FIN 4330 Exam 2 Questions with Correct Answers Latest Update 2025/2026
Derivatives - Answers prices are derived from underlying assets
Derivatives can be used for three distinct management objectives: - Answers 1. Speculation -
enter into a position to take risk for a premium based on belief
2. Hedging - pay a premium for speculators to eliminate risk
3. Arbitrage - conditions: a) no net investment; b) no risk; c) sure profit
Differences between forward and futures contracts - Answers Futures contracts...
1. always traded on organized exchange
2. trade only standardized contracts
3. operate a clearinghouse, which guarantees performance
4. require marking to market
5. require initial margin and maintenance margin
Notional principal - Answers = notional value = contract value = contract size
Fixed Exchange Rate System - Answers held constant or allowed to fluctuate within very narrow
boundaries; central bank can devalue or revalue its currency
advantages:
1. risk is low
2. attract more foreign direct investments (FDI)
disadvantages:
1. central bank maintains large quantities of reserve
2. risk central bank will devalue currency
3. vulnerable to high inflation and high unemployment
Freely Floating Exchange Rate System - Answers determined by market forces without
government intervention
Derivatives - Answers prices are derived from underlying assets
Derivatives can be used for three distinct management objectives: - Answers 1. Speculation -
enter into a position to take risk for a premium based on belief
2. Hedging - pay a premium for speculators to eliminate risk
3. Arbitrage - conditions: a) no net investment; b) no risk; c) sure profit
Differences between forward and futures contracts - Answers Futures contracts...
1. always traded on organized exchange
2. trade only standardized contracts
3. operate a clearinghouse, which guarantees performance
4. require marking to market
5. require initial margin and maintenance margin
Notional principal - Answers = notional value = contract value = contract size
Fixed Exchange Rate System - Answers held constant or allowed to fluctuate within very narrow
boundaries; central bank can devalue or revalue its currency
advantages:
1. risk is low
2. attract more foreign direct investments (FDI)
disadvantages:
1. central bank maintains large quantities of reserve
2. risk central bank will devalue currency
3. vulnerable to high inflation and high unemployment
Freely Floating Exchange Rate System - Answers determined by market forces without
government intervention
