?

    <p>Support from private and government institutions (A)</p> Signup and view all the answers

    Which type of financial instruments are discussed in relation to building and improving homes?

    <p>Microfinance tools (B)</p> Signup and view all the answers

    What is the aim of the Dungganon project as indicated in the study?

    <p>To provide affordable financing for housing units (D)</p> Signup and view all the answers

    What is the relationship between low-income households and the financial instruments mentioned?

    <p>They provide potential home ownership opportunities for low-income families. (B)</p> Signup and view all the answers

    What defines a financial instrument?

    <p>It functions as an asset for one party and a liability for another. (C)</p> Signup and view all the answers

    Which of the following is an example of a cash instrument?

    <p>Equity securities (C)</p> Signup and view all the answers

    What are derivative instruments primarily based on?

    <p>The value of underlying assets. (C)</p> Signup and view all the answers

    What is the role of foreign exchange instruments in the market?

    <p>They enable the buying and selling of different currencies. (B)</p> Signup and view all the answers

    Which statement accurately describes cash instruments?

    <p>Their value is directly perceived by the market. (D)</p> Signup and view all the answers

    Study Notes

    Financial Instruments

    • Financial instruments are agreements between parties, creating an asset for one party and a liability for the other. They represent capital, and can be created, liquidated, revised, and traded.
    • Different types of financial instruments exist, including cash instruments, derivative instruments, and foreign exchange instruments.

    Cash Instruments

    • Cash instruments are valued directly by the market.
    • Examples include securities (like stocks and bonds) and deposits/loans.

    Securities

    • Securities represent ownership (stocks) or debts (bonds).
    • Stocks allow partial ownership in publicly listed companies. Offered via initial public offerings (IPOs), stockholders have potential for increased value and dividend payments.
    • Stock price may increase over time. Companies pay dividends to stockholders. Stockholders participate in annual meetings and access company reports, allowing for indirect influence on decisions.
    • Bonds are issued by companies and governments needing funds. Bondholders receive their money back with interest. Bond holders are prioritized during liquidation. Bonds are affordable, tradable, and liquid.

    Deposits and Loans

    • Deposits are money placed in a bank account. The bank's liability is to return the deposit. 
    • Loans occur when money is borrowed, with an agreement to pay back the full amount plus interest.

    Types of Bonds

    • Government bonds are issued by the Bureau of Treasury. Examples include Peso and Dollar denominated securities.

    • Corporate bonds are issued by companies or corporations. 

    • Agency bonds are issued by government agencies like Mutual Funds and Unit Investment Trust Funds. 

    • Municipal bonds are issued by national and local government units to finance local infrastructure. 

    • Cash deposits are funds placed into bank accounts. Cash Loan: Money borrowed with an agreement to repay the principal and interest by a certain date.

    Derivative Instruments

    • Derivative instruments derive their value from another asset (like bonds, stocks, or currency).
    • If the underlying asset changes, the derivative instrument's value also changes.
    • Types include forward contracts, futures contracts, options, and swaps.

    Forward Contracts

    • Forward contracts are custom-made agreements that specify an asset's price at a specific future date.

    Futures Contracts

    • Futures contracts force the seller to sell and the buyer to buy an asset at a pre-agreed price on a future date

    Options

    • Options give the buyer the right, but not the obligation, to buy or sell an asset at a pre-determined price within a specified timeframe.

    Swaps

    • Swaps involve parties exchanging financial instruments (like cash flows, interest rates, other derivatives, and securities).

    • Comparison of Derivatives: A table compares forward, futures, options, and swaps in terms of obligation, payment, date of execution, and market regulations.

    Foreign Exchange Instruments

    • Foreign exchange (FX or Forex) instruments allow investors to buy, sell, and exchange currencies.
    • The market is regulated by the Securities and Exchange Commission (SEC). 
    • Types include spot currency, outright forward, and currency swaps. 

    Spot Currency

    • Spot currency transactions involve exchanging currency on the same day, or within 1-2 business days. Value is determined by the current exchange rate.

    Outright Forward

    • Outright forward contracts lock in a currency rate and delivery date for a future transaction.

    Currency Swap

    • Currency swaps occur where two foreign parties exchange currencies with equal value based on the exchange rate.

    Additional Information

    • The presentation contained case studies illustrating how financial instruments are used.
    • There are questions regarding the differences between equity-based and debt-based securities, as well as queries regarding the four key derivatives and why they are called derivatives.
    • A learning competency related to comparing and contrasting financial instruments is also mentioned, along with learning objectives.

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    Related Documents

    Financial Instruments PDF

    Description

    Test your knowledge on different types of derivative instruments including options, futures, swaps, and forwards. This quiz explores key characteristics, payment structures, and risks associated with these financial tools. Perfect for students of finance and professional investors alike.

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