Financial Derivatives and Risk Management PDF

School of Distance Education UNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION FINANCIAL DERIVATIVES AND RISK MANAGEMENT M.Com. IV SEMESTER...

School of Distance Education UNIVERSITY OF CALICUT SCHOOL OF DISTANCE EDUCATION FINANCIAL DERIVATIVES AND RISK MANAGEMENT M.Com. IV SEMESTER Multiple Choice Question Bank 1. The payoffs for financial derivatives are linked to a. securities that will be issued in the future b. the volatility of interest rates c. previously issued securities d. government regulations specifying allowable rates of return. 2.Financial Derivatives include a. Stocks b. Bonds c. Futures d. None of these 3.By hedging Portfolio a bank manager a. Reduces interest rate risk b. Increases exchange rate risk c. Increases reinvestment risk d. Increase the probability of gains 4.The markets in which derivatives are traded is known as a. Asset backed market b. Cash market c. Mortgage market d. Derivative market 5.The contract where buyer and seller agrees to exchange asset on future date without the involvement of an exchange a. Options b. Futures c. Forwards d. Swaps 6.The contract which gives the buyer the right but not obligation a. Options b. Futures c. Swaps d. Forwards 7.The buyer in the derivative contract is also known as a. Deep in the contract b. Middle in the contract c. Short in the contract d. Long in the contract 8.ETD stands for a. Electronic traded derivatives b. Equity traded derivatives c. Exchange traded derivatives d. Estimated trade delay Financial Derivatives and Risk Management Page 1  School of Distance Education 9.Market players who take benefits from difference in market prices are called a. Speculators b. Arbitrageurs c. Hedgers d. Spreaders 10.Short in derivative contract implies a. Middle man b. Buyer c. Seller d. Stock exchange 11. Which of the following is potentially obligated to sell an asset at a predetermined price a. Put writer b. A call writer c. A put buyer d. A call buyer 12. Which of the following contract is non standardised and suffers illiquidity most a. Swaps b. Forwards c. Options d. Futures 13.The initial amount paid by option buyer at the time of entering the contract a. Option margin b. Option premium c. Option money d. Option title 14.The difference between strike price and current market price of underlying security in option contract is a. Time value b. Intrinsic value c. Exchange value d. Trade value 15.The option contract which gives the buyer the right to buy the underlying asset is a. Put option b. Call option c. European option d. Bermudan option 16.The option contract which gives the seller the obligation to buy is a. Put option b. Call option c. American option d. European option 17. The option contract that can be exercised at any time before the maturity date is known as a. European option b. American option c. Bermudan option d. None of the above 18.The option contract which can be exercised on a few dates before the maturity date a. Bermudan option b. American option c. European option d. All the above 19.The amount to be deposited by buyer and seller of future contract at the time of entering future contract a. Future margin b. Future premium c. Future payoff d. None of the above 20.The option contract that can be exercised only at the date of maturity is called a. European option b. American option c. Bermudan option d. Call option 21.Option strategy with combination of selling one put option at low strike price and buying put option at a high strike price a. Put bear spread b. Call bear spread c. Long call butterfly d. Short call butterfly Financial Derivatives and Risk Management Page 2  School of Distance Education 22.An option that would lead to negative cash flow if it were exercised immediately is a. the money option b. Out of the money option c. At the money option d. With money option 23.Asian option and look back options are types of a. Vanilla option b. Exotic option c. Real option d. Warrants 24.______are the long dated option traded generally traded over the counter a. Warrants b. LEAPS c. Baskets d. Real option 25.A contract that confers the obligation to buy or sell foreign currency at a specified price at some future date a. Currency forwards b. Currency futures c. Currency options d. Currency Swaps 26.An option contract with commodities as underliers a. Commodity option b. Currency option c. Stock index option d. None of the above 27.The risk arising from counterparty’s failure to meet its financial obligation is a. Market risk b. Liquidity risk c. Operation risk d. Credit risk 28.The difference between the spot price and strike price of the future contract is a. Basis b. Margin c. Premium d. Strike price 29._______ refers to a margin payment based on the price movements of futures contracts held by the clearinghouse members a. Initial margin b. Maintenance margin c. Variation margin d. Additional margin 30.The system of daily settlement in the future market is known as _____ settlement a. Mark to market b. Market making c. Market backwardation d. Market moving 31.The test used to check the validity of VaR estimate a. Black testing b. Back testing c. Back end test d. Back to back test 32. Which measure is used to indicate the maximum loss that an investor could incur on an exposure at a point in time, determined at a certain confidence level. a. VaR b. VaM c. VaG d. VaK Financial Derivatives and Risk Management Page 3  School of Distance Education 33.Which among the following is not a commodity future exchange a. NCDEX b. NSDL c. NMCE d. MCX 34.The tendency of spot price and future price to come together is a. Principle of divergence b. Principle of convergence c. Principle of backwardation d. Principle of contango 35.The condition where future prices are greater than cash price resulting in positive basis is a. Normal backwardation b. Contango c. Expectation hypothesis d. Cost of carry 36.------------ are formed by using the options on the same asset with same strike price but with different expiration dates a. Box spread b. Ratio spread c. Calendar spread d. Call put spread 37.The difference between option premium and intrinsic value a. Time value b. Intrinsic value c. Money value d. Premium 38.Option pricing model developed John Cox, Stephen Ross and Mark Rubinstein is a. Binomial Option pricing Model b. Black schools model c. Cost of carry model d. Backwardation model 39.The type of swap agreement which gives seller the chance to terminate swap at any time before maturity. a. Coupon swap b. Callable swap c. Putable swap d. Rate capped swap 40.When Swap is combined with Option it is called a. Swaption b. Forwad Swaps c. Swap options d. All the above 41.What is the time value of option at expiration a. Zero b. Same as strike price c. Same as exercise price d. Same as market price 42. A option that provides a fixed payoff depending on the fulfilment of some condition a. Asian option b. Barrier option c. Binary option d. Lookback option 43.Which of the following is a way to settle option contracts a. By exercising b. By letting option expire Financial Derivatives and Risk Management Page 4  School of Distance Education c. By offsetting d. All the above 44.The date on which option expires is known as a. Exercise date b. Expiration date c. Contract date d. Maturity date 45.The risk that arises due to adverse movements in the price of a financial asset or commodity a. Credit risk b. Market risk c. Legal risk d. Liquidity risk 46.The persons who enter into derivative contract with the objective of covering risk a. Hedgers b. Speculators c. Spreaders d. Arbitrageurs 47. The persons who enter into derivative contract in anticipation of lower expected return at the reduced risk a. Hedgers b. Speculators c. Spreaders d. Arbitrageurs 48.The approach which assumes that the expected basis would be equal to zero a. Normal backwardation approach b. Contago c. Expectation hypothesis d. None of the above 49. A trading strategy that takes a short position in an asset where the investor or trader is already long. a. Long hedge b. Short hedge c. Perfect hedge d. Imperfect hedge 50.When the gains or losses in the futures do not exactly offset the loss/gains in the physical market a. Long hedge b. Short hedge c. Perfect hedge d. Imperfect hedge 51.The hedging strategy which results in exact offsetting of gains and losses in the futures market and physical market is known as a. Short hedge b. Long hedge c. Imperfect hedge d. Perfect hedge 52. If the maturity of futures contract mismatches future hedging is known as a. Short hedge b. Delta hedge c. Cross hedge d. Imperfect hedge 53.When the maturity matches but the size of the futures does not match, the hedge can be a. Long hedge b. Short hedge c. Cross hedge d. Delta cross hedge 54.The total number of futures/option contracts outstanding at the close of the previous day’s trading is Financial Derivatives and Risk Management Page 5  School of Distance Education a. Open interest b. Outstanding contract c. Closed interest d. None of the above 55.Which of the following is Non variance based models of computation of VaR a. Historical method b. Monte carlo simulation c. Delta normal d. All the above 56.The person who takes short position in option contract a. Option writer b. Option purchaser c. Option investor d. None of the above 57.The option contract whose underlying asset consist of stock market indices a. Stock option b. Stock index option c. Currency option d. Equity option 58.Which of the following is not used in Future pricing a. Cost of carry model b. Expectation model c. CAPM d. Binomial model 59.The option contract that would lead to zero cash flow if it were exercised immediately a. At the money option b. In the money option c. Out of the money option d. None of the above 60.The option contract that would lead to positive cash flow if it were exercised immediately a. In the money option b. Out of the money option c. At the money option d. None of the above 61.There is no arbitrage between the value of a European call and put options with same strike price and expiry date on the same underlying asset. This is shown by a. Put-call parity pricing relationship b. Principle of convergence c. Principle of divergence d. All the above 62.A swap that takes into consideration daily variation of market rates within specific range. a. Barrier swap b. Corridor swap c. Digital swap d. Asian swap 63.A swap that pays certain fixed amount if the rate is above or below a certain level. a. Barrier swap b. Digital swap c. Chooser swap d. Corridor swap 64.A swap agreement that allows the purchaser to fix the duration of received flows on a swap. a. Constant maturity swap b. Accreting swap Financial Derivatives and Risk Management Page 6  School of Distance Education c. Roller-coaster swap d. Forward starting swap 65.Which of the following is over the counter traded derivative? a. Swaps b. Options c. Futures d. All the above 66.LIBOR stands for a. London inter bank offered rate b. Local industrial bank offered rate c. Local interbank offered rate d. London industrial bank offered rate 67.The underlying amount in a swap contract a. Basis b. Notional principle c. Vested amount d. Capital 68.The seller of an option has the a. right to buy or sell the underlying asset. b. the obligation to buy or sell the underlying asset. c. ability to reduce transaction risk. d. right to exchange one payment stream for another. 69.Options on futures contracts are referred to as a. stock options. b. futures options. c. American options. d. individual options. 70.A call option gives the seller a. the right to sell the underlying security. b. the obligation to sell the underlying security. c. the right to buy the underlying security. d. the obligation to buy the underlying security 71.The main advantage of using options on futures contracts rather than the futures contracts themselves is that a. interest rate risk is controlled while preserving the possibility of gains. b. interest rate risk is controlled, while removing the possibility of losses. c. interest rate risk is not controlled, but the possibility of gains is preserved. d. interest rate risk is not controlled, but the possibility of gains is lost. 72.The main reason to buy an option on a futures contract rather than the futures contract is a. to reduce transaction cost b. to preserve the possibility for gains c. to limit losses d. remove the possibility for gains 73.All other things held constant, premiums on options will increase when the a. exercise price increases. b. volatility of the underlying asset increases. Financial Derivatives and Risk Management Page 7  School of Distance Education c. term to maturity decreases. d. futures price increases. 74.The main disadvantage of hedging with futures contracts as compared to options on futures contracts is that futures a. remove the possibility of gains. b. increase the transactions cost. c. are not as an effective a hedge. d. do not remove the possibilityof losses. 75.The amount paid for an option is the a. strike price. b. premium. c. discount. d. commission. 76.Forward contracts are risky because they a. are subject to lack of liquidity b. are subject to default risk. c. hedge a portfolio. d. both (a) and (b) are true. 77.A contract that requires the investor to sell securities on a future date is called a a. short contract b. long contract c. hedge d. micro hedge 78.Hedging risk for a long position is accomplished by a. taking another long position. b. taking a short position. c. taking additional long and short positions in equal amounts. d. taking a neutral position. 79. Hedging risk for a short position is accomplished by a. taking a long position. b. taking another short position. c. taking additional long and short positions in equal amounts. d. taking a neutral position. 80.A disadvantage of a forward contract is that a. it may be difficult to locate a counterparty. b. the forward market suffers from lack of liquidity. c. these contracts have default risk. d. all of the above. 81. Futures markets have grown rapidly because futures a. are standardized. b. have lower default risk. c. are liquid. d. all of the above 82.If you sold a short contract on financial futures you hope interest rates a. rise. b. fall. c. are stable. d. fluctuate. 83.Which of the following is not a financial derivative? Financial Derivatives and Risk Management Page 8  School of Distance Education (a) Stock (b) Futures (c) Options (d) Forward contract 84.A swap agreement created through the synthesis of two swaps differing in duration for the purpose of fulfilling the specific time frame needed of an investor a. Forward swap b. Roller coaster swap c. Amortizing swap d. Accreting swap 85.A swap where are one stream of future interest payments is exchanged for another based on a specified principal amount a. Interest rate swaps b. Index amortizing swap c. Asian swaps d. Roller coaster swap 86. Futures differ from forwards because they are: a. used to hedge portfolios. b. used to hedge individual securities. c. used in both financial and foreign exchange markets. d. marked to market daily. 87. Standardized futures contracts exist for all of the following underlying assets except: a. stock indexes. b. gold. c. common stocks. d. Treasury bonds. 88. Which of the following is most similar to a stock broker? a. Pit trader. b. Local. c. Floor broker. d. Futures commission merchant. 89. Using futures contracts to transfer price risk is called: a. hedging. b. diversifying c. arbitrage. d. speculating. 90.Which of the following has the right to sell an asset at a predetermined price? a. A put writer. b. A put buyer. c. A call buyer. d. A call writer. Financial Derivatives and Risk Management Page 9  School of Distance Education ANSWER KEY 1 C 21 A 41 A 61 A 81 D 2 C 22 B 42 C 62 B 82 A 3 A 23 B 43 D 63 B 83 A 4 D 24 A 44 B 64 A 84 A 5 C 25 A 45 B 65 A 85 A 6 A 26 A 46 A 66 A 86 D 7 D 27 D 47 C 67 B 87 C 8 C 28 A 48 C 68 B 88 D 9 B 29 C 49 B 69 B 89 A 10 C 30 A 50 D 70 B 90 B 11 A 31 B 51 D 71 A 12 B 32 A 52 B 72 B 13 B 33 B 53 C 73 B 14 B 34 B 54 A 74 A 15 B 35 B 55 D 75 B 16 A 36 C 56 A 76 D 17 B 37 A 57 B 77 A 18 A 38 A 58 D 78 B 19 A 39 C 59 A 79 A 20 A 40 A 60 A 80 D Financial Derivatives and Risk Management 10  School of Distance Education Financial Derivatives and Risk Management 11