Introduction to Derivatives and Risk Management - week 4 Test Questions with Correct Answers
Latest 2025
Risk management - Answers The process of recognizing, understanding, exploiting, protecting against,
and evaluating results after allowing for risk.
Derivatives - Answers Contracts that derive their value from the value or return of an underlying asset.
Forward purchases - Answers Buying in advance to mitigate potential price rises, considering budget,
inflation, and storage space.
Hedging - Answers Investing to reduce the risk of an adverse movement in asset price, often involving
costs such as premiums or profit foregone.
Speculation - Answers Earning a profit in return for accepting risk, where hedgers pay speculators for
taking on the risk.
Arbitrage - Answers Earning riskless, costless profit by trading, driving markets towards equilibrium.
Leverage (gearing) - Answers Borrowing to increase potential return on investment, which also increases
both risk and return.
Types of derivatives - Answers Common types include forwards, futures, options, and swaps, which are
claims to state-contingent cash flows.
Credit derivatives - Answers Allows a creditor to transfer the risk of default by the debtor to another
party.
Mortgage-backed securities - Answers An asset like a bond made of mortgage debt, representing risk
transferral.
Underlying asset - Answers The asset from which the value of a derivative contract is derived, such as
stocks, interest rates, or commodities.
Market positions - Answers Hedgers and speculators can take opposite market positions with respect to
cash flows.
Risk re-allocation - Answers The concept that risk cannot be removed but can be redistributed among
different parties.
Volume of derivatives trading - Answers Has grown explosively in all developed markets, indicating their
importance in risk management.
Adverse movement - Answers A negative change in asset price that hedging aims to protect against.
Diversified portfolios - Answers A collection of different assets aimed at reducing risk.
Interest rate changes - Answers A concern for borrowers and lenders that can impact financial decisions.
Latest 2025
Risk management - Answers The process of recognizing, understanding, exploiting, protecting against,
and evaluating results after allowing for risk.
Derivatives - Answers Contracts that derive their value from the value or return of an underlying asset.
Forward purchases - Answers Buying in advance to mitigate potential price rises, considering budget,
inflation, and storage space.
Hedging - Answers Investing to reduce the risk of an adverse movement in asset price, often involving
costs such as premiums or profit foregone.
Speculation - Answers Earning a profit in return for accepting risk, where hedgers pay speculators for
taking on the risk.
Arbitrage - Answers Earning riskless, costless profit by trading, driving markets towards equilibrium.
Leverage (gearing) - Answers Borrowing to increase potential return on investment, which also increases
both risk and return.
Types of derivatives - Answers Common types include forwards, futures, options, and swaps, which are
claims to state-contingent cash flows.
Credit derivatives - Answers Allows a creditor to transfer the risk of default by the debtor to another
party.
Mortgage-backed securities - Answers An asset like a bond made of mortgage debt, representing risk
transferral.
Underlying asset - Answers The asset from which the value of a derivative contract is derived, such as
stocks, interest rates, or commodities.
Market positions - Answers Hedgers and speculators can take opposite market positions with respect to
cash flows.
Risk re-allocation - Answers The concept that risk cannot be removed but can be redistributed among
different parties.
Volume of derivatives trading - Answers Has grown explosively in all developed markets, indicating their
importance in risk management.
Adverse movement - Answers A negative change in asset price that hedging aims to protect against.
Diversified portfolios - Answers A collection of different assets aimed at reducing risk.
Interest rate changes - Answers A concern for borrowers and lenders that can impact financial decisions.
