Which of the following is a financial derivative?
a) Stock
b) Bond
c) Futures contract
d) Treasury bill
What does a derivative contract primarily derive its value from?
a) The bond market
b) An underlying asset
c) The currency exchange rate
d) Interest rates
Which of the following is a characteristic of a forward contract?
a) Standardized and traded on exchanges
b) Not customizable
c) Traded over-the-counter (OTC)
d) Short-term in nature
What type of derivative contract is a call option?
a) A contract that obligates the holder to buy an asset
b) A contract that gives the holder the right to buy an asset
c) A contract that obligates the holder to sell an asset
d) A contract that gives the holder the right to sell an asset
Which of the following is true about futures contracts?
a) They are always customizable to suit the needs of the parties
b) They are settled at the time of the contract’s inception
c) They are standardized and traded on exchanges
d) They do not require any margin payments
Hedging with derivatives primarily aims to:
a) Increase potential profits
b) Speculate on price movements
c) Reduce risk exposure
d) Diversify investments
Which of the following is an example of a financial instrument used for hedging?
a) Futures contract
b) Treasury bond
c) Corporate stock
d) Savings account
What is a common use of interest rate swaps?
a) To exchange currency denominations
b) To hedge against fluctuating interest rates
c) To speculate on future stock prices
d) To purchase underlying assets
Which of the following options strategies can be used to hedge against a decline in the price of an asset?
a) Buying call options
b) Buying put options
c) Writing put options
d) Writing call options
In a long futures position, an investor benefits from:
a) A decline in the price of the underlying asset
b) An increase in the price of the underlying asset
c) No change in the price of the underlying asset
d) A stable interest rate
A derivative contract that obligates one party to buy and another party to sell an asset at a predetermined price at a future date is a:
a) Forward contract
b) Call option
c) Futures contract
d) Swap contract
Which of the following best describes a ‘put option’?
a) A contract that gives the holder the right to buy an asset
b) A contract that gives the holder the right to sell an asset
c) A contract that obligates the holder to sell an asset
d) A contract that obligates the holder to buy an asset
What is the primary difference between a forward contract and a futures contract?
a) Forward contracts are traded on exchanges, while futures contracts are not
b) Futures contracts are customizable, while forward contracts are not
c) Forward contracts are settled at maturity, while futures contracts are settled daily
d) Futures contracts are for shorter durations than forward contracts
Which of the following is true regarding options contracts?
a) They give the holder an obligation to buy or sell the underlying asset
b) They are settled immediately upon entering the contract
c) They provide the holder with the right, but not the obligation, to buy or sell the underlying asset
d) They are always traded over-the-counter (OTC)
Which of the following is a common use of currency derivatives?
a) To speculate on interest rates
b) To hedge against currency exchange rate fluctuations
c) To purchase foreign equities
d) To increase the price of commodities
A swap contract is primarily used to:
a) Exchange one type of asset for another
b) Exchange cash flows based on different financial variables
c) Hedge against foreign currency risk
d) Lock in the price of an underlying asset
Which of the following strategies can be used to hedge risk in a stock portfolio?
a) Buying a call option on the stocks in the portfolio
b) Writing a call option on the stocks in the portfolio
c) Buying a put option on the stocks in the portfolio
d) Buying additional stocks in the portfolio
What is the purpose of a margin requirement in futures contracts?
a) To ensure that the futures contract can be bought and sold without delay
b) To guarantee that the investor has enough funds to cover potential losses
c) To protect the exchange from volatility
d) To ensure that the investor makes a profit
Which of the following best describes a ‘covered call’ strategy?
a) Selling a call option while holding the underlying asset
b) Buying a call option while holding the underlying asset
c) Selling a call option without holding the underlying asset
d) Writing a put option while holding the underlying asset
What is a major risk associated with using financial derivatives for hedging?
a) Unlimited profit potential
b) Increased exposure to market risk
c) Reduced liquidity in markets
d) The need for a large initial investment
A ‘short futures position’ benefits from:
a) An increase in the price of the underlying asset
b) A decline in the price of the underlying asset
c) A stable price of the underlying asset
d) No change in the market conditions
Which of the following is a risk inherent in forward contracts?
a) Liquidity risk
b) Counterparty risk
c) Market volatility
d) Trading fees
Which of the following statements is true regarding a swap agreement?
a) It always involves the exchange of one currency for another
b) It requires one party to make periodic payments to the other party
c) It always involves the exchange of interest rate payments only
d) It is the same as a futures contract
Which type of financial derivative is used by companies to hedge against fluctuations in commodity prices?
a) Currency options
b) Interest rate swaps
c) Commodity futures
d) Stock options
Which of the following financial derivatives is commonly used by investors to manage the risk of rising interest rates?
a) Interest rate swaps
b) Currency forwards
c) Equity futures
d) Commodity options
Which of the following is a characteristic of an option contract?
a) It obligates the holder to buy or sell the underlying asset
b) It is always traded over-the-counter (OTC)
c) It provides the holder with the right to buy or sell the underlying asset at a specified price
d) It is standardized and settled daily
Which of the following is true about a ‘straddle’ options strategy?
a) It involves buying both a call and a put option with different strike prices
b) It involves buying both a call and a put option with the same strike price and expiration date
c) It involves selling both a call and a put option with different expiration dates
d) It involves writing both a call and a put option with the same strike price and expiration date
Which of the following is NOT an example of a financial derivative?
a) Futures contract
b) Options contract
c) Stock index
d) Forward contract
The primary function of a swap contract is to:
a) Allow investors to speculate on the future price of an asset
b) Exchange future cash flows based on different financial instruments
c) Hedge against changes in stock prices
d) Exchange currencies between two parties
