Here is the list of multiple-choice questions for the FINANCIAL DERIVATIVES course. The MCQs are collected and compiled from different online and offline sources.

- What is a financial derivative?

**A security that derives its value from an underlying asset**- A type of bond issued by a financial institution
- A stock option with a fixed expiration date
- A loan provided by a bank to a financial institution

- Which of the following is an example of a financial derivative?

- Common stock
- Treasury bond
**Futures contract**- Corporate bond

- What is a put option?

**An option that gives the holder the right to sell an underlying asset**- An option that gives the holder the right to buy an underlying asset
- An option that requires the holder to buy an underlying asset
- An option that requires the holder to sell an underlying asset

- What is a call option?

- An option that gives the holder the right to sell an underlying asset
**An option that gives the holder the right to buy an underlying asset**- An option that requires the holder to buy an underlying asset
- An option that requires the holder to sell an underlying asset

- Which of the following is NOT a type of financial derivative?

- Forward contract
- Option contract
**Bond contract**- Swap contract

- Which of the following is NOT a type of financial derivative?

- Futures
- Options
- Swaps
**Stocks**

- What is the difference between a call option and a put option?

**A call option gives the holder the right to buy an underlying asset, while a put option gives the holder the right to sell an underlying asset.**- A call option gives the holder the right to sell an underlying asset, while a put option gives the holder the right to buy an underlying asset.
- A call option and a put option are the same thing.
- A call option and a put option have no relation to buying or selling an underlying asset.

- Which of the following is NOT a type of financial derivative?

- Options
- Futures
**Mutual funds**- Swaps

- Which of the following is an example of a forward contract?

- Buying a stock option
- Purchasing a government bond
**Selling a currency at a future date**- Investing in a real estate property

- Which of the following is a type of interest rate derivative?

- Credit default swap
**Forward rate agreement**- Commodity swap
- Equity swap

- Which of the following is NOT a type of equity derivative?

- Stock options
**Stock bonds**- Stock futures
- Stock swaps

- What is a futures contract?

- A contract that gives the holder the right to buy an asset at a specific price
- A contract that obligates the holder to sell an asset at a specific price
- A contract that gives the holder the right to sell an asset at a specific price
**A contract that obligates the holder to buy an asset at a specific price**

- Which of the following is NOT a type of commodity derivative?

- Oil futures
**Stock swaps**- Gold options
- Wheat swaps

- What is the main purpose of futures contracts?

- To provide a guaranteed return on investment
- To replace traditional investments like stocks and bonds
**To transfer risk from one party to another**- To eliminate the need for financial intermediaries

- Which of the following is NOT a type of futures contract?

- Stock futures
- Bond futures
**Mutual fund futures**- Currency futures

**FINANCIAL DERIVATIVES: FEATURES AND FUNCTIONS**

- What is a long position in a futures contract?

**Buying the contract and expecting the price to rise**- Selling the contract and expecting the price to fall
- Selling the contract and expecting the price to rise
- Buying the contract and expecting the price to fall

- What is a short position in a futures contract?

- Buying the contract and expecting the price to fall
- Selling the contract and expecting the price to fall
- Buying the contract and expecting the price to rise
**Selling the contract and expecting the price to rise**

- What is the margin requirement in futures trading?

**The initial payment made by the buyer or seller of a futures contract**- The interest rate charged on futures contracts
- The total cost of the futures contract
- The profit earned from trading futures

- What is the expiration date of a futures contract?

- The date when the underlying asset is delivered
**The date when the futures contract is no longer valid**- The date when the futures contract is initially traded
- The date when the futures contract is settled

- What is the role of a futures exchange?

- To guarantee profits for futures traders
- To provide free education for futures traders
**To provide a platform for buying and selling futures contracts**- To regulate the futures market and prevent fraud

- What is a futures spread?

- A strategy that involves holding a futures contract until its expiration date
- A strategy that involves buying and selling options contracts simultaneously
**A strategy that involves buying and selling different futures contracts simultaneously**- A strategy that involves buying and selling the same futures contract simultaneously

- Which of the following is NOT a type of futures spread?

- Calendar spread
**Volatility spread**- Intermarket spread
- Intramarket spread

- What is the role of a futures broker?

- To provide investment advice to futures traders
- To set the price of futures contracts
**To execute futures trades on behalf of clients**- To regulate the futures market

- Which of the following is a disadvantage of trading futures contracts?

- Low volatility
- Low transaction costs
- High liquidity
**High leverage**

- What is a futures price?

- The price at which the underlying asset is currently trading
- The price at which the futures contract was opened
**The price at which the underlying asset will be delivered**- The price at which the futures contract will expire

- What is a swap?

- A contract to exchange currencies at a fixed exchange rate
- A contract to exchange stocks at a predetermined price
**A contract to exchange assets or liabilities with another party**- A contract to exchange commodities at a future date

- Which of the following is NOT a type of swap?

- Interest rate swap
- Equity swap
**Future swap**- Currency swap

- What is the main purpose of an interest rate swap?

**To exchange fixed interest payments for floating interest payments**- To exchange equity ownership in two different companies
- To speculate on the future price movements of an asset
- To exchange one currency for another at a fixed exchange rate

- What is an option?

- A contract to exchange commodities at a future date
- A contract to exchange stocks at a predetermined price
- A contract to exchange assets or liabilities with another party
**A contract to buy or sell an asset at a future date at a predetermined price**

- Which of the following is NOT a type of option?

- European option
**Equity option**- American option
- Asian option

- Which of the following is a type of swap?

- Interest rate swap
- Currency swap
- Commodity swap
**All of the above**

- What is a strike price?

**The price at which an option can be exercised**- The price at which an underlying asset can be bought or sold
- The difference between the market price and the exercise price of an option
- The amount of money required to enter into an options contract

- Which of the following is a disadvantage of options trading?

- Limited risk
- Transparency
**Limited potential profit**- Flexibility

- What is the main purpose of a currency swap?

- To hedge against interest rate risk
- To raise capital for a company
**To hedge against currency risk**- To speculate on stock prices

- What is the premium of an option?

- The price at which the option is written
- The price at which the option is executed
- The price at which the option is exercised
**The price paid by the holder of the option to the writer for the right to buy or sell the underlying asset**

- What is the Black-Scholes model used for?

- Pricing futures
**Pricing options**- Pricing swaps
- Pricing bonds

- What is the main assumption of the Black-Scholes model?

- The option can be exercised only on the expiration date
- The underlying asset follows a normal distribution
- The option can be exercised at any time
**The underlying asset follows a log-normal distribution**

- What is the main assumption of the Monte Carlo simulation method for option pricing?

**The underlying asset follows a log-normal distribution**- The underlying asset follows a normal distribution
- The option can be exercised only on the expiration date
- The option can be exercised at any time

- What is delta in option pricing?

- The sensitivity of the option price to changes in the time to expiration
- The sensitivity of the option price to changes in the volatility of the underlying asset
**The sensitivity of the option price to changes in the underlying asset price**- The sensitivity of the option price to changes in interest rates

- What is vega in option pricing?

- The sensitivity of the option price to changes in the underlying asset price
- The sensitivity of the option price to changes in interest rates
- The sensitivity of the option price to changes in the time to expiration
**The sensitivity of the option price to changes in the volatility of the underlying asset**

- Which of the following inputs is NOT used in the Black-Scholes-Merton model?

- Strike price
**Dividend yield**- Volatility
- Interest rate

- What is the binomial option pricing model used for?

- Pricing futures
- Pricing forwards
**Pricing options**- Pricing swaps

- What is the main assumption of the binomial option pricing model?

- The stock price follows a random walk
- The stock price is log-normally distributed
**The stock price follows a binomial process**- The stock price is normally distributed

- What is the main advantage of the Monte Carlo simulation method?

- a. It is easy to implement
- b. It is computationally efficient
- c.
**It can handle complex payoff functions** - It is more accurate than other methods

- What is the difference between the Black-Scholes-Merton model and the binomial option pricing model?

- The Black-Scholes-Merton model assumes a log-normal distribution of stock prices, while the binomial option pricing model assumes a binomial distribution of stock prices.
- The Black-Scholes-Merton model can only handle European options, while the binomial option pricing model can handle both European and American options.
**The Black-Scholes-Merton model uses a closed-form solution, while the binomial option pricing model uses a numerical solution.**- The Black-Scholes-Merton model is more accurate, while the binomial option pricing model is faster.

- What is the binomial option pricing model?

- A model used for pricing interest rate swaps
- A model used for pricing credit default swaps
- A model used for pricing commodity futures contracts
**A discrete-time model used for pricing options**

- Which of the following is NOT a type of option pricing model?

- Monte Carlo simulation model
**American option pricing model**- Black-Scholes model
- Binomial option pricing model

- What is a risk-neutral probability in option pricing?

- The probability that an option will expire worthless
**The probability used to discount future cash flows in the option pricing model**- The probability that the underlying asset will experience a certain level of volatility
- The probability that the option holder will exercise the option

- What is the purpose of sensitivity analysis in option pricing?

- To determine the historical price movements of the underlying asset
**To assess the impact of changes in key inputs on the price of the option**- To determine the risk-neutral probabilities of different outcomes
- To estimate the implied volatility of the underlying asset

- What is Black-Scholes model?

- A pricing model for interest rate swaps
- A pricing model for currency swaps
**A pricing model for stock options**- A pricing model for futures contracts

- Which of the following is NOT a commonly used model for pricing options?

- Black-Scholes model
- Monte Carlo model
**Newton-Raphson model**- Binomial model

- What is implied volatility in option pricing?

- The actual volatility of the underlying asset
- The estimated volatility of the underlying asset using historical data
**The volatility implied by the market prices of the options**- The volatility used in the Black-Scholes model for pricing options

- What is the regulatory authority in India that oversees derivative markets?

**Securities and Exchange Board of India (SEBI)**- Bombay Stock Exchange (BSE)
- Reserve Bank of India (RBI)
- National Stock Exchange (NSE)

- Which of the following is NOT a type of derivative traded in India?

- Futures
- Options
- Swaps
**Treasury Bonds**

- Which stock exchange in India is the largest in terms of trading volumes for derivatives?

- Indian Commodity Exchange (ICEX)
- Bombay Stock Exchange (BSE)
**National Stock Exchange (NSE)**- Multi Commodity Exchange (MCX)

- In India, which entity is responsible for clearing and settlement of derivative trades?

- National Securities Depository Limited (NSDL)
- Central Depository Services (India) Limited (CDSL)
**National Securities Clearing Corporation Limited (NSCCL)**- Reserve Bank of India (RBI)

- In India, which of the following is NOT a category of market participants in the derivative segment?

**Auditors**- Speculators
- Hedgers
- Arbitrageurs

- What is the meaning of the term “Derivative” in the Indian financial market?

**A contract whose value is derived from an underlying asset**- A type of investment in stocks
- A type of debt instrument issued by the government
- A type of insurance policy

- Which among the following is not a type of derivative traded in India?

- Options
- Swaps
- Futures
**Bonds**

- Who can participate in derivative trading in India?

- Only institutional investors
- Only individual investors
**Both institutional and individual investors**- Only foreign investors

- What is the tax treatment of gains from derivative trading in India?

- Tax-free
- Taxed at a higher rate than other investments
**Taxed at the same rate as other investments**- Taxed at a lower rate than other investments

- Which of the following is an example of a derivative instrument in India?

- Corporate bond
**Index futures**- Government bond
- Common stock

- What are the risks associated with derivative trading in India?

- Credit risk
- Liquidity risk
- Market risk
**All of the above**

- What is the role of the option writer (seller)?

- Exercises options
- Buys options from the market
**Sells options to the market**- None of the above

- What is the maximum gain for the buyer of a put option?

- The premium paid for the option
- Zero
**The strike price of the option**- Unlimited

- What is the maximum gain for the buyer of a call option?

- The premium paid for the option
- The strike price of the option
**Unlimited**- Zero

- What is the key characteristic of options that distinguishes them from other financial instruments?

- Physical delivery
**Leverage**- Risk-free return
- Guaranteed profit

- What is the predetermined price at which the underlying asset can be bought or sold?

- Premium
- Future price
**Strike price**- Spot price

- Which of the following is not a factor that affects the price of an option?

- Strike price
- Spot price of the underlying asset
**Current interest rates**- Expiration date

- What is the purpose of using derivatives in hedging?

- To decrease leverage
**To manage risks**- To speculate on future prices
- To increase leverage

- What is the main benefit of hedging?

- Eliminating all risks
- Maximizing returns
- Guaranteeing profits
**Reducing or mitigating risks**

- Which of the following is an example of a commonly used hedging technique?

**Short selling**- Margin trading
- Day trading
- Dividend investing

- What is the primary goal of a company when it engages in hedging?

- Speculating on future prices
**Reducing costs**- Maximizing revenue
- Maximizing shareholder value

- What is the key consideration in choosing a hedging strategy?

- Minimizing costs
**Minimizing risks**- Maximizing profits
- Maximizing leverage

- Which of the following is an example of a natural hedge?

- A company operating in a foreign country buying a futures contract to lock in a currency exchange rate
- A company operating in a foreign country using a currency swap to lock in a currency exchange rate
**A company with operations in different countries having revenues in one currency and expenses in another currency**- A company using options contracts to hedge against price changes in commodities

- Which of the following is a characteristic of an effective hedging strategy?

- Low liquidity
**Low transaction costs**- High volatility
- High risk tolerance

- Which of the following is a potential drawback of hedging using derivatives?

- Increased volatility
**Counterparty risk**- Inability to achieve desired hedge ratios
- Lack of liquidity

- What is the key principle of hedging in risk management?

- Concentration
- Speculation
- Timing
**Diversification**

- What is the main objective of using a “long hedge” strategy?

**To protect against an increase in the price of an asset**- To speculate on the price decrease of an asset
- To protect against a decrease in the price of an asset
- To speculate on the price increase of an asset

- Which of the following is an example of a “short hedge” strategy?

- Buying put options
- Selling call options
- Buying call options
**Selling put options**

- Which of the following is an example of a market risk mitigation technique?

- Margin trading
- Portfolio rebalancing
- Market timing
**Stop-loss orders**

- Which of the following is NOT a step in the market risk management process?

**Risk elimination**- Risk identification
- Risk measurement
- Risk monitoring

- What is meant by “liquidity risk” in market risk management?

**The risk of not being able to sell an investment quickly without significant loss**- The risk of not being able to buy an investment at the desired price
- The risk of loss due to changes in market interest rates
- The risk of loss due to changes in foreign exchange rates

- What is a credit default swap (CDS)?

- A type of bond issued by a government
- A type of loan provided by a bank
**A financial contract that provides protection against default by a borrower**- A type of mortgage-backed security

- Which of the following is an example of a credit market intermediary?

**Commercial bank**- Pension fund
- Mutual fund
- Insurance company

- What is a credit spread?

**The difference between the interest rate on a bond and the risk-free rate**- The difference between the bid and ask price of a stock
- The difference between the credit limit and balance on a credit card
- The difference between the face value and market value of a bond

- What is a credit default swap (CDS)?

**A financial contract that provides protection against default by a borrower**- A type of mortgage-backed security
- A type of bond issued by a government
- A type of loan provided by a bank

- What is the role of a credit rating agency in the credit market?

- To provide loans to borrowers
- To facilitate stock trading activities
- To issue bonds to investors
**To assess the creditworthiness of borrowers**

- What is a collateralized debt obligation (CDO)?

- A type of loan provided by a bank
- A type of mortgage-backed security
**A financial instrument that pools together various types of loans and sells them to investors**- A type of bond issued by a government