OPTIONS, FUTURES AND OTHER
DERIVATIVES TRAINING STUDY SHEET 2026
UPDATED QUESTIONS AND ANSWERS
◉Generalized Wiener Process. Answer: A stochastic process where
the change in a variable in time t has a normal distribution with
mean and variance both proportional to t.
◉Employee Stock Option. Answer: A stock option issued by
company on its own stock and given to its employees as part of their
remuneration.
◉Differential Swap. Answer: A swap where a floating rate in one
currency is exchanged for a floating rate in another currency and
both rates are applied to the same principal.
◉Constant Maturity Swap. Answer: A swap where a swap rate is
exchanged for either a fixed rate or a floating rate on each payment
date.
◉Commodity Swap. Answer: A swap where cash flows depend on
the price of a commodity.
,◉Basis Swap. Answer: A swap where cash flows determined by one
floating reference rate are exchanged for cash flows determined by
another floating reference rate.
◉Currency Swap. Answer: A swap where interest and principal in
one currency are exchanged for interest and principal in another
currency.
◉Puttable Swap. Answer: A swap where one side has the right to
terminate early.
◉Amortizing Swap. Answer: A swap where the notional principal
decreases in a predetermined way as time passes.
◉Indexed Principal Swap. Answer: A swap where the principal
declines over time. The reduction in the principal on a payment date
depends on the level of interest rates.
◉Step-up Swap. Answer: A swap where the principal increases over
time in a predetermined way.
◉Total Return Swap. Answer: A swap where the return on an asset
such as a bond is exchanged for LIBOR plus a spread. The return on
the asset includes income such as coupons and the change in value
of the asset.
,◉Equity Swap. Answer: A swap where the return on an equity
portfolio is exchanged for either a fixed or a floating rate of interest.
◉Constant Maturity Treasury Swap. Answer: A swap where the yield
on a Treasury bond is exchanged for either a fixed rate or a floating
rate on each payment date.
◉Extendable Swap. Answer: A swap whose life can be extended at
the option of one side to the contract.
◉Collateralization. Answer: A system for posting collateral by one or
both parties in a derivatives transaction.
◉Credit Ratings Transition Matrix. Answer: A table showing the
probability that a company will move from one credit rating to
another during a certain period of time.
◉Volatility Surface. Answer: A table showing the variation of
implied volatilities with strike price and time to maturity.
◉Control Variate Technique. Answer: A technique that can
sometimes be used for improving the accuracy of a numerical
procedure.
, ◉Triple Witching Hour. Answer: A term given to the time when
stock index futures, stock index options, and options on stock index
futures all expire together.
◉Plain Vanilla. Answer: A term used to describe a standard deal.
◉Volatility Skew. Answer: A term used to describe the volatility
smile when it is nonsymmetrical.
◉Liquidity Preference Theory. Answer: A theory leading to the
conclusion that forward interest rates are above expected future
spot interest rates.
◉Market Segmentation Theory. Answer: A theory that short interest
rates are determined independently of long interest rates by the
market.
◉Hedge. Answer: A trade designed to reduce risk.
◉Day Trade. Answer: A trade that is entered into and closed out on
the same day.
DERIVATIVES TRAINING STUDY SHEET 2026
UPDATED QUESTIONS AND ANSWERS
◉Generalized Wiener Process. Answer: A stochastic process where
the change in a variable in time t has a normal distribution with
mean and variance both proportional to t.
◉Employee Stock Option. Answer: A stock option issued by
company on its own stock and given to its employees as part of their
remuneration.
◉Differential Swap. Answer: A swap where a floating rate in one
currency is exchanged for a floating rate in another currency and
both rates are applied to the same principal.
◉Constant Maturity Swap. Answer: A swap where a swap rate is
exchanged for either a fixed rate or a floating rate on each payment
date.
◉Commodity Swap. Answer: A swap where cash flows depend on
the price of a commodity.
,◉Basis Swap. Answer: A swap where cash flows determined by one
floating reference rate are exchanged for cash flows determined by
another floating reference rate.
◉Currency Swap. Answer: A swap where interest and principal in
one currency are exchanged for interest and principal in another
currency.
◉Puttable Swap. Answer: A swap where one side has the right to
terminate early.
◉Amortizing Swap. Answer: A swap where the notional principal
decreases in a predetermined way as time passes.
◉Indexed Principal Swap. Answer: A swap where the principal
declines over time. The reduction in the principal on a payment date
depends on the level of interest rates.
◉Step-up Swap. Answer: A swap where the principal increases over
time in a predetermined way.
◉Total Return Swap. Answer: A swap where the return on an asset
such as a bond is exchanged for LIBOR plus a spread. The return on
the asset includes income such as coupons and the change in value
of the asset.
,◉Equity Swap. Answer: A swap where the return on an equity
portfolio is exchanged for either a fixed or a floating rate of interest.
◉Constant Maturity Treasury Swap. Answer: A swap where the yield
on a Treasury bond is exchanged for either a fixed rate or a floating
rate on each payment date.
◉Extendable Swap. Answer: A swap whose life can be extended at
the option of one side to the contract.
◉Collateralization. Answer: A system for posting collateral by one or
both parties in a derivatives transaction.
◉Credit Ratings Transition Matrix. Answer: A table showing the
probability that a company will move from one credit rating to
another during a certain period of time.
◉Volatility Surface. Answer: A table showing the variation of
implied volatilities with strike price and time to maturity.
◉Control Variate Technique. Answer: A technique that can
sometimes be used for improving the accuracy of a numerical
procedure.
, ◉Triple Witching Hour. Answer: A term given to the time when
stock index futures, stock index options, and options on stock index
futures all expire together.
◉Plain Vanilla. Answer: A term used to describe a standard deal.
◉Volatility Skew. Answer: A term used to describe the volatility
smile when it is nonsymmetrical.
◉Liquidity Preference Theory. Answer: A theory leading to the
conclusion that forward interest rates are above expected future
spot interest rates.
◉Market Segmentation Theory. Answer: A theory that short interest
rates are determined independently of long interest rates by the
market.
◉Hedge. Answer: A trade designed to reduce risk.
◉Day Trade. Answer: A trade that is entered into and closed out on
the same day.
