Derivatives Exam 1 ACTUAL Exam
Questions and CORRECT Answers
Derivatives - CORRECT ANSWER - financial instruments whose value depends on (is
derived from) the value of other more basic underlying assets/variables
prices of traded assets including stock indices, currencies, commodities, interest rates and bonds
- CORRECT ANSWER - underlying assets/variables
forwards, futures, swaps, and options - CORRECT ANSWER - derivative examples
transfer risk - CORRECT ANSWER - key role of derivatives
hedging, speculating, arbitraging, changing the nature of assets and liabilities, managing duration
and portfolio risk, creating synthetic securities, asset allocation, trading spreads and basis, etc. -
CORRECT ANSWER - Derivatives are used for
Financial institutions connect and contract directly with each other and clients
Can trade non-standardized contracts
Trades cleared either through central counterparty (CCP) or bilaterally - CORRECT
ANSWER - Over-the-Counter (OTC) Market
to make OTC derivatives market more similar to exchange traded market in terms of
transparency and reduce systemic risk to financial system (Swap Execution Facilities (SEF's),
Central Counterparties (CCP's), Central Repository) - CORRECT ANSWER - Goal of
Regulatory Changes following the 2007-2009 financial/credit crisis in OTC Market:
Forward contract - CORRECT ANSWER - agreement to buy or sell an asset at a certain
future time for a certain future price
, buy; sell - CORRECT ANSWER - Long position agrees to ______, Short position agrees
to ____
ST -K - CORRECT ANSWER - Payoff from long position in forward contract on one unit
of asset:
K- ST - CORRECT ANSWER - Payoff from short position in forward contract on one unit
of asset:
forward pricing - CORRECT ANSWER - The Classic Cost of Carry Model used for
F=S-S(C-R)t
F=Spot - (Current Income - Financing Costs)
F=Spot - Carry - CORRECT ANSWER - The Classic Cost of Carry Model
Spot Price - Carry - CORRECT ANSWER - Forward Price =
conform to the model - CORRECT ANSWER - Arbitrage forces forward prices to
Futures contract - CORRECT ANSWER - is an agreement to buy or sell an asset at a
certain future time for a certain future price on exchanges with standardized contract
specifications
non-exchange traded (OTC)
customized contract
usually one specific delivery day
gains/losses only settles at end of contract
face credit risk of trading partner or CCP
delivery of final cash settlement often takes place
Questions and CORRECT Answers
Derivatives - CORRECT ANSWER - financial instruments whose value depends on (is
derived from) the value of other more basic underlying assets/variables
prices of traded assets including stock indices, currencies, commodities, interest rates and bonds
- CORRECT ANSWER - underlying assets/variables
forwards, futures, swaps, and options - CORRECT ANSWER - derivative examples
transfer risk - CORRECT ANSWER - key role of derivatives
hedging, speculating, arbitraging, changing the nature of assets and liabilities, managing duration
and portfolio risk, creating synthetic securities, asset allocation, trading spreads and basis, etc. -
CORRECT ANSWER - Derivatives are used for
Financial institutions connect and contract directly with each other and clients
Can trade non-standardized contracts
Trades cleared either through central counterparty (CCP) or bilaterally - CORRECT
ANSWER - Over-the-Counter (OTC) Market
to make OTC derivatives market more similar to exchange traded market in terms of
transparency and reduce systemic risk to financial system (Swap Execution Facilities (SEF's),
Central Counterparties (CCP's), Central Repository) - CORRECT ANSWER - Goal of
Regulatory Changes following the 2007-2009 financial/credit crisis in OTC Market:
Forward contract - CORRECT ANSWER - agreement to buy or sell an asset at a certain
future time for a certain future price
, buy; sell - CORRECT ANSWER - Long position agrees to ______, Short position agrees
to ____
ST -K - CORRECT ANSWER - Payoff from long position in forward contract on one unit
of asset:
K- ST - CORRECT ANSWER - Payoff from short position in forward contract on one unit
of asset:
forward pricing - CORRECT ANSWER - The Classic Cost of Carry Model used for
F=S-S(C-R)t
F=Spot - (Current Income - Financing Costs)
F=Spot - Carry - CORRECT ANSWER - The Classic Cost of Carry Model
Spot Price - Carry - CORRECT ANSWER - Forward Price =
conform to the model - CORRECT ANSWER - Arbitrage forces forward prices to
Futures contract - CORRECT ANSWER - is an agreement to buy or sell an asset at a
certain future time for a certain future price on exchanges with standardized contract
specifications
non-exchange traded (OTC)
customized contract
usually one specific delivery day
gains/losses only settles at end of contract
face credit risk of trading partner or CCP
delivery of final cash settlement often takes place
