this is a mcq of derivatives of management kindly check and follow fore your exam and all the best for exam

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Financial Derivatives and Risk Management Page 1
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
FINANCIAL DERIVATIVES AND RISK MANAGEMENT
M.Com. (2018 Admn.)
IV SEMESTER – PAPER XIV
Multiple Choice Quenstion 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 trade 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 stock 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 serivatives b. Equity traded derivatives
c. Exchange traded derivatives d. Estimated trade delay

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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 contarct 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
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

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23.Asian option and look back options are types of
a. Vanilla option b. Exotic option c. Real option d. Warrants
24.Which of the following is long dated option traded generally traded over the counter
a. Warrants b. LEAPS c. Baskets d. Real option
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
26.An option contract with underlying asset commodities is
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 fianacial obligation is
a. Market risk b. Liquidity risk
c. Operation risk d. Credit risk
28.The difference between the future price and cash price is
a. Basis b. Margin c. Premium d. Strike price
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
30.The system of daily settlement in the future market is
a. Marking 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
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 cashprice resulting in positive basis is
a. Normal backwardation b. Contango
c. Expectation hypothesis d. Cost of carry

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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. Coupan 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
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. Liquidty 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

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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.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
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
a. Open interest b. Outstanding contract
c. Closed interest d. None of the above
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
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

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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 aswap.
a. Constant maturity swap b. Accreting swap
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.

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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.
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 possibility of 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.

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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?
(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 starting swap b. Roller coaster swap
c. Amortizing swap d. Accreting 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
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
87.A fixed-for-floatinginterest 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
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

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89. Standardized futures contracts exist for all of the following underlying assets except:
a. stock indexes. b. gold.
c. common stocks. d. Treasury bonds.
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.
91. Which of the following is most similar to a stock broker?
a. Pit trader. b. Local.
c. Floor broker. d. Futures commission merchant.
92. Using futures contracts to transfer price risk is called:
a. hedging. b. diversifying
c. arbitrage. d. speculating.
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.
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.
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.
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.
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.
98. Which of the following investment strategies has unlimited profit potential?
a. Writing a call. b. Bull spread.
c. Protective put. d. Covered call.

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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
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

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ANSWER KEY
Prepared by : Jiji N,
Assistant Professor,
Govt.College, Madappally.
Vadakara – 673 102.
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 C 45 B 65 A 85 A
6 A 26 A 46 A 66 A 86 A
7 D 27 D 47 C 67 B 87 D
8 C 28 A 48 C 68 B 88 A
9 B 29 C 49 A 69 B 89 C
10 C 30 A 50 D 70 B 90 A
11 A 31 A 51 D 71 A 91 D
12 B 32 A 52 B 72 B 92 A
13 B 33 B 53 C 73 B 93 B
14 B 34 B 54 A 74 A 94 B
15 B 35 B 55 D 75 B 95 D
16 A 36 C 56 A 76 D 96 B
17 B 37 A 57 B 77 B 97 A
18 A 38 A 58 D 78 B 98 C
19 A 39 C 59 A 79 A 99 C
20 A 40 A 60 A 80 D 100 B