MCQ

I. What is a derivative contract? 1

a) An agreement to exchange physical goods
a) A financial contract whose value is derived from an underlying asset
b) A contract for the purchase of real estate
c) An agreement for the provision of services

II. Which of the following is an example of a derivative instrument? 1

a) Common stock
b) Corporate bond
c) Futures contract
d) Treasury bill

III. In a forward contract, the terms are agreed upon: 1

a) After the contract expires
b) At the time of contract execution
c) Only during weekends
d) Never, as it is always variable

IV. What is the primary purpose of using derivatives? 1

A) To guarantee profits
B) To transfer risk
C) To eliminate market volatility
D) To avoid government regulations

V. Which type of derivative provides the option, but not the obligation, to buy or 1
sell an asset at a specified price before or at a specified expiration date?
A) Forward contract
B) Swap
C) Option
D) Future contract

VI. What is a futures contract? 1

A) A contract that lasts indefinitely
B) A contract for the immediate delivery of goods
C) A standardized contract to buy or sell an asset at a future date
D) A contract exclusively for currency exchange
VII. In a swap contract, parties typically exchange: 1
A) Goods for services
B) Fixed and variable interest rate payments
C) Currencies at a fixed rate
D) Physical commodities

VIII. Which derivative contract provides protection against adverse price 1

movements in an asset?
A) Forward contract
B) Option contract
C) Swap contract
D) Future contract

IX. What is the main difference between options and futures contracts? 1
A) Options involve an obligation, while futures do not.
B) Options are standardised, while futures are customised.
C) Options provide the right, but not the obligation, to buy or sell,
while futures contracts require execution.
D) There is no difference; the terms are used interchangeably.

X. Which of the following is a key risk associated with derivative trading? 1

A) Market risk
B) Sovereign risk
C) Operational risk
D) All of the above

XI. What is a call option? 1

A) The right to sell an asset at a specified price
B) The right to buy an asset at a specified price
C) The obligation to buy an asset at a specified price
D) The obligation to sell an asset at a specified price

XII. What is the purpose of a hedging strategy using derivatives? 1

A) To increase risk exposure
B) To speculate on market movements
C) To reduce or eliminate risk
D) To diversify investment portfolios

XIII. Which type of risk do derivatives help in managing? 1

A) Political risk
B) Credit risk
 C) Market risk
D) Inflation risk

XIV. What is the notional amount in a derivative contract? 1

A) The actual amount exchanged between the parties
B) The initial deposit required
C) The face value used to calculate cash flows
D) The amount guaranteed by the government

XV. In the context of interest rate swaps, what is a fixed-for-floating swap? 1

A) An exchange of fixed interest rate payments for fixed interest rate
payments
B) An exchange of fixed interest rate payments for floating interest
rate payments
C) An agreement to maintain the same interest rate indefinitely
D) A swap with no fixed or floating components

XVI. What is a key characteristic of a forward contract? 1

A) It is traded on an exchange.
B) It has standardized terms.
C) It involves immediate delivery of the underlying asset.
D) It is customizable and traded over-the-counter.

XVII. Which of the following is an example of a commodity derivative? 1

A) Eurodollar futures
B) Gold futures
C) S&P 500 options
D) Interest rate swaps

XVIII. What is the expiration date of an options contract? 1

A) The date on which the option is exercised
B) The date on which the underlying asset is delivered
C) The date on which the option contract ceases to exist
D) There is no specific expiration date for options

XIX. What is the role of a clearinghouse in derivative trading? 1

A) To initiate trades between parties
B) To guarantee the creditworthiness of the parties
C) To set the terms of derivative contracts
D) To speculate on market movements
XX. Which regulatory body is often responsible for overseeing and regulating 1
derivative markets?
A) International Monetary Fund (IMF)
B) World Bank
C) Securities and Exchange Commission (SEC)
D) Food and Drug Administration (FDA)

Ans: 1.B
2. C
3. B
4. B
5. C
6. C
7. B
8. B
9. C
10. D
11. B
12. C
13. C
14. C
15. B
16. D
17. B
18. C
19. B
20. C

Q1) What is a derivative in financial markets? 2

Answer: A derivative is a financial contract whose value is derived from the
price of an underlying asset, index, or rate.

Q2) How does a futures contract differ from a forward contract? 2

Answer: Unlike a forward contract, a futures contract is standardised, traded
on an exchange, and has daily price fluctuations marked to the market.

Q3) What is the purpose of hedging in the derivative market? 2

 Answer: Hedging in the derivative market is used to offset the risk of adverse
price movements in the underlying assets, protecting against potential
losses.

Q4) Define the term "options" in the context of derivatives. 2

Answer: Options are financial contracts that provide the holder with the right,
but not the obligation, to buy or sell an asset at a predetermined price before
or at expiration.

Q5) How does leverage work in derivative trading? 2

Answer: Leverage in derivative trading allows investors to control larger
positions with a smaller amount of capital, amplifying both potential gains and
losses.

Q6) What is the role of a clearinghouse in the derivative market? 2

Answer: A clearinghouse acts as an intermediary, clearing and settling
trades, managing counterparty risk, and ensuring the integrity of the financial
markets.

Q7) Explain the concept of "mark to market" in futures trading. 2

Answer: Mark to market is the daily adjustment of the futures contract's value
based on the current market price, leading to gains or losses credited or
debited to traders' accounts.

Q8) How does the Black-Scholes model contribute to options pricing? 2

Answer: The Black-Scholes model is a mathematical formula used to
calculate the theoretical price of European-style options, considering factors
like volatility, time to expiration, and the underlying asset's price.

Q9) What is a swap in the derivative market? 2

Answer: A swap is a financial contract where two parties agree to exchange
cash flows or other financial instruments, often used for managing interest
rate or currency risk.

Q10) How do derivatives contribute to price discovery in financial markets? 2

Answer: Derivatives contribute to price discovery by reflecting market
expectations and sentiments, providing insights into future asset prices and
market trends.

Long Questions

1.What are the types of derivative Contracts ?

2.Explain type of investor ?
3.What is the Economic function of the derivative market ?
4.What is the economic significance of Index movement ?
5.What are desirable attributes of an index ?
6.What is the distinction between future and forward contract ?
7.What is the difference between Trading Underline and Trading sungle stock
futures?
8.What are the future payoffs ?
9.What is Beta (β) ?
10.What do you understand by Hedging ,Speculation and Arbitrage ?
11.Explain option payoffs ?
12.Explain future market terminologies.
13. Explain option market terminologies.
14.What is the swap market ?