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The payoffs for financial derivatives are linked to
The payoffs for financial derivatives are linked to
Financial Derivatives include
Financial Derivatives include
By hedging Portfolio a bank manager
By hedging Portfolio a bank manager
The markets in which derivatives are traded is known as
The markets in which derivatives are traded is known as
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The contract where buyer and seller agrees to exchange asset on future date without the involvement of an exchange
The contract where buyer and seller agrees to exchange asset on future date without the involvement of an exchange
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The contract which gives the buyer the right but not obligation
The contract which gives the buyer the right but not obligation
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The buyer in the derivative contract is also known as
The buyer in the derivative contract is also known as
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ETD stands for
ETD stands for
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Market players who take benefits from difference in market prices are called
Market players who take benefits from difference in market prices are called
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Short in derivative contract implies
Short in derivative contract implies
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Which of the following is potentially obligated to sell an asset at a predetermined price
Which of the following is potentially obligated to sell an asset at a predetermined price
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Which of the following contract is non-standardized and suffers illiquidity most
Which of the following contract is non-standardized and suffers illiquidity most
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The initial amount paid by option buyer at the time of entering the contract
The initial amount paid by option buyer at the time of entering the contract
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When the maturity matches but the size of the futures does not match, the hedge can be
When the maturity matches but the size of the futures does not match, the hedge can be
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What is the total number of futures/option contracts outstanding at the close of the previous day’s trading?
What is the total number of futures/option contracts outstanding at the close of the previous day’s trading?
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Which of the following is a non-variance based model for computation of VaR?
Which of the following is a non-variance based model for computation of VaR?
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Who takes the short position in an option contract?
Who takes the short position in an option contract?
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Which of the following is not used in future pricing?
Which of the following is not used in future pricing?
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Which type of option contract would lead to zero cash flow if exercised immediately?
Which type of option contract would lead to zero cash flow if exercised immediately?
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Which type of option contract would lead to positive cash flow if exercised immediately?
Which type of option contract would lead to positive cash flow if exercised immediately?
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The absence of arbitrage between the value of European call and put options with same strike price and expiry date on the same underlying asset is shown by
The absence of arbitrage between the value of European call and put options with same strike price and expiry date on the same underlying asset is shown by
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What is a swap that takes into consideration daily variation of market rates within a specific range?
What is a swap that takes into consideration daily variation of market rates within a specific range?
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What is a swap that pays a certain fixed amount if the rate is above or below a certain level?
What is a swap that pays a certain fixed amount if the rate is above or below a certain level?
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Study Notes
Financial Derivatives and Risk Management
Financial Derivatives
- Payoffs are linked to underlying assets or securities, such as interest rates, currencies, or commodities.
- Include futures, options, forwards, and swaps.
Futures
- Traded on exchanges, such as NCDEX, NMCE, and MCX.
- Mark-to-market settlement system used.
- Open interest refers to the total number of outstanding contracts.
Options
- Give the buyer the right, but not the obligation, to buy or sell an underlying asset.
- Types: call, put, American, European, and Bermudan options.
- OPTION STRATEGIES:
- Selling one put option at a low strike price and buying a put option at a high strike price is a put bear spread.
- A calendar spread is formed by using options on the same asset with the same strike price but different expiration dates.
Forwards
- Customized contracts between two parties.
- Not traded on exchanges.
- Settlement occurs on the expiration date.
Swaps
- Agreement to exchange cash flows between two parties.
- Types: currency swaps, interest rate swaps, and commodity swaps.
- SWAP FEATURES:
- Callable swap: seller has the chance to terminate the swap at any time before maturity.
- Putable swap: buyer has the chance to terminate the swap at any time before maturity.
Risk Management
- Hedging: reduces risk by taking a position in a futures or options contract to offset potential losses or gains in an underlying asset.
- Types of risk: market risk, liquidity risk, credit risk, and operational risk.
- Value-at-Risk (VaR): estimates the potential loss of a portfolio over a specific time horizon with a given probability.
Option Pricing Models
- Binomial Option Pricing Model: developed by John Cox, Stephen Ross, and Mark Rubinstein.
- Black-Scholes Model: used to estimate the value of options.
Swap Agreements
- Notional principle: the underlying amount in a swap contract.
- LIBOR: London Interbank Offered Rate, used as a reference rate in swap agreements.
Hedging and Speculation
- Hedgers: reduce risk by taking a position in a futures or options contract to offset potential losses or gains in an underlying asset.
- Speculators: take positions in futures or options contracts in anticipation of profit from price movements.
- Arbitrageurs: take advantage of price differences between two markets to earn a risk-free profit.### Types of Swaps
- An accreting swap is a type of swap where one stream of future interest payments is exchanged for another based on a specified principal amount.
- Interest rate swaps are a type of swap where one party exchanges a series of fixed-rate interest payments for a series of floating-rate interest payments.
Futures vs. Forwards
- Futures differ from forwards because they are marked to market daily.
- Futures are used to hedge portfolios, individual securities, and in both financial and foreign exchange markets.
Standardized Futures Contracts
- Standardized futures contracts exist for stock indexes, gold, and Treasury bonds.
- Common stocks are an exception, where standardized futures contracts do not exist.
Roles in Futures Markets
- A pit trader is a type of trader who executes trades on the floor of an exchange.
- A local is a trader who trades for their own account.
- A floor broker is a trader who executes trades for others.
- A futures commission merchant is similar to a stock broker, as they act as an intermediary between buyers and sellers.
Risk Management
- Using futures contracts to transfer price risk is called hedging.
- Hedging involves reducing or eliminating risk by taking a position in a futures contract that is opposite to a current position.
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Description
Test your knowledge of financial derivatives and risk management with this multiple-choice question bank designed for M.Com IV semester students.
