Derivatives Exam 1 UPDATED ACTUAL
Exam Questions and CORRECT Answers
1. Which class of derivatives have been blamed most widely for causing the financial crisis of
2008? - CORRECT ANSWER - Credit Derivatives
2. Which class of derivatives accounts for the largest dollar share in the world market in terms of
notional amount outstanding? - CORRECT ANSWER - Interest-Rate Derivatives
3. A derivative security derives its value from an "underlying" security that is - CORRECT
ANSWER - Any other security
Which of the following securities is not a derivative? - CORRECT ANSWER - A bond
issued by a BBB-rated corporate firm
A forward contract may be used for - CORRECT ANSWER - (a) Hedging price exposure
at a future date.
(b) Speculating on price.
(c) Locking-in a price for a future transaction.
(d) All of the above.
Answer d.
A forward contract is struck at a forward price of $40. At maturity the spot price of the asset is
$45. The short forward position earns the following payoff: - CORRECT ANSWER - (a)
$5
(b) -$5
(c) $45
(d) -$45
Answer b.
,Which of the following statements is true when comparing the payoffs at maturity of a long
forward contract with a long position in a call option, assuming the strike price of the option is
the same as the delivery price in the forward contract? - CORRECT ANSWER - The
minimum payoff of the option exceeds that of the forward contract.
Which of the following statements about forwards is false? - CORRECT ANSWER - The
payoff at maturity from a long forward contract is always non-negative (either positive or zero).
Which of the following statements is true of forward contracts? - CORRECT ANSWER -
A forward contract is customizable and traded over-the-counter.
At maturity of the forward contract, the following is true of the spot price and delivery price
locked-in using the forward contract: - CORRECT ANSWER - The spot price can be
greater, equal to, or less than the delivery price.
State which of these statements is false - CORRECT ANSWER - (a) A futures contract is
traded on an exchange.
(b) A futures contract involves counterparty credit risk.
(c) A futures contract is fully customizable.
(d) A futures contract may be reversed unilaterally.
Answer c.
An option gives the buyer - CORRECT ANSWER - The right but not the obligation to
undertake the trade specified in the contract at maturity
Which option gives the right to sell an asset at any time prior to or at maturity? - CORRECT
ANSWER - American put
An embedded option is one where the security contains features that are option-like. Which of
the following is not an example of a security with an embedded option? - CORRECT
ANSWER - Preferred stock.
, Consider hedging an exposure with (i) a futures contract, or (ii) an option with a strike price
close to the futures price. The hedge with the futures contract - CORRECT ANSWER -
Has no upfront cost
The following is not a point of difference between futures and forwards - CORRECT
ANSWER - The futures payoff depends on the spot price of the asset at contract maturity
Which of the following statements is true of the value of European (E) options, American (A)
options, and Bermudan (B) options? - CORRECT ANSWER - (a)
(b)
(c)
(d)
Answer a.
How many options does a callable, convertible bond contain? - CORRECT ANSWER - (a)
0
(b) 1
(c) 2
(d) 3
Answer c. There are two options: (a) the issuer holds a call on the bond, and (b) the buyer has the
right to convert the bond into equity. One may extend the idea and say that there is an additional
option—the option to default held by the issuer of the convertible. If such a response is provided,
then the correct answer would be 3 options, i.e., answer (d).
An investor enters into a forward contract to buy 4,000 barrels of oil in three months at $80 a
barrel. At the maturity of the contract, the spot price of oil is $65 a barrel. The investor's payoff
(gain/loss) from the forward contract is - CORRECT ANSWER - (a) A gain of $60,000
(b) A loss of $60,000
(c) A gain of $260,000
(d) A loss of $260,000
Answer b.
Exam Questions and CORRECT Answers
1. Which class of derivatives have been blamed most widely for causing the financial crisis of
2008? - CORRECT ANSWER - Credit Derivatives
2. Which class of derivatives accounts for the largest dollar share in the world market in terms of
notional amount outstanding? - CORRECT ANSWER - Interest-Rate Derivatives
3. A derivative security derives its value from an "underlying" security that is - CORRECT
ANSWER - Any other security
Which of the following securities is not a derivative? - CORRECT ANSWER - A bond
issued by a BBB-rated corporate firm
A forward contract may be used for - CORRECT ANSWER - (a) Hedging price exposure
at a future date.
(b) Speculating on price.
(c) Locking-in a price for a future transaction.
(d) All of the above.
Answer d.
A forward contract is struck at a forward price of $40. At maturity the spot price of the asset is
$45. The short forward position earns the following payoff: - CORRECT ANSWER - (a)
$5
(b) -$5
(c) $45
(d) -$45
Answer b.
,Which of the following statements is true when comparing the payoffs at maturity of a long
forward contract with a long position in a call option, assuming the strike price of the option is
the same as the delivery price in the forward contract? - CORRECT ANSWER - The
minimum payoff of the option exceeds that of the forward contract.
Which of the following statements about forwards is false? - CORRECT ANSWER - The
payoff at maturity from a long forward contract is always non-negative (either positive or zero).
Which of the following statements is true of forward contracts? - CORRECT ANSWER -
A forward contract is customizable and traded over-the-counter.
At maturity of the forward contract, the following is true of the spot price and delivery price
locked-in using the forward contract: - CORRECT ANSWER - The spot price can be
greater, equal to, or less than the delivery price.
State which of these statements is false - CORRECT ANSWER - (a) A futures contract is
traded on an exchange.
(b) A futures contract involves counterparty credit risk.
(c) A futures contract is fully customizable.
(d) A futures contract may be reversed unilaterally.
Answer c.
An option gives the buyer - CORRECT ANSWER - The right but not the obligation to
undertake the trade specified in the contract at maturity
Which option gives the right to sell an asset at any time prior to or at maturity? - CORRECT
ANSWER - American put
An embedded option is one where the security contains features that are option-like. Which of
the following is not an example of a security with an embedded option? - CORRECT
ANSWER - Preferred stock.
, Consider hedging an exposure with (i) a futures contract, or (ii) an option with a strike price
close to the futures price. The hedge with the futures contract - CORRECT ANSWER -
Has no upfront cost
The following is not a point of difference between futures and forwards - CORRECT
ANSWER - The futures payoff depends on the spot price of the asset at contract maturity
Which of the following statements is true of the value of European (E) options, American (A)
options, and Bermudan (B) options? - CORRECT ANSWER - (a)
(b)
(c)
(d)
Answer a.
How many options does a callable, convertible bond contain? - CORRECT ANSWER - (a)
0
(b) 1
(c) 2
(d) 3
Answer c. There are two options: (a) the issuer holds a call on the bond, and (b) the buyer has the
right to convert the bond into equity. One may extend the idea and say that there is an additional
option—the option to default held by the issuer of the convertible. If such a response is provided,
then the correct answer would be 3 options, i.e., answer (d).
An investor enters into a forward contract to buy 4,000 barrels of oil in three months at $80 a
barrel. At the maturity of the contract, the spot price of oil is $65 a barrel. The investor's payoff
(gain/loss) from the forward contract is - CORRECT ANSWER - (a) A gain of $60,000
(b) A loss of $60,000
(c) A gain of $260,000
(d) A loss of $260,000
Answer b.
