110+ Financial Derivatives and Risk Management Solved MCQs

1.

The payoffs for financial derivatives are linked to

A. securitiesthat will be issued in the future
B. the volatility of interest rates
C. previously issued securities
D. government regulations specifying allowable rates of return.
Answer» C. previously issued securities
2.

Financial Derivativesinclude

A. Stocks
B. Bonds
C. Futures
D. None of these
Answer» C. Futures
3.

By hedging Portfolio a bank manager

A. Reducesinterest rate risk
B. Increases exchange rate risk
C. Increases reinvestment risk
D. Increase the probability of gains
Answer» A. Reducesinterest rate risk
4.

The markets in which derivatives are trade is known as

A. Asset backed market
B. Cash market
C. Mortgage market
D. Derivative market
Answer» D. Derivative market
5.

The contract where buyer and seller agrees to exchange asset on future date without the involvement of stock exchange

A. Options
B. Futures
C. Forwards
D. Swaps
Answer» C. Forwards
6.

The contract which gives the buyer the right but not obligation

A. Options
B. Futures
C. Swaps
D. Forwards
Answer» A. Options
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
Answer» D. Long in the contract
8.

ETD stands for

A. Electronic traded serivatives
B. Equity traded derivatives
C. Exchange traded derivatives
D. Estimated trade delay
Answer» C. Exchange traded derivatives
9.

Market players who take benefits from difference in market prices are called

A. Speculators
B. Arbitrageurs
C. Hedgers
D. Spreaders
Answer» B. Arbitrageurs
10.

Short in derivative contract implies

A. Middle man
B. Buyer
C. Seller
D. Stock exchange
Answer» C. Seller
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
Answer» A. Put writer
12.

Which of the following contract is non standardised and suffers illiquidity most

A. Swaps
B. Forwards
C. Options
D. Futures
Answer» B. Forwards
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
Answer» B. Option premium
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
Answer» B. Intrinsic 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
Answer» B. Call 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
Answer» A. Put 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
Answer» B. American option
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
Answer» A. Bermudan option
19.

The amount to be deposited by buyer and seller of future contarct at the time of entering future contract

A. Future margin
B. Future premium
C. Future payoff
D. None of the above
Answer» A. Future margin
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
Answer» A. European 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
Answer» A. Put bear spread
22.

An option that would lead to negative cash flow if it were exercised immediately is

A. In the money option
B. Out of the money option
C. At the money option
D. With money option
Answer» B. Out of the money option
23.

Asian option and look back options are types of

A. Vanilla option
B. Exotic option
C. Real option
D. Warrants
Answer» B. Exotic option
24.

Which of the following is long dated option traded generally traded over the counter

A. Warrants
B. LEAPS
C. Baskets
D. Real option
Answer» A. Warrants
25.

A contract that confers the right 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
Answer» C. Currency options
26.

An option contract with underlying asset commoditiesis

A. Commodity option
B. Currency option
C. Stock index option
D. None of the above
Answer» A. Commodity option
27.

The risk arising from counterparty’sfailure to meet its fianacial obligation is

A. Market risk
B. Liquidity risk
C. Operation risk
D. Credit risk
Answer» D. Credit risk
28.

The difference between the future price and cash price is

A. Basis
B. Margin
C. Premium
D. Strike price
Answer» A. Basis
29.

The additional amount that has to deposited by the trader with broker to bring the balance of margin account to initial margin

A. Initial margin
B. Maintenance margin
C. Variation margin
D. Additional margin
Answer» C. Variation margin
30.

The system of daily settlement in the future market is

A. Marking to market
B. Market making
C. Market backwardation
D. Market moving
Answer» A. Marking to market
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
Answer» A. Black testing
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
Answer» A. VaR
33.

Which among the following is not a commodity future exchange

A. NCDEX
B. NSDL
C. NMCE
D. MCX
Answer» B. NSDL
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
Answer» B. Principle of convergence
35.

The condition where future prices are greater than cashprice resulting in positive basis is

A. Normal backwardation
B. Contango
C. Expectation hypothesis
D. Cost of carry
Answer» B. Contango
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
Answer» C. Calendar spread
37.

The difference between option premium and intrinsic value

A. Time value
B. Intrinsic value
C. Money value
D. Premium
Answer» A. Time value
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
Answer» A. Binomial Option pricing Model
39.

The type of swap agreement which gives seller the chance to terminate swap at any time before maturity.

A. Coupan swap
B. Callable swap
C. Putable swap
D. Rate capped swap
Answer» C. Putable swap
40.

When Swap is combined with Option it is called

A. Swaption
B. Forwad Swaps
C. Swap options
D. All the above
Answer» A. Swaption
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
Answer» A. Zero
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
Answer» C. Binary option
43.

Which of the following is a way to settle option contracts

A. By exercising
B. By letting option expire
C. By offsetting
D. All the above
Answer» 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
Answer» B. Expiration date
45.

The risk that arises due to adverse movementsin the price of a financial asset or commodity

A. Credit risk
B. Market risk
C. Legal risk
D. Liquidty risk
Answer» B. Market risk
46.

The persons who enter into derivative contract with the objective of covering risk

A. Hedgers
B. Speculators
C. Spreaders
D. Arbitrageurs
Answer» A. Hedgers
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
Answer» C. Spreaders
48.

The approach which assumesthat the expected basis would be equal to zero

A. Normal backwardation approach
B. Contago
C. Expectation hypothesis
D. None of the above
Answer» C. Expectation hypothesis
49.

The type of hedge used by those who are short on the underlying asset

A. Long hedge
B. Short hedge
C. Perfect hedge
D. Imperfect hedge
Answer» A. Long hedge
50.

when the gains or losses in the futures do not exactly offset the loss/gainsin the physical market

A. Long hedge
B. Short hedge
C. Perfect hedge
D. Imperfect hedge
Answer» 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
Answer» D. Perfect hedge
52.

If the maturity of futures contract mismatchesfuture hedging is known as

A. Short hedge
B. Delta hedge
C. Cross hedge
D. Imperfect hedge
Answer» B. Delta 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
Answer» C. Cross hedge
54.

The total number of futures/option contracts outstanding at the close of the previous day’s trading is

A. Open interest
B. Outstanding contract
C. Closed interest
D. None of the above
Answer» A. Open interest
55.

Which of the following is Non varience based models of computation of VaR

A. Historical method
B. Monte carlo simulation
C. Delta noramal
D. All the above
Answer» 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
Answer» A. Option writer
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
Answer» B. Stock index 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
Answer» 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
Answer» A. At the money option
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
Answer» A. In the money option
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
Answer» A. Put-call parity pricing relationship
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
Answer» B. Corridor 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
Answer» B. Digital swap
64.

A swap agreement that allows the purchaser to fix the duration of received flows on aswap.

A. Constant maturity swap
B. Accreting swap
C. Roller-coasterswap
D. Forward starting swap
Answer» A. Constant maturity swap
65.

Which of the following is over the counter traded derivative?

A. Swaps
B. Options
C. Futures
D. All the above
Answer» A. Swaps
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
Answer» A. London inter bank offered rate
67.

The underlying amount in a swap contract

A. Basis
B. Notional principle
C. Vested amount
D. Capital
Answer» B. Notional principle
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.
Answer» B. the obligation to buy or sell the underlying asset.
69.

Options on futures contracts are referred to as

A. stock options.
B. futures options.
C. American options.
D. individual options.
Answer» B. futures 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
Answer» B. the obligation to sell the underlying security.
71.

The main advantage of using options on futures contractsrather than the futures contracts themselvesis 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 preserv
D. d. interest rate risk is not controlled, but the possibility of gains is lost.
Answer» A. interest rate risk is controlled while preserving the possibility of gains.
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
Answer» B. to preserve 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.
C. term to maturity decreases.
D. futures price increases.
Answer» B. volatility of the underlying asset increases.
74.

The main disadvantage of hedging with futures contracts as compared to options on futures contractsis 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 possibility of losses.
Answer» A. remove the possibility of gains.
75.

The amount paid for an option is the

A. strike price.
B. premium.
C. discount.
D. commission.
Answer» B. premium.
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.
Answer» 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
Answer» B. long contract
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 positionsin equal amounts.
D. taking a neutral position.
Answer» B. taking a short 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 positionsin equal amounts.
D. taking a neutral position.
Answer» A. taking a long 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.
Answer» D. all of the above.
81.

Futures markets have grown rapidly because futures

A. are standardized.
B. have lower default risk.
C. are liqu
D. d. all of the above
Answer» D. 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.
Answer» A. rise.
83.

Which of the following is not a financial derivative?

A. Stock
B. Futures
C. Options
D. Forward contract
Answer» A. Stock
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 starting swap
B. Roller coaster swap
C. Amortizing swap
D. Accreting swap
Answer» A. Forward starting swap
85.

A swap where interest rate risk can be shifted byconverting floating rate liability or vice versa

A. Range accrual swaps
B. Index amortizing swap
C. Asian swaps
D. Roller coaster swap
Answer» A. Range accrual swaps
86.

A swap where principal amount decreases over prespecified points of time over the life time of swap

A. Forward starting swap
B. Roller coaster swap
C. Amortizing swap
D. Asian swaps
Answer» A. Forward starting swap
87.

A fixed-for-floating interest rate swap with the floating rate leg tied to an index of daily interbank rates or overnight

A. Power swap
B. Leveraged swap
C. Quanto swap
D. Overnight index swaps
Answer» D. Overnight index swaps
88.

Swaps whose notional accretes when a certain floating rate,often a different rate from the one used to pay,lies within a range.

A. Range accrual swaps
B. Asian swaps
C. Index amortizing swap
D. Bermudan swaps
Answer» A. Range accrual swaps
89.

Standardized futures contracts exist for all of the following underlying assets except:

A. stock indexes.
B. gold.
C. common stocks.
D. Treasury bonds.
Answer» C. common stocks.
90.

Which of the following does the most to reduce default risk for futures contracts?

A. Marking to market.
B. Flexible delivery arrangements.
C. High liquidity.
D. Credit checks for both buyers and sellers.
Answer» A. Marking to market.
91.

Which of the following is most similar to a stock broker?

A. Pit trader.
B. Local.
C. Floor broker.
D. Futures commission merchant.
Answer» D. Futures commission merchant.
92.

Using futures contracts to transfer price risk is called:

A. hedging.
B. diversifying
C. arbitrage.
D. speculating.
Answer» A. hedging.
93.

Which of the following is best described as selling a synthetic asset and simultaneously buying the actual asset?

A. Diversifying.
B. Arbitrage.
C. Speculating.
D. Hedging.
Answer» B. Arbitrage.
94.

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.
Answer» B. A put buyer.
95.

Which of the following is potentially obligated to sell an asset at a predetermined price?

A. A put buyer.
B. A call buyer.
C. A put writer.
D. A call writer.
Answer» D. A call writer.
96.

Which of the following actions will not close a long position in a call option?

A. Selling a call with the same strike price, expiration, and underlying asset.
B. Buying a put with the same strike price, expiration, and underlying asset.
C. Exercising the call.
D. Allowing the call to expire.
Answer» B. Buying a put with the same strike price, expiration, and underlying asset.
97.

Which of the following strategies will be profitable if the price of the underlying asset is expected to decrease?

A. Selling a call.
B. Selling a put.
C. Buying a put.
D. Buying a call.
Answer» A. Selling a call.
98.

Which of the following investment strategies has unlimited profit potential?

A. Writing a call.
B. Bull spread.
C. Protective put.
D. Covered call.
Answer» C. Protective put.
99.

A swap deal wherein floating rate payer pays the floating rate square or cubic or any power of the rate to the counter party

A. Leveraged swap
B. Quanto swap
C. Power swap
D. Overnight index swap
Answer» C. Power swap
100.

A swap agreement that pays and resets at the same time.

A. Constant maturity swap
B. In-arrear swap
C. Roller coaster swap
D. Amortizing swap
Answer» B. In-arrear swap
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