1-- If there are more traders with _______ offers than ________ offers for a particular contract,

the futures price will __________ until this imbalance is removed.

a-- Sell, buy, rise

b-- Buy, cell, fall

c-- Buy, sell, rise

d-- None of the above

2-- _________ risk refers to fluctuations in the value of the instrument as a result of market
conditions.

a-- Market

b-- Liquidity

c-- Credit

d-- Basic

3-- To liquidate a futures position by entering an equivalent, but opposite transaction which
eliminates the delivery obligation is called as:

a-- Open interest

b-- Offsetting

c-- Delivery

d-- Maintenance margin

4-- The major types of risk in derivatives trading are.

a-- Credit

b-- Liquidity

c-- Settlement

d-- All of these

5-- Future contracts are preferred to forward contract because of

a-- High Liquidity

b-- High Counterparty risk

c-- Low liquidity

d-- All of the above

6-- To ensure a stock portfolio against price Decreases, owners of stock portfolios should:

a-- Buy a put on stock index

b-- Buy a call on stock index

c-- Sell a put on stock index

d-- Sell a call on stock index

7-- A call option has an exercise price of $48 and a premium of $2 per share. What is the break-
even price of the underlying stock on the expiration date?

a-- 50

b-- 48

c-- 46

d-- None of these

8-- The type of contract in which the contract holder has the right to sell an asset at specific
period for predetermine price is classified as

a-- Option

b-- Written contract

c-- Determined contract

d-- Featured contracts

9-- By selling a short futures contract of $10,00,000 at a price of 96, you are agreeing to deliver

a-- $100,000 face value securities for $104,167

b-- $96,000 face value securities for $100,000

c-- $100,000 face value securities for $96,000

d-- 100,000 face value securities for $100,000

10-- The variability of stock price, option term to maturity and the free rate are dependents of

a-- Price of an option

b-- Expiry of an option

c-- Exercise of an option

d-- Estimation of an option

11-- When an investor exercises a call option on a future contract, she or he:

a-- Receives the asset underlying the futures contract

b-- Pays an amount of money equal to the current futures price

c-- Receive a long position in the futures contract

d-- Receives an amount of money equal to the current futures price

12-- The basic aim of the hedger is to

a-- Maximize profits.

b-- Eliminate risk.

c-- Minimize risk.

d-- None of these

13-- You purchase a call option on British pounds for a premium of $.04 per unit with an
exercise price of $1.65. The option will not be exercised until the expiration date, if at all. If the
spot rate on the expiration date is $1.67, your net profit or net loss will be

a-- Profit of $.04.

b--Profit of $.02.

c-- Loss of -$.02.

d-- Loss of -$.04.

14-- In binomial approach of option pricing model, the fourth step is to create

a-- Equalize the domain of payoff

b-- Equalize the ending price

c-- Riskless investment

d-- High risky investment

15-- Margin level are determined by

a-- investor credibility

b-- Time period to maturity

c-- Negotiation power

d-- Variation in prices of underlying asset

16-- The higher the maturity, the higher will be the premium of both call and put option
because

a-- The option holder has more time to exercise the option.

b-- The option holder has less time to exercise the option.

c-- The extra time decreases the probability of profit for option holder and loss for option
writer.
d-- None of these

17-- Call swaptions are attractive when interest rates are expected to _______.

a-- Fall

b-- Rise

c-- Stay the same

d-- None of these

18--Person a has a call option of 10 shares of ibm. The time to maturity for his contract is 10
months. Person b also has call option for the same number of ibm shares with the maturity of 6
months.

a-- Person a will pay more premium than person b.

b-- Person b will pay more premium than person a.

c-- Both will pay the same premiums.

d-- None of these.

19--The options that gives investors the right to sell a stock at predefined price is classified as

a-- Put option

b-- Call option

c-- Money back options

d-- Out of money options

20-- The excess of actual price of option over the exercise value of option is classified as

a-- Time value option

b-- Actual options

c-- Estimated options

d-- Optional pricing

21-- ______take offsetting positions in two or more instruments to lock in a profit.

a-- hedgers

b-- Arbitrageurs

c-- Speculators

d-- None of these

22-- A stock is currently selling for $50. One month from today the stock price could go up by
10% or fall by 50%. If the monthly interest rate is 1% (periodic rate) calculate the price of a
European call option on the stock with an exercise price of $48 and a maturity of one months.

a-- 2.77

b-- 2

c-- 1.98

d-- None of the above

23-- The black-Scholes opm is dependent on which five parameters?

a-- Stock price, exercise price, risk free rate, beta, and time to maturity

b-- Stock price, risk free rate, beta, time to maturity, and variance

c-- Stock price, risk free rate, probability, variance and exercise price

d-- Stock price, exercise price, risk free rate, variance and time to maturity

24-- The _______ rate indicates the rate at which a currency can be exchanged in the future.

a-- Spot exchange

b-- Forward

c-- Cross exchange

d-- None of the above

25-- None of the below is incorrect except

a-- Minimum levels for initial & maintenance margins are set by the mutual consent of parties

b-- Maintenance margin is usually 75% of the initial

c-- margin requirement on short futures positions are same as on long futures position

d-- To satisfy initial margin requirements investor can deposit securities with broker

26-- The value of the option which is considered as its worth as soon as it is expired is classified
as

a-- Minimum option value

b-- Minimum value

c-- Maximum value

d-- Exercise value

27-- The last day at which the European and American option can be exercised is classified as

a-- European date

b-- American date

c-- Expiration date

d-- Money date

28-- Today is 30th of November and you have entered a long futures contract to buy 300 ounces
of silver that settles on 30th of February. The futures price is Rs. 800per ounce. On 1 st December
the current market price is Rs. 827 per ounce. You are having:

a-- A loss of Rs. 8100

b-- A gain of Rs. 8100

c-- after entering the contact, profit and losses do not occur

d-- No profit, no loss

29-- A________ is the minimum level by which an investor’s equity position may fall as a result
of unfavorable price movements before the investor is required to deposit additional amount.

a-- Initial margin

b-- variation margin

c-- maintenance margin

d-- Deposit margin

30-- As the time to maturity increases, call and put option become:

a-- Call option is not valuable

b-- put option is not valuable

c-- Both call and put option tend to become valuable

d-- Neither of the two type option is valuable

31-- Under______ option the buyer/holder gets the right to sell the underlying asset.

a-- Put

b-- Call

c-- Both of these

d-- None of these

32-- Person a entered long in a futures contract for corn on December 21. The locked price for
the contract is Rs. 20. On December 22 the futures price at the close of the trading day is Rs. 22
and on December 23 it is Rs. 24 and on December 24 it is Rs. 22. Calculate the profit or loss
from the contract.
a-- Profit of Rs. 2

b-- Loss of Rs. 2

c-- profit of Rs. 4

d-- loss of Rs. 4

33-- Spot rate of Canadian dollar is $0.80. A 90-day forward rate of Canadian dollar is $0.79. 90-
day Canadian interest rate is 4% and 90 day us interest rate is 2.5%. If the initial investment is
$1,000,000 what would be the percentage return to us investor

a-- 0.025

b-- 0.027

c-- 0.023

d-- 0.029

34-- A stock is currently selling for $100. One year from today the stock price could go up by
30% or go down by 20%. The risk-free interest rate is 10%[apr]. Calculate the price of a one-
year European call option on the stock with an exercise price of $100.

a-- 30

b-- 16.36

c-- 15.67

d-- none of the above

35-- Which of the following is a derivative that give the owner the right but not the obligations
to buy the underlying asset?

a-- Long, futures

b-- Put option

c-- Call option

d-- Short features

36-- A currency swap bank is usually ______.

a-- An end user

b-- A financial intermediary

c-- A currency speculator

d-- All of these

37-- Relative to the underlying stock, a call option always has:

a-- A higher beta and a higher standard deviation of return

b-- A lower beta and a higher standard deviation of return

c-- A higher beta and a lower standard deviation of return

d-- A lower beta and a lower standard deviation of return

38-- Interest rate swaps involve counterparties who want to _______.

a-- Exchange a floating rate commitment for a fixed rate loan

b-- Exchange debt for stock

c-- Exchange a short-term loan for a long-term loan

d-- None of these

39-- In order to gain profit from an identified arbitrage opportunity, the future price of the
commodity should be ______ the spot price.

a-- Less than

b-- Equal to

c-- More than

d-- Less than or more than

40-- The value of n(d) in the black-Scholes model can take any value between:

a-- -1 and +1

b-- 0 and +1

c-- -1 and 0

d-- None of these

41-- Financial swap markets have emerged in recent years because of the following reasons
______.

a-- Interest rates fluctuate widely

b-- Forward marks may not function properly

c-- Currency futures are available only for selected currencies

d-- All of these

42-- Option premiums consist of

a-- Intrinsic value, time value, and current value

b-- Intrinsic value, time value, and volatility

c-- Current value, time value, and volatility

d-- Time value, intrinsic value, and historical value

43-- A farmer who must purchase his inputs now but will sell his corn at a market price at a
future date

a-- faces a market risk that cannot be offset

b-- is a good example of what the chapter refers to as a speculator

c-- would hedge by taking the short position in a corn futures contract

d-- would hedge by taking the long position in a corn futures contract
44-- The situation in call options in which the strike price is greater than current price of stock is
classified as

a-- Out-of-the-portfolio

b-- In-the-portfolio

c-- in-the-money

d-- out-of-the-money

45-- The situation in financial options in which the strike price is less than current price of stock
is classified as

a-- in-the-money

b-- out-of-the-money

c-- out-of-the-portfolio

d-- in-the-portfolio

46-- Which of the following statements regarding short selling is not true?

a-- It is an arbitrage strategy

b-- Assets involved are not owned

c-- Is possible for all investment assets

d-- None of these

47-- Victoria’s stock price is currently $20. In the next six months it will either fall to $10 or rise
to $30. What is the current value of a put option with an exercise price of $12? The six-month
risk-free interest rate is 5% (periodic rate).

a-- 9.78

b-- 2
c-- 0.86

d-- 9.43

48-- Differences between the futures market and the forward market include

a-- Price range

b-- Maturity

c-- Credit risk

d-- All of these

49-- According to exercise value and option price, the market value of the option will be zero
when

a-- Stock price is maximum

b-- Option price is zero

c-- Stock price is zero

d-- Stock price is minimum

50-- If the strike price increases then the: [assume everything else remaining the same]

a-- Value of the put option increases and that of the call option decreases

b-- Value of the put option decreases and that of the call option increases

c-- Value of the put option and the call option increases

d-- Value of the put option and the call option decreases

51-- The premium for a British put pound with an exercise price of $1.70 is $.05. What is the
breakeven spot rate for the buyer of the put?

a-- $1.70.

b-- $1.65.
c-- $1.75.

d-- $1.60.

52-- In cross-hedging, when the futures contract is highly correlated with the portfolio being
hedged, the value of the futures contract changes by:

a-- A higher percentage than the portfolio’s market value.

b-- A lower percentage than the portfolio’s market value.

c-- The same percentage as the portfolio’s market value.

d-- Either a higher percentage, a lower percentage, or the same percentage as the portfolio’s
market value.

53-- Carol’s stock price is currently $20. In the next six months it will either fall to $10 or rise to
$40.What is the current value of a six-month call option with an exercise price of $ 12?The six-
month risk-free interest rate (periodic rate) is 5%.

a-- 9.78

b-- 10.28

c-- 16.88

d-- 13.33

54-- The current value of stock included in portfolio is subtracted from present value of
portfolio to calculate

a-- Last month option price

b-- Last year option price

c-- Current option price

d-- Future option price

55-- In put call parity relationship, the put option minus call option plus stock is equal to
a-- Exercise price present value

b-- Exercise price future value

c-- Time line value

d-- Time value of bond

56-- If you grow sugarcane in your farms, how will you hedge your risk?

a-- By taking contracts to sell at spot price

b-- By taking contracts to buy at spot price

c-- By taking contracts to sell at per agreed forward price

d-- By taking contracts to buy at pre agreed forward price

57-- In put call party relationship, the present value of exercise price is added to call option
which is equal to

a-- Put option stock

b-- Call option + stock

c-- Call option + market price

d-- Put option + market price

58-- In short-selling

a-- A person takes long position in spot market and short position in forward contract.

b-- A person takes short position in spot market and long position in forward contract.

c-- Short –selling cannot be done in forward contracts.

d-- None of these.

59-- In calculation of the value of dividend paying securities, the income is subtracted because
a-- We own the asset

b-- We own the current income

c-- We will receive it at the maturity

d-- All of these

60-- The movement of price or the rise or fall or prices of options is classified as

a-- Option lattice

b-- Pricing movement

c-- Price change

d-- Binomial lattice

61-- When there is increase in future price broker of parties with ______ positions pay money
to exchange

a-- Long position

b-- Short position

c-- Long as well as short position

d-- None of these

62-- Ann’s stock price is currently $25. In the next six months it will either fall to $15 or rise to
$40. What is the current value of a six-month call option with an exercise price of $20? The six-
month risk-free interest rate is 5% (periodic rate).

a-- 20

b-- 8.57

c-- 9.52

d-- 13.1
63-- _________ are transactions for which there are, at present, no contracts or agreements
between parties.

a-- Backlog exposure

b-- Quotation exposure

c-- Anticipated exposure

d-- None o these

64-- An investor is trying to determine the price of a forward contract of 9 month maturity on a
stock with current market price of Rs. 70. Assuming risk free rate as 6% per annum. Also
assume an equal dividend of rs. 10 is expected after 6 months and 9 months.

a-- Rs. 73.22

b-- Rs. 56.76

c-- Rs. 53.07

d-- None of these

65-- ________ is an agreement to buy or sell an asset today.

a-- Forward contract

b-- Future contract

c-- Spot contract

d-- Option contract

66- A short forward contract is profitable until

a-- St<e

b-- St>e

c-- St=e

d-- None of the above.

67-- Consider the following data relating to NM stock. NM has a beta of 0.7 with Nifty. Each
Nifty contract is equal to 200 units. NM now quotes at Rs. 150 and the Nifty futures is 1400
index points.

How many future contracts will you have to take?

a-- 4.2

b-- 4.5

c-- 5.2

d-- 5.5

68-- Consider the following data relating to NM stock. NM has a beta of 0.7 with Nifty. Each
Nifty contract is equal to 200 units. NM now quotes at Rs. 150 and the Nifty future is 1400
index points. You expects price to fall and have gone short on 1200 shares of NM in the spot
market.

If the price in the spot market drops by 10%, what will be the amount of gain or loss?

a-- Loss Rs. 9,000

b-- Gain Rs. 9,000

c-- Loss Rs. 18,000

d-- Gain Rs. 18,000

69-- Consider the following data relating to NM stock. NM has a beta of 0.7 with Nifty. Each
Nifty contract is equal to 200 units. NM now quotes at Rs. 150 and the Nifty future is 1400
index points. You expects price to fall and have gone short on 1200 shares of NM in the spot
market.

If the price increase by 5%, what will be the amount of gain or loss?

a-- Loss Rs. 9,000

b-- Gain Rs. 9,000

c-- Loss Rs. 18,000

d-- Gain Rs. 18,000

70-- Consider the following data relating to NM stock. NM has a beta of 0.7 with Nifty. Each
Nifty contract is equal to 200 units. NM now quotes at Rs. 150 and the Nifty future is 1400
index points. You expects price to fall and have gone short on 1200 shares of NM in the spot
market.

The above situation deals with

a-- Swaps

b-- Hedging through future

c-- Hedging through options

d-- Hedging through forward

71-- A 6 month forward contract on an investment asset with current price of Rs 90 is expected
to provide income equal to 3% of the asset price twice in a year. The risk free rate of interest
(with continuous compounding) is 8% per annum. the forward price in this case will be:

a-- 92.74

b-- 97.74

c-- 67.71

d-- 94.61

72-- black-schole model uses the following variables to value non-dividend paying call option
except

a-- Current stock price

b-- Exercise price of call

c-- Quality of call option

d-- The variability of the Underlying asset prices

73-- Which of the below mentioned statement is false

a-- Profits from the option contracts are linear.

b-- Profits from the option contracts are not linear.

c-- Profits from the future contracts are not linear.

d-- Both a and c

74-- Interest rate parity exists when

a-- Opportunity for covered interest arbitrage finishes

b-- Rh = Rf

c-- Consumers have same buying over domestic and foreign goods

d-- Both A & B

75-- To speculate on an anticipated depreciation of a foreign currency, an investor would take a

_______ position in dollars and a ______ position in the foreign currency

a-- Short, Short

b-- Long, long

c-- Short, long

d-- Long, short

76-- Which of the following is not a characteristic of speculation

a-- profit motive

b-- exchange rate fluctuation

c-- hedging

d-- risk taking

77-- A US company is expected to receive £100,000 in 120 days. If the company wants to
minimize the risk of foreign exchange, then it would

a-- buy British pounds forward

b-- sell British pounds forward

c-- buy British pounds 120 days from now

d-- sell British pounds 120 days from now

78-- Option premium consists of

a-- intrinsic value, time value, and current value

b-- intrinsic value, time value, and volatility

c-- current value, time value, and volatility

d-- time value, intrinsic value , and historical value

79-- Transaction exposure occurs if there is a change in an exchange rate and

a-- an outstanding obligation denominated in a foreign currency is settled

b-- sales are made in cash

c-- purchases are made in cash

d-- an outstanding obligation denominated in a home currency is settled

80-- The three types of foreign exchange exposure are

a-- precautionary, transaction, and speculative

b-- translation, economic, and transaction

c-- translation, precautionary, and political

d-- transaction, political, and devaluation

81-- Which of the following is related to the Euro dollar market?

a-- KIBOR

b-- LIBOR

c-- SIBOR

d-- MIBOR

82-- The option delta is calculated as the ratio:

a-- (the spread of possible share prices) / (the spread of possible option prices)

b-- (the share price) / (the option price)

c-- (the spread of possible option prices) / (the spread of possible share prices)

d-- (the option price) / (the share price)

83-- The delta of a put option is always equal to:

a-- The delta of an equivalent call option

b-- The delta of an equivalent call option with a negative sign

c-- The delta of an equivalent call option minus one

d-- None of the above

84-- If the volatility (variance) of the underlying stock increases then the: [Assume everything
else remaining the same]

a-- Value of the put option increases and that of the call option decreases

b-- Value of the put option decreases and that of the call option increases

c-- Value of both the put option and the call option increases

d-- Value of both the put option and the call option decreases
85-- Which of the following statements regarding American puts is/are true?

a-- An American put can be exercised any time before expiration

b-- An American put is always more valuable than an equivalent European put

c-- Multi-period binomial model can be used to value an American put

d-- All of the above

86-- A stock is currently selling for $50. The stock price could go up by 10% or fall by 5% each
month. The monthly interest rate is 1% (periodic rate). Calculate the price of a European call
option on the stock with an exercise price of $48 and a maturity of two months.

a-- $3.96

b-- $2.77

c-- $1.98

d-- None of the above

87-- Losses from ______ exposure generally reduce taxable income in the year they are realized
______ exposure losses are not cash losses and therefore, are not tax deductible.

a-- Transaction; operating

b-- Accounting; operating

c-- Accounting; transaction

d-- Transaction; translation

88-- An investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,850. If
the investor holds the Treasury bill to maturity, his annualized yield is ____ percent.

a-- 1.52

b-- 1.50

c-- 3.05
d-- 3.01

89-- An investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,850. If
the investor holds the Treasury bill to maturity, the Treasury bill discount yield is ______
percent.

a-- 3.05

b-- 2.97

c-- 3.01

d-- none of the above

90-- An investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,850. If
the investor had sold the T-bill after 100 days for $9,940, her annualized yield would be
_______ percent.

a-- 3.34

b-- 3.29

c-- 1.83

d-- 1.80

91-- If a bond sells above its par value, it is called a _____ bond

a-- discount

b-- premium

c-- callable

d-- convertible

92-- exchange-traded funds:

a-- are funds designed to mimic particular stock indexes.

b-- are traded on a stock exchange

c-- resemble some index mutual funds in several ways

d-- all of the above

93-- A private investor would like to invest in the stock market via S&P 500 futures contracts.
The investor purchases futures when the S&P 500 index is at 1,150. At the settlement date, the
S&P 500 index is at 1,210. The investor's profit or loss is $_______.

a-- 15,000 profit

b-- 15,000 loss

c-- 6,000 profit

d-- 6,000 loss

94-- Suppose Ralph's stock price is currently $50. In the next six months it will either fall to $30
or rise to $80. What is the option delta of a call option with an exercise price of $50?

a-- 0.375

b-- 0.5

c-- 0.6

d-- 0.75

95-- Suppose Waldo's stock price is currently $50. In the next six months it will either fall to $40
or rise to $60. What is the current value of a six-month call option with an exercise price of
$50? The six-month risk-free interest rate is 2% (periodic rate).

a-- $5.39

b-- $15.00

c-- $8.25

d-- $8.09
96-- Suppose Waldo's stock price is currently $50. In the next six months it will either fall to $40
or rise to $80. What is the current value of a six-month call option with an exercise price of
$50? The six-month risk-free interest rate is 2% (periodic rate).

a-- $2.40

b-- $15.00

c-- $8.25

d-- $8.09

97-- Situation in which large portion of majority Borrowed from broker of investor is classified
as

a-- Future investment

b-- Forward investment.

c-- Leveraged investment

d-- Non leveraged investment.

98-- The short position in a future contract represent to party that will

a-- Accept the risk

b-- Ultimately suffer the loss

c-- Deliver a commodity or financial instrument to the buyer at a future date

d-- Benefit from increases in price of the underlying asset

 FINE003 – Answer Key

1 C 26 D 51 B 76 C

2 A 27 C 52 D 77 D

3 B 28 B 53 A 78 B

4 A 29 C 54 C 79 A

5 B 30 C 55 A 80 B

6 A 31 A 56 C 81 B

7 A 32 A 57 A 82 C

8 A 33 B 58 A 83 C

9 C 34 B 59 C 84 C

10 A 35 C 60 D 85 D

11 C 36 B 61 A 86 A

12 C 37 A 62 B 87 D

13 C 38 A 63 C 88 C

14 C 39 D 64 C 89 B

15 A 40 B 65 A 90 A

16 A 41 D 66 D 91 B

17 A 42 B 67 A 92 D

18 B 43 C 68 D 93 A

19 A 44 D 69 A 94 C

20 A 45 A 70 B 95 A

21 B 46 A 71 D 96 D

22 A 47 C 72 C 97 C

23 D 48 C 73 D 98 C

24 B 49 C 74 C

25 D 50 A 75 D