State True or false1) Credit risk is composed of default risk and credit migration risk. True2) Generally, modelling credit risk is less difficult than modelling market risk. False3) Operational risk is hard to quantify. True4) Diversification can be used to diversify away market risk. False5) Insurance is particularly useful for management of credit and operational risks. True6) An option is an asymmetrical instrument since the holder of an option will only exercise

it if it’s beneficial to him or her. True7) By buying a protective put option, investors can set a floor on their losses True8) In an interest rate swap the notional principal is the same for both parties. True9) In a fixed for floating swap, the received fixed counterparty receives a payment when

the floating rate exceeds the fixed rate. False10)The first option contracts were created when the Chicago Board Options Exchange

opened on April 26, 1973. False11)American-style options can be exercised any time before expiration. True12)Derivatives cannot be replicated by buying or short selling the underlying asset and

borrowing or lending the money. False13)An option’s value can never be less than zero. True14)Margin requirements are usually significantly higher for futures than for stocks. False15)Everything else held constant, the intrinsic value of an option decreases as the option

approaches expiration. False16)The buyer of a forward contract is obligated to buy the underlying asset when the

contract expires. True17)The buyer of a call option is obligated to buy the underlying asset when the contract

expires. False18)Parties to forward contracts are more exposed to default risk than parties to futures

contracts.19)With forward contracts, all gains and losses are accumulated to one payment on the

delivery date, whereas futures contracts recognize gains and losses daily. True20)Most futures contracts do not result in delivery of the underlying asset. True21)The clearinghouse eliminates default risk in futures transactions. True22)Naked option trading refers to option trades with a simultaneous offsetting position in

other instruments. FalseAn option position where the buyer or seller has no underlying security position. Naked options are very risky. Profits are huge if the underlying asset moves in the direction desired by the investor. On the other hand, a writer of a naked option can lose big if the underlying asset moves in the opposite direction.

23)The payoff pattern for of a forward is different from that of the underlying asset. False24)Having a stock and writing a call option on that same stock is called covered call writing. True25)A high credit rating means you will always be approved for a line of credit, while a low

rating score means you will be turned down. False26)Credit ratings do not take into account factors such as gender, race, marital status, or

nationality. True27)Lenders are not obligated to reveal why you were turned down for credit. False28)Closing old loan accounts will undoubtedly raise your credit score. False29) Inaccurate information can be taken off of your credit report. True

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30)Value at risk is the maximum loss that a portfolio may be expected to suffer over a given holding period, at a given level of confidence. True

31)The value at risk depends on two key parameters: the holding period and the confidence level. True

Choose Correct Option from the Given choice1) Nowadays we frequently read news items about ’Derivatives’ as used in the world of

finance and money market. Which of the following statement(s) correctly describes what a derivative is and how it affects money finance markets?

a) Derivatives enable individuals and companies to insure themselves against financial risk.

b) Derivatives are like fixed deposits in a bank and are the safest way to invest one’s idle money lying in a bank.

c) Derivatives are the financial instruments which were used in India even during the British Raj.

d) None of these2) Futures contracts are traded

a) Over the counter.b) On stock exchanges. c) Through private placement. d) All the above.

3) Which of the following is false?a) Futures contracts allow fewer delivery options than forward contracts.b) Futures contracts are more liquid than forward contracts.c) Futures contracts trade on a financial exchange.d) Futures contracts are marked to market.

4) Which of the following does the most to reduce default risk for futures contracts?a) Credit checks for both buyers and sellersb) High liquidity.c) Marking to marketd) Flexible Delivery arrangement

5) Using futures contracts to transfer price risk is called:a) Speculatingb) Arbitragec) Hedgingd) Diversifying

6) Which of the following is best described as simultaneous buying & selling in two different market to take advantage of price dis-equilibrium?

a) Speculatingb) Arbitragec) Hedgingd) Diversifying

7) A put option has a strike price of Rs.35. The price of the underlying stock is currently Rs.42. The put is:

a) At the moneyb) Out of the moneyc) In the money

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d) Near the money8) Which of the following has the right to sell an asset at a predetermined price?

a) A put buyer.b) A call buyerc) A put writerd) A call writer

9) Which of the following is potentially obligated to sell an asset at a predetermined price?a) A put buyer.b) A call buyerc) A put writerd) A call writer

10) Which of the following is a major difference between swaps and futures contracts?a) Swaps are derivative securities, but futures contracts are not.b) Swaps are typically short term, whereas futures contracts tend to extend over

several years.c) A futures contract involves only one future transaction, whereas a swap typically

involves several future transactions.d) Swaps are usually marked to market, whereas futures contracts are not.

11) Why is the system of trading on margin practised in futures markets? a) to allow people to make high rates of profitb) to make futures contracts more readily tradablec) to reduce the risk of default on contractsd) to allow poor people to participate in futures trading

12) What advantage do over-the-counter derivatives have over exchange-traded derivatives?  

a) over-the-counter contracts are more readily tradableb) over-the-counter contracts are always for longer periodsc) over-the-counter contracts are more flexibled) there is less risk of default on over-the-counter contracts

13) The buyer of a futures contract:  a) goes long in the cash market because the contract requires him/her to take

delivery of the underlying asset on the expiry date

b) goes short in the cash market because the contract requires her to deliver the underlying asset on the expiry date

c) goes short in the cash market because the contract requires her to take delivery of the underlying asset on the expiry date

d) goes long in the cash market because the contract requires her to deliver the underlying asset on the expiry date

14) Futures contracts seldom lead to the delivery of the underlying asset because: a) sellers of contracts frequently defaultb) either the buyer or the seller cannot meet margins paymentsc) holders of contracts reverse the contracts before delivery date;d) buyers of contracts frequently defaulte) the clearing house charges a penalty if contracts result in delivery

15) The relationship between the price of the underlying asset and the futures price is the result of: 

a) the standardization of exchange-traded contracts3

b) Liquidityc) Speculationd) the decisions of the clearing house in determining the settlement pricee) aribtrage

16) The size of the initial margin payable on a futures contract is related to: a) the length of the contractb) the volatility of the price of the underlying assetc) the current open interest in the contractd) the number of contracts entered into by the buyere) the past financial record of the buyer of the contract

17) When a contract is marked-to-market:  a) one of the parties to the contract defaultsb) delivery of the underlying asset occursc) the contract is reversedd) the margins account of the contract holder is adjusted to reflect changes in prices

in the underlying markete) the holder engages in arbitrage between the underlying market and the futures

market18) An option which gives the holder the right to sell a stock at a specified price at some

time in the future is called a(n)

a) Call option.

b) Put option.

c) Out-of-the-money option.

d) Naked option.

e) Covered option.

19) An example of a derivative security is ______. a) a common share of Infosys b) a call option on TCS stock c) a commodity futures contract d) B and C e) A and B

20) __________ are a way U. S. investor can invest in foreign companies. a) ADRs b) Interest rate futuresc) Special Drawing Rights d) Futures.e) Interest Rate Swaps

21) The sale of a mortgage portfolio trough SPV by setting up mortgage pass-through securities is an example of ________.

a) credit enhancement b) securitization c) unbundling

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d) derivatives e) none of the above

22) Investment bankers perform the following role(s) ___________. a) market new stock and bond issues for firms b) provide advice to the firms as to market conditions, price, etc c) design securities with desirable properties d) all of the above e) none of the above

23) Important factors/trends changing the investment environment are :a) globalization. b) securitization. c) information and computer networks. d) financial engineering. e) all of the above

24) Although derivatives can be used as speculative instruments, businesses most often use them to

a) attract customers. b) Please stockholders. c) offset debt. d) hedge. e) enhance their balance sheets.

25) Derivatives are:a) On-Balance Sheet itemb) Off-Balance Sheet itemc) P & L account itemd) Cash flow fund flow item

26) Money market securities ____________. a) are short term b) pay a fixed income c) are highly marketable d) generally very low risk e) all of the above

27) The consideration for option contract is a sum of money called:a) Commissionb) Option discountc) Option premiumd) Option cost

28) Through which of the following we can lower the average cost of production? a) Economies of scaleb) Economies of supplyc) Economies of distributiond) Economies of markets.

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