INTRODUCTION TO DERIVATIVES AND RISK
MANAGEMENT 10TH EDITION ACTUAL EXAM
QUESTIONS AND CORRECT ANSWERS
◉ What are the main uses of derivatives?
Answer: To control credit risk, reduce market risk (hedging),
increase risk to enhance returns, and switch asset allocations.
◉ What are the two main marketplaces for derivatives?
Answer: Exchange-traded derivatives and over-the-counter
derivatives.
◉ What is the purpose of regulators in the derivatives market?
Answer: To improve transparency and reduce counterparty risks.
◉ What is a futures contract?
Answer: A standardized, exchange-tradable contract to trade a
specified asset on a set date in the future at a specified price.
◉ What types of futures exist?
Answer: Financial futures (e.g., bond, currency, short interest rate,
equity index) and commodity futures (e.g., gold, pork bellies).
,◉ What is the cash market?
Answer: The market for the underlying asset of a futures contract.
◉ What is a tick size in futures trading?
Answer: The minimum price movement allowed for a contract.
◉ Who can deal on futures exchanges?
Answer: Only members of the exchange; other investors must use a
member firm as a broker.
◉ What is the role of a clearing house in futures trading?
Answer: To act as a counterparty to both buyer and seller,
guaranteeing each side of the transaction.
◉ What is the significance of standardization in futures contracts?
Answer: It makes futures easily tradable by specifying contract
details like unit of trading and settlement price.
◉ What is the delivery date in a futures contract?
Answer: The specified date on which the asset will be traded as per
the contract.
, ◉ What is the notional amount in a futures contract?
Answer: The amount of money that changes hands on the delivery
date, agreed upon at the start of the contract.
◉ What happens when a buyer and seller agree to a futures
contract?
Answer: Opposing contracts are created between each party and the
clearing house of the exchange.
◉ How does a clearing house reduce counterparty credit risk?
Answer: By guaranteeing each side of the original transaction and
breaking the link between buyer and seller.
◉ What is the purpose of the derivatives market?
Answer: To facilitate the trading of derivative contracts and manage
risks associated with underlying assets.
◉ What is hedging in the context of derivatives?
Answer: A process to reduce market risk by taking an offsetting
position in a related security.
◉ What is the difference between exchange-traded derivatives and
over-the-counter derivatives?
MANAGEMENT 10TH EDITION ACTUAL EXAM
QUESTIONS AND CORRECT ANSWERS
◉ What are the main uses of derivatives?
Answer: To control credit risk, reduce market risk (hedging),
increase risk to enhance returns, and switch asset allocations.
◉ What are the two main marketplaces for derivatives?
Answer: Exchange-traded derivatives and over-the-counter
derivatives.
◉ What is the purpose of regulators in the derivatives market?
Answer: To improve transparency and reduce counterparty risks.
◉ What is a futures contract?
Answer: A standardized, exchange-tradable contract to trade a
specified asset on a set date in the future at a specified price.
◉ What types of futures exist?
Answer: Financial futures (e.g., bond, currency, short interest rate,
equity index) and commodity futures (e.g., gold, pork bellies).
,◉ What is the cash market?
Answer: The market for the underlying asset of a futures contract.
◉ What is a tick size in futures trading?
Answer: The minimum price movement allowed for a contract.
◉ Who can deal on futures exchanges?
Answer: Only members of the exchange; other investors must use a
member firm as a broker.
◉ What is the role of a clearing house in futures trading?
Answer: To act as a counterparty to both buyer and seller,
guaranteeing each side of the transaction.
◉ What is the significance of standardization in futures contracts?
Answer: It makes futures easily tradable by specifying contract
details like unit of trading and settlement price.
◉ What is the delivery date in a futures contract?
Answer: The specified date on which the asset will be traded as per
the contract.
, ◉ What is the notional amount in a futures contract?
Answer: The amount of money that changes hands on the delivery
date, agreed upon at the start of the contract.
◉ What happens when a buyer and seller agree to a futures
contract?
Answer: Opposing contracts are created between each party and the
clearing house of the exchange.
◉ How does a clearing house reduce counterparty credit risk?
Answer: By guaranteeing each side of the original transaction and
breaking the link between buyer and seller.
◉ What is the purpose of the derivatives market?
Answer: To facilitate the trading of derivative contracts and manage
risks associated with underlying assets.
◉ What is hedging in the context of derivatives?
Answer: A process to reduce market risk by taking an offsetting
position in a related security.
◉ What is the difference between exchange-traded derivatives and
over-the-counter derivatives?
