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 thereduced 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 andphysical 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 priceand 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 contractsthemselvesis 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.
