NOIDA INSTITUTE OF ENGINEERING & TECHNOLOGY

GREATER NOIDA

MBA
Financial Derivatives and Risk Management (AMBAFM0413)

Unit-4
By

Dr. Mohd Iftikhar Baig

Assistant professor
Department-MBA
NIET, GREATER NOIDA
 SWAPS
• Exchanging things is called Swap. It can be anything you may be Exchanging things
is called Swap. It can be anything you may be swapping, your pen, mobile etc., with
your friends.

Or

• A swap, in finance, is an agreement between two counterparties to exchange financial

instruments or cash flows or payments for a certain time. The instruments can be
almost anything but most swaps involve cash based on a notional principal amount.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 26Iftikhar Baig
By: Mohd
 SWAPS

• History of Swap

• In ancient medieval period there was no currency or money. So people used to

exchange things i.e. Farmer exchanging Rice with wheat, this was called as Barter
System.

• Swap has evolved from Barter system.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 27Iftikhar Baig
By: Mohd
 Types of Swaps

• Interest Rate Swap

• Cross Currency Swap

• Circus Swap

• Callable Swap

• Putable Swap

• Credit Default Swap

•Equity Swap

• Equity Default Swap

• Commodity Swap

• Swaption
.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 28Iftikhar Baig
By: Mohd
 Calculation of Coupon
• Trade Date Accrual Date Accrual End Date
• Maturity date
• Coupon Period
• Coupon= Notional Amount*No of Days * Roi * Day Count
Basis
• Eg:- Day Count Basis 30/360, ACT/360 , ACT/ACT

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 29Iftikhar Baig
By: Mohd
 Daily Quiz
1. Standardized of the futures contracts in case of commodities is/are in terms of:
(a) Quality. (b) Expiration month.
(c) Quantity. (d) All of the above.

2. The valuation model for futures differs from that of an option as:
(a) Futures the right without an obligation.
(b) Option is the right without an obligation.
(c) Futures are traded in organized markets.
(d) Futures can be enforced the maturity.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 30Iftikhar Baig
By: Mohd
 Daily Quiz

3. On NSE, for its index what would be the opening day of its January series ?
(a)1st trading day after last Thursday in December.
(b) 1st trading day after last Thursday in October.
(c) 1st trading day after last Thursday in January.
(d) 1st trading day after last Thursday in February.

4. In an Index Futures Contract, if the tick size 0.1 of an index point and the
index multiple is at Rs. 50, a tick is valued at:
(a) Rs. 5.00 (b) Rs. 12.50
(c) Rs. 0.75 (d) Rs. 0.50

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 31Iftikhar Baig
By: Mohd
 Daily Quiz
5. Initial margin is also referred to us:
(a) Vertical margin. (b) Variation margin.
(c) Performance margin. (d) Spread margin.
6. A futures contract is standardized version of a:
(a) Put option. (b) Call option.
(c) Swap contract. (d) Forward contract.
7. What does FRA means?
(a) Futures rate Agreement
(b) Forward Rates Agreement

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 32Iftikhar Baig
By: Mohd
 Daily Quiz
8. In futures, the terms and conditions are standardized with reference to:
(a) Rate and date only. (b) Quantity only.
(c) Place of delivery only. (d) All of the above .
9. In futures trading, the initial margin is to be deposited with the broker by:
(a) Seller of the contract. (b) Buyer of the contract.
(c) Bothe the parties. (d) None of the above.

10. For SENSEX futures, what is the opening day of its March series of index
futures contracts:
(a) First trading day after last Thursday in December.
(b) First trading day after last Thursday in February.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 33Iftikhar Baig
By: Mohd
 Interest Rate SWAP
• In a swap, two counterparties agree to a contractual arrangement wherein they exchange
at periodic intervals.

• Fixed Interest rate to Floating Interest

• Floating Interest rate to Fixed Interest rate

Link: https://www.youtube.com/watch?v=BJUsXG-ozxA&t=38s

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Size of the Swap Market

•The swap market is one of the largest and most liquid global marketplaces, with
many willing participants eager to take either side of a contract.

•According to the most recent statistics, the notional amount outstanding in over-
the-counter interest rate swaps was more than $542 trillion.

The most popular currencies are:

• U.S. dollar

• Japanese yen

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 39Iftikhar Baig
By: Mohd
 Size of the Swap Market
• Euro
• Swiss franc
• British pound sterling

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 40Iftikhar Baig
By: Mohd
 Advantages of Interest Rate Swap

•Swapping from fixed to floating may save issuer money.

•Protects against adverse movements in interest rates.

•No premium is paid to enter into a swap.

• No principal amount is exchanged.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 41Iftikhar Baig
By: Mohd
 Cross Currency Swap
In a Cross currency swap, two counterparties counterparties agree to a contractual
arrangement wherein they agree to exchange their currencies.

E.g.

• USD being exchanged with GBP USD being exchanged with GBP

• AUD being exchanged with USD

Link: https://www.youtube.com/watch?v=uxF7m08cgJk

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 42Iftikhar Baig
By: Mohd
 Circus Swap

• In a Circus Swap ,two counterparties

• agree to a contractual arrangement wherein they agree to exchange their wherein they agree
to exchange their Notional Amount and Interest Rate.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 43Iftikhar Baig
By: Mohd
 Callable & Putable Swap

• Callable Swap:

• A callable swap is a contract between two counterparties in which the exchange of one
stream of future interest payments is exchanged for another based on a specified
principal amount.

• Putable Swap:

• A putable swap is a variation on an interest rate swap that contains an embedded put
option giving the holder the right to cancel the contract at certain points over the life of
the swap.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 2 Iftikhar Baig
By: Mohd
 Credit Default Swap (CDS)

• A credit default swap is an agreement by one party to accept a premium at regular

intervals in return for making a larger payment if a specific company defaults, goes
bankrupt, or suffers payment if a specific company defaults, goes bankrupt, or suffers a
negative credit event. a negative credit event.

• It is an agreement between a protection buyer and a protection seller whereby the buyer
pays a periodic fee in return for a contingent payment by the seller upon a credit event
(such as a certain default) happening in the reference entity.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 45Iftikhar Baig
By: Mohd
 Credit events

• Credit Event

• A credit event is a negative change in a borrower's capacity to meet its payments,

which triggers settlement of a credit default swap.

• The three most common credit events are

1. Filing for bankruptcy,

2. Defaulting on payment, and

3. Restructuring debt

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 46Iftikhar Baig
By: Mohd
 Daily Quiz
1. For contingency exposure of foreign exchange, the best derivative that can be used
to hedge is
(a) Forwards. (b) Options.
2. The strike price under an option is
(a) The price at which the option is auctioned
(b) The exchange rate which the currencies are agreed to be exchanged under the
contract
3. The acronym CIRCUS stands for
(a) Current Interest Rate Swap.
(b) Circular Currency Swap.
(c) Combined Income Range Currency Swap.
(d) Combined Interest Rate and Currency Swap.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 47Iftikhar Baig
By: Mohd
 Daily Quiz

3. Zero coupon swap is an arrangement

(A) Involving exchange of zero coupon bonds.
(B) Whereby only one party makes payment periodically.
(C) Whereby one of the counter-parties makes payment in lump sum instead of
periodically.

4. In an Index Futures Contract, if the tick size 0.1 of an index point and the index
multiple is at Rs. 50, a tick is valued at:
(a) Rs. 5.00 (b) Rs. 12.50
(c) Rs. 0.75 (d) Rs. 0.50

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 48Iftikhar Baig
By: Mohd
 Daily Quiz
5. In futures, the terms and conditions are standardized with reference to:
(a) Rate and date only. (b) Quantity only.
(c) Place of delivery only. (d) All of the above .
6. A forward rate agreement helps the user to
(a) Fix the cost of borrowing.
(b) Reduce the cost of borrowing.

7. An interest rate cap is a series of

(A) Call options
(B) Put options.
(C) Periodical payments

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 49Iftikhar Baig
By: Mohd
 Settlement of CDS
• Cash Settlement - A cash-settled option is a type of option for which actual physical
delivery of the underlying asset or security is not required. The settlement results in
a cash payment, instead of settling in stocks, bonds, commodities, or any other asset.

• Physical Delivery - Transfer of a pre-agreed Physical Delivery - Transfer of a pre-

agreed asset or assets ("Deliverable Obligation") to the seller in exchange for a payment
equal to the seller in exchange for a payment equal to the notional of the contract.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Equity Swap
• Equity swap is a transaction between two parties in which each party agrees to make a
series of payments to the other, with at least one set of payments determined by the return
on a stock or stock index.

• The return is calculated based on a pre-determined notional principal may or may not
include dividends.

• The payments occur on regularly scheduled dates over a specified period of time.

• An equity swap is an exchange of future cash flows between two parties that allows each
party to diversify its income for a specified period of time while still holding its original
assets
. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Type of Equity SWAPS
There are three main types of equity swaps:

1. An equity swap with the equity return paid against a fixed

rate.

2. An equity swap with the equity return paid against a floating rate.

3. An equity swap with the equity return paid against another equity return

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz
1. Define SWAP
2. Discuss interest rate
3. What is equity?
4. What is equity return?
5. Define currency exchange.
6. Discuss forex market.
7. Define cash settlement.
8. Give full form of CDS.
9. What floating rate.
10. What is trading?

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Forward Interest Rate

• A customized contract between two parties that guarantees a certain interest rate on
an investment or a loan for a specified time interval in the future, i.e. begins on one
forward date and ends later.

• Notion

• Forward-forwards have a special notation to designate the future term.

• For instance, a term that begins in 6 months and ends 1 year later, would be
designated as 6 v 18.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 How is the Forward Rate Determined?

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 How is the Forward Rate Determined?

•The interest rate for the shorter period is the market yield with the term equal to the
number of days from the agreement date until the contract begins.

•The longer period is determined using the market yield with the term equal to the number
of days from the agreement date until the contract ends.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Forward Rate Agreement

• Similar to forward contracts .

• Two parties involved

BORROWER (Long) LENDER (Short)

https://www.youtube.com/watch?v=-tY8D_LQUsU&t=108s

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Forward Rate Agreement

• EXAMPLE

• Two parties can enter into an agreement to borrow $1 million after 60 days for a
period of 90 days, at say 5%.

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 66Iftikhar Baig
By: Mohd
 Characteristics of FRAs
• Usually cash-settled

• Net amount is settled (difference between the current LIBOR and the agreed
FRA rate)

• Payment made only at maturity

• Deposit amount is known as notional amount

• Determined on short-term interest rates (reference rates)

.. Subject: AMBAFinancial
Subject: FM0413 Derivatives
(FD & RM) & Riskby: Dr. Mohd Iftikhar
Management Slide no. 2 Iftikhar Baig
By: Mohd
 Mechanism of an FRA Agreement
• A bank and a company are agreeing to the company being able to borrow Rs. 50 million
for six months in two months’ (2v8) time at

• 6.4167% interest.

• Current IR is 6%.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 The formula for the Settlement Amount

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Examples
• Example # 01

• Consider a 3v6 FRA on a notional principal amount of $1 million. The FRA rate is 6%
. The FRA settlement date is after 3 months (90 days) and settlement is based on a
90 day LIBOR. Assume that on the settlement date, the actual 90 day LIBOR is
8%. Calculate the FRA settlement amount.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 FRA Periods Longer Than 1 year
• If the period of the FRA is longer than 1 year, the corresponding LIBOR rates is used for
settlement relates to a period where interest is conventionally paid at the end of each year
as well as at maturity.

• FOR EXAMPLE:

• A 6v24 FRA covers a period from 6 months to 24 months and will be settled against an
18 month LIBOR rate at the beginning of the FRA period.

• An 18 month deposit would, typically pay interest at the end of one year and again after
18 months.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Formula for Period Longer than a Year But Less 2 years

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz

1.Give full form of LIBOR.

2.Give full form of FRAs.
3.Define the word-settlement in security market.
4. Discuss the longer period in FRAs.
5.Define the shorter period in FRAs.
6.What is LIBOR?
7.What is currency SWAP?
8. Define interest rate SWAP.
9.What is notional principal amount?
10.Define FRA settlement amount.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Summary

• We have covered the following topics in this lecture:

• Forward rate Agreement-Settlement

• FRA Periods Longer Than 1 year

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• A contractual agreement, generally made on the trading floor of a futures
exchange to buy or sell a particular commodity or financial instrument at a pre-
determined price in the future.

• Futures contracts detail the quality and quantity of the underlying asset.

• They are standardized to facilitate trading on a futures exchange.

• Some futures contracts may call for physical delivery of the asset.

• While others are settled in cash.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• The future contract is traded on a particular exchange.

• Future contracts are generally standardized.

• The specifications of each future contracts are laid down precisely by the relevant exchange

• vary from instrument to instrument and exchange to exchange.

• It varies from instrument to instrument and exchange to exchange.

• The theory underlying the pricing of a future contract depends on the underlying instrument on which the
contract is based.

• For a future contract based on 3-month interest rates, the pricing is therefore based on the same forward-
forward pricing theory.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• Example

• 3-month EURIBOR futures contract traded on LIFFE.

• Exchanges: LIFFE (London International Financial Futures and Options Exchange)

Underlying: The basis of the contract is a 3-month deposit of EUR 1 million
based on ACT/360 year.

• Delivery: It is not permitted for this contract to be delivered: if a trader buys such a
contract, he cannot insist that, on the future delivery date, his counterparty makes an
arrangement for him to have a deposit for 3-months from then onwards at the interest
rate agreed.
. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• Delivery months: The nearest 3-months following the dealing and March,
June, September and December thereafter.

• Delivery Day: First business day after the last Trading day.

• Last Trading Day: 10.00 a.m. 2 Business Days prior to the third Wednesday of the
delivery month.

• Settlement Prices: On the last day of trading- usually the third Monday of the month-
LIFFFE declares an exchange delivery settlement price (EDSP) which is the closing price
at which any contracts still outstanding will be automatically reversed.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract

• Price: The price is determined as a free market and is quoted as an index rather than as
an interest rate.

• Price Movement: Prices are quoted in unit of 0.005. This minimum movement is called
the Trek.

• Profit and Loss value: The P&L is defined as being calculated on exactly 3/12 of a year
regardless of a number of days in a calendar quarter. The profit or loss on a single
contract is therefore.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• There are relatively minor differences between future exchanges and even between different
STIR contracts on the same exchange.

• Underlying: The typical contract specification for short term interest rate futures is for 3-
month interest rate. Although 1-month contracts also exist in some currencies on some
exchanges.

• Delivery Date: STIR contracts worldwide are generally based on the delivery month cycle
of March, June, September and December.

• Trading: Trading times vary. Some contracts are traded by open outcry, notably on the
IMM (the International Monetary Market, the financial sector of the Chicago Mercantile
Exchange (CME)) and some are traded electronically.
. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• Price movement:

• Price action is the movement of a security's price plotted over time. Price
action forms the basis for all technical analysis of a stock, commodity or other asset

• Settlement price:

• Settlement price refers to the price at which an asset closes or of which a derivatives
contract will reference at the end of each trading day and/or upon its expiration.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• Example:
• A dealer expects interest rates to fall (future to rise) and takes a speculative position.
He therefore buys 20 EUR 1-month futures contracts at 95.27. He closes them out
subsequently at 95.20. What is his profit?
• The price has fallen, so he makes a loss of EUR 3,500:

• Number of contracts x contract amount x price movement x 1/12

• = 20 x EUR 3,000,000 x 0.07% x 1/12 = EUR 3,500

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Future Contract
• SHORT-TERM INTEREST RATE FUTURES

• Price= 100 – (implied forward-forward interest rate x 100)

• Profit on a long position in a 3-month contract

• = contract amount x (sale price – purchase price)/100 x 3/12

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz
1. Standardized of the futures contracts in case of commodities is/are in terms of:
(a) Quality. (b) Expiration month.
(c) Quantity. (d) All of the above.

2. The valuation model for futures differs from that of an option as:
(a) Futures the right without an obligation.
(b) Option is the right without an obligation.
(c) Futures are traded in organized markets.
(d) Futures can be enforced the maturity.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 The Mechanics of Futures
Market participation:
• Members
• Customers
• Locals
• Public orders member

Open outcry versus screen-trading

• Open outcry:
• The buyer and seller deal face to face in public in the exchange’s trading pit.

• Screen trading:
• Designed to simulate open outcry but with the advantage of lower costs and wider
access.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 The Mechanics of Futures
CLEARING:

• The futures exchange is responsible for administering the market, but all transactions are
cleared through a clearing house.

• Only clearing members of an exchange are entitled to clear their transactions directly with
the clearing house.

• Non-clearing members have to clear all their transactions through a clearing member.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 The Mechanics of Futures
• MARGIN REQUIREMENTS

• Initial Margin

• Variation Margin

• Calculation of variation margin:

• The variation margin required is the tick value multiplied by the number of ticks price movement
since the close the previous day.

• Example:

• The variation margin required is the tick value multiplied by the number of ticks price movement
since the close the previous day.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Closing Out and Limit out

Closing Out:

• A futures position can be closed out by means of an exactly offsetting transactions.

Limit Out:

• Some markets impose limits on trading movements in an attempt to prevent wild

price fluctuations and hence limit risk to some extent.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Basis
• Basis is the difference between what the futures price would be based on the current
cash interest rate, and the actual futures price.

• Value basis = Theoretical futures price – Actual futures price

• Basis = Implied cash price – Actual futures price

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz
1. Standardized of the futures contracts in case of commodities is/are in terms
of:
(a) Quality. (b) Expiration month.
(c) Quantity. (d) All of the above.

2. The valuation model for futures differs from that of an option as:
(a) Futures the right without an obligation.
(b) Option is the right without an obligation.
(c) Futures are traded in organized markets.
(d) Futures can be enforced the maturity.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz
3. On NSE, for its index what would be the opening day of its January series ?
(a)1st trading day after last Thursday in December.
(b) 1st trading day after last Thursday in October.
(c) 1st trading day after last Thursday in January.
(d) 1st trading day after last Thursday in February.

4. In an Index Futures Contract, if the tick size 0.1 of an index point and the
index multiple is at Rs. 50, a tick is valued at:
(a) Rs. 5.00 (b) Rs. 12.50
(c) Rs. 0.75 (d) Rs. 0.50

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Daily Quiz
5. In futures, the terms and conditions are standardized with reference to:
(a) Rate and date only. (b) Quantity only.
(c) Place of delivery only. (d) All of the above .

6. In futures trading, the initial margin is to be deposited with the broker by:
(a) Seller of the contract. (b) Buyer of the contract.
(c) Bothe the parties. (d) None of the above.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 Weekly Assignment
Q.1 Define the term ‘Swap Contract’. Who are the parties involved in a swap?

Q.2 Write a note on types of interest rate swaps.

Q.3 Explain the comparison between options, futures and swap contracts

Q.4Write the notes on the following:

• (i) Currency Swap.

• (ii) Callable Swap.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 MCQ s
1. Standardized of the futures contracts in case of commodities is/are in terms of:
(a) Quality. (b) Expiration month.
(c) Quantity. (d) All of the above.

2. The valuation model for futures differs from that of an option as:
(a) Futures the right without an obligation.
(b) Option is the right without an obligation.
(c) Futures are traded in organized markets.
(d) Futures can be enforced the maturity.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 3. On NSE, for its index what would be the opening day of its January series ?
(a)1st trading day after last Thursday in December.
(b) 1st trading day after last Thursday in October.
(c) 1st trading day after last Thursday in January.
(d) 1st trading day after last Thursday in February.

4. In an Index Futures Contract, if the tick size 0.1 of an index point and the
index multiple is at Rs. 50, a tick is valued at:
(a) Rs. 5.00 (b) Rs. 12.50
(c) Rs. 0.75 (d) Rs. 0.50

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 5. In futures, the terms and conditions are standardized with reference to:
(a) Rate and date only. (b) Quantity only.
(c) Place of delivery only. (d) All of the above .

6. In futures trading, the initial margin is to be deposited with the broker by:
(a) Seller of the contract. (b) Buyer of the contract.
(c) Bothe the parties. (d) None of the above.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 7. A futures contract is standardized version of a:
(a) Put option. (b) Call option.
(c) Swap contract. (d) Forward contract.

8. Which of the following are not featured of a futures contract?

(a) Only the following size and the futures price is set by the market
participation.
(b) Daily settlement.
(c) Initial margin deposit is required.
(d)A long position may be offset by shorting the exact same contract.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 9. What does FRA means?
(a) Futures rate Agreement
(b) Forward Rates Agreement
10. For contingency exposure of foreign exchange, the best derivative that can be
used to hedge is
(a) Forwards.
(b) Options.
(c) Swaps.
11. The strike price under an option is
(a) The price at which the option is auctioned
(b) The exchange rate which the currencies are agreed to be exchanged under
the contract

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 12. An option at-the-money when
(a) The strike price is greater than spot price, in the case of a put option.
(b) The option has a ready market.
(c) The strike price and the spot price are the same.

13. Where an option is out of the money

(a) The premium will be refunded to the buyer.
(b) The buyer is unable to take up the contract
(c) The seller gains to the extent of the premium received.
(d) No further purchase by the buyer is permitted.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig
 14. Zero coupon swap is an arrangement
(A) Involving exchange of zero coupon bonds.
(B) Whereby only one party makes payment periodically.
(C) Whereby one of the counter-parties makes payment in
lump sum instead of periodically.
15. The acronym CIRCUS stands for
(a) Current Interest Rate Swap.
(b) Circular Currency Swap.
(c) Combined Income Range Currency Swap.
(d) Combined Interest Rate and Currency Swap.
16. A forward rate agreement helps the user to
(a) Fix the cost of borrowing.
(b) Reduce the cost of borrowing.

. Subject: Financial Derivatives & Risk Management By: Mohd Iftikhar Baig