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
