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MBA
(SEM 4) THEORY EXAMINATION 2019-20
FINANCIAL DERIVATIVES
MULTIPLE CHOICE QUESTIONS

Time: 3 Hours Total Marks: 100

1) In a forward contract the party who commits to sell an asset at a specified date in the
future takes a(n) position, and the party who commits to buy an asset at a
specified date in the future takes a(n) position.
(a) risk seeking; risk averse
(b) open; closed
(c) closed; open
(d) short; long
(e) long; short

2) Assume the one year forward rate for a share of stock is $45, the spot price is $41 and
the risk-free rate is 5% pa. The observed forward price is ______ and the implied
forward price is __________:
(a) $45; $41
(b) $45; $43.05
(c) $41; $45
(d) $41; $43.05
(e) $45; $38.95

3) An investment strategy that requires no outlay of an investor’s own money to generate

positive riskless profits is:
(a) arbitrage
(b) risk seeking
(c) portfolio replicating
(d) beta adjusting
(e) minimum variance
4) An OTC forward contract is:
(a) an option to call
(b) a forward contract for which the payback is outside the contract period
(c) a customised agreement that is not traded on an exchange
(d) a standardised agreement that is traded on an exchange
(e) a forward contract in which the spot price of the asset at maturity is over the
contract forward price
5) A call option is in-the-money if the:
(a) strike price of the option is less than the current price of the underlying asset
(b) strike price of the option is greater than the current price of the underlying asset
(c) strike price of the option is equal to the price of the underlying asset
(d) intrinsic value of the option is zero
(e) settlement date is less than one month from the current date

6) The price of a put option ___________ as the volatility of the returns of the underlying
asset increases, and the price of a put option ______ as the time to expiration decreases.
(a) decreases; remains unchanged
(b) decreases; decreases
(c) increases; increases
(d) increases; remains unchanged
(e) increases; decreases

7) What among the following are the underlying assets of a derivative contract?
a) Currency
b) Interest Rates
c) Live Cattle
d) Weather
e) All of these

8) Which of the following is false?

a) Futures contracts trade on a financial exchange.
b) Futures contracts are marked to market.
c) Futures contracts allow fewer delivery options than forward contracts.
d) Futures contracts are more liquid than forward contracts.

9) Which one of the following actions will offset a long position in a futures contract that
expires in June?
a) Hold the futures contract until it expires.
b) Sell any futures contract, regardless of its expiration date.
c) Sell a futures contract that expires in June.
d) Buy any futures contract, regardless of its expiration date.
e) Buy a futures contract that expires in June.

10) Which of the following does the most to reduce default risk for futures contracts?
a) Credit checks for both buyers and sellers.
b) Marking to market.
 c) Flexible delivery arrangements.
d) High liquidity.
e) End of Question 4

11) Using futures contracts to transfer price risk is called:

a) arbitrage.
b) diversifying.
c) speculating.
d) hedging.

12) A put option has a strike price of $35. The price of the underlying stock is currently $42.
The put is:
a) at the money.
b) out of the money.
c) in the money.
d) near the money.
e) End of Question 9

13) A call option with a strike price of $55 can be bought for $4. What will be your net
profit if you sell the call and the stock price is $52 when the call expires?
a) $0.
b) –$4.
c) $3.
d) $4.
e) –$7.

14) Which of the following has the right to sell an asset at a predetermined price?
a) A call writer.
b) A put writer.
c) A put buyer.
d) A call buyer.

15) Which of the following is potentially obligated to sell an asset at a predetermined price?
a) A put buyer.
b) A put writer.
c) A call buyer.
d) A call writer.

16) Which of the following actions will not close a long position in a call option?
a) Selling a call with the same strike price, expiration, and underlying asset.
b) Allowing the call to expire.
c) Buying a put with the same strike price, expiration, and underlying asset.
d) Exercising the call.

17) Which of the following strategies will be profitable if the price of the underlying asset is
expected to decrease? (There may be more than one correct response.)
a) Buying a call.
b) Buying a put.
c) Selling a put.
d) Selling a call.
18) What will be the effect on option value due to higher market price under put option
a) higher option value
b) lower option value
c) no change
d) None of these
19) derivatives market involves which participants
a) Hedgers
b) Arbitrageurs
c) Speculators
d) All of these

20) If your company buys 100 TCS put option at Rs. 200 per option with a strike price of
Rs. 3600 but on the date of exercise the stock price is 3700 , what should be the action to
take, considering no transaction cost
a) to exercise the option
b) Not to exercise the option
c) may or may not exercise the option depending on whether he is in Mumbai or not at
that time
d) None of these

21) Enlist the option type, if the writer gives the buyer of the option the right to sell the
underlying asset
a) Call Option
b) Put Option
c) Both Call option and Put Option
d) None of these

22) Which derivative product give the buyer the right but not the obligation to buy a given
quantity of the underlying asset, at a given price on or before a given future date
a) forward contract
b) futures contract
c) Call Options
d) Put Options

23) Which of the following swaps is commonly used

a) Interest Rate Swaps
b) Currency Swaps
c) Index Swaps
d) Both Interest Rate Swaps and Currency Swaps

24) Which derivative product is a customized contract between two entities, where
settlement takes place on a specific date in the future at today's pre-agreed price
a) Forward contract
b) Futures contract
c) Options
d) Warrants

25) What will be the effect on option value due to higher volatility under call option
a) higher option value
b) lower option value
c) no change
d) None of these
26) What is not a type of derivatives
a) Commodity
b) Financial
c) Both Financial and Commodity
d) None of these

27) What refers to purchase of a put option on a stock being already possessed
a) Writing a naked option
b) Writing a covered call
c) Protective put strategy
d) Protective Call strategy

28) What will be the effect on option value due to higher market price under call option
a) Higher option value
b) lower option value
c) no change
d) None of these

29) What makes OTC derivatives risky

a) There is no formal house margining system.
b) They are not settled on a clearing basis.
c) They do not follow any formal rules or mechanisms.
d) All of these

30) What characterizes an OTC or Over the Counter option

a) Is a standardised contract traded on an Exchange
b) Is a contract tailored to suit individual requirements
c) Is an option on stocks of pharmaceutical companies
d) Can be bought from any option writer

31) What does option values depend upon

a) Market Price
b) Strike Price
c) Volatility
d) All of these

32) What are the factors driving the growth of financial derivatives
a) Increased volatility in asset prices in financial markets,
b) Increased integration of national financial markets with the international markets
c) Marked improvement in communication facilities and sharp decline in their costs
d) All of these

33) What is not included in financial derivative

a) Bonds
b) Stocks
c) Interest rate
d) Gold
34) What will be the effect on option value due to higher interest rates under put option
a) Higher option value
b) Lower option value
c) No change
d) None of these

35) What will be the effect on option value due to higher strike price under call option
a) Higher option value
b) Lower option value
c) No change
d) None of these

36) Who launched the first Exchange-traded Index Derivative Contract, in India
a) BSE
b) NSE
c) SEBI
d) None of these

37) What type of risk is generated during earthquake or a war

a) Systematic risk
b) Non-Systematic risk
c) Unique risk
d) None of these

38) If you bought Sensex Futures for 3350 and the closing price on the last Thursday was
3360, then the result will be
a) Profit of 10 for me
b) Profit of 10 by the other party
c) Profit of 10 by the exchange
d) Depends upon futures terms and conditions

39) The word derivative is defined in India by

a) Income Tax Act
b) Securities Contracts(Regulation) Act
c) The SEBI Act
d) None of these

40) What will be the result if you have bought 1,200 TCS futures at Rs 250 each under
delivery based settlement, but on the day of expiry, TCS was actually quoting at Rs 280
a) Profit of 30 each
b) Loss of 30 each
c) Depends upon futures terms and conditions
d) None of these

41) What is the essential features of a forward contract

a) Contract between two parties (without any exchange between them)
b) Price decided today
c) Quantity decided today
d) All of these
42) What will be the effect on option value due to longer time to expiry under call option
a) Lower option value
b) Higher option value
c) No change
d) None of these

43) Whose pricing is determined by the Black-Scholes model

a) Index futures
b) Options
c) Equity shares
d) Corporate debt

44) What creates a bull spread

a) Buying one call and selling another call
b) Buying one put and buying one call
c) Selling one call and buying two puts
d) None of these

45) What will be the implication for a stock having a beta of 1.15 and base index moves up by 10%
a) Move up by 11.5%
b) Go down by 11.5%
c) Depends upon fluctuations in other index values
d) None of these

46) What does derivative includes, as per Securities Contracts (Regulation) Act, 1956
a) A security derived from a debt instrument
b) A security derived from a share
c) A security derived from a loan
d) All of these

47) Which derivative product give the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before a given date
a) Forward contract
b) Futures contract
c) Call Options
d) Put Options

48) Which of the following is a form of basket options

a) A forward contract
b) A futures contract
c) Equity index option
d) A Call Option

49) What does derivatives are used for

a) managing risk in commodities markets
b) managing risk in financial markets
c) managing risk in financial and commodities markets
d) None of these
50) What does not characterizes financial derivative
a) Specified obligation
b) exchange traded
c) Related to notional amount
d) None of these

51) What does option values depend upon

a) Market Price
b) Strike Price
c) Volatility
d) All of these

52) Which derivative product give the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before a given date
a) forward contract
b) futures contract
c) Call Options
d) Put Options

53) Enlist the option type, if the writer gives the buyer of the option the right to purchase
from him the underlying asset
a) Call
b) Put
c) Both call and Put
d) None of these

54) Which of the following swaps is commonly used

a) Interest Rate Swaps
b) Currency Swaps
c) Index Swaps
d) Both Interest Rate Swaps and Currency Swaps

55) What are the factors driving the growth of financial derivatives
a) Increased volatility in asset prices in financial markets,
b) Increased integration of national financial markets with the international markets
c) Marked improvement in communication facilities and sharp decline in their costs
d) All of these

56) Which of the following is not a financial derivative?

a) Stock
b) Futures
c) Options
d) Forward contracts

57) Which of the following is a reason to hedge a portfolio?

a) To increase the probability of gains.
b) To limit exposure to risk.
c) To profit from capital gains when interest rates fall.
d) All of the above.
e) Both (a) and (c) of the above.
58) Hedging risk for a short position is accomplished by
a) taking a long position.
b) taking another short position.
c) taking additional long and short positions in equal amounts.
d) taking a neutral position.
e) none of the above.
59) A contract that requires the investor to buy securities on a future date is called a
a) Short contract.
b) Long contract.
c) Hedge.
d) Cross.

60) A person who agrees to buy an asset at a future date has gone
a) Long.
b) Short.
c) Back.
d) Ahead.
e) Even.

61) A short contract requires that the investor

a) Sell securities in the future.
b) Buy securities in the future.
c) Hedge in the future.
d) Close out his position in the future.

62) If a bank manager chooses to hedge his portfolio of treasury securities by selling futures
contracts, he
a) Gives up the opportunity for gains.
b) Removes the chance of loss.
c) Increases the probability of a gain.
d) both (a) and (b) are true.

63) To say that the forward market lacks liquidity means that
a) Forward contracts usually result in losses.
b) Forward contracts cannot be turned into cash.
c) It may be difficult to make the transaction.
d) Forward contracts cannot be sold for cash.
e) None of the above.

64) A disadvantage of a forward contract is that

a) It may be difficult to locate a counterparty.
b) The forward market suffers from lack of liquidity.
c) These contracts have default risk.
d) All of the above.
e) Both (a) and (c) of the above.
65) Forward contracts are risky because they
a) Are subject to lack of liquidity
b) Are subject to default risk.
c) Hedge a portfolio.
d) Both (a) and (b) are true.

66) The advantage of forward contracts over future contracts is that they
a) Are standardized.
b) Have lower default risk.
c) Are more liquid.
d) None of the above.

67) The advantage of forward contracts over futures contracts is that they
a) Are standardized.
b) Have lower default risk.
c) Are more flexible.
d) both (a) and (b) are true.

68) Forward contracts are of limited usefulness to financial institutions because

a) Of default risk.
b) It is impossible to hedge risk.
c) Of lack of liquidity.
d) All of the above.
e) Both (a) and (c) of the above.

69) Hedging in the futures market

a) Eliminates the opportunity for gains.
b) Eliminates the opportunity for losses.
c) Increases the earnings potential of the portfolio.
d) Does all of the above.
e) Does both (a) and (b) of the above.

70) When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities
in the futures market
a) Suffers a loss.
b) Experiences a gain.
c) Has no change in its income.
d) None of the above.

71) Futures markets have grown rapidly because futures

a) Are standardized.
b) Have lower default risk.
c) Are liquid.
d) All of the above.
72) Parties who have bought a futures contract and thereby agreed to (take delivery of) the
bonds are said to have taken a ___________________________ position.
a) sell; short
b) buy; short
c) sell; long
d) buy; long

73) Parties who have sold a futures contract and thereby agreed to (deliver) the bonds are
said to have taken a _______________________________ position.
a) sell; short
b) buy; short
c) sell; long
d) buy; long

74) By selling short a futures contract of $100,000 at a price of 115 you are agreeing to
deliver
a) $100,000 face value securities for $115,000.
b) $115,000 face value securities for $110,000.
c) $100,000 face value securities for $100,000.
d) $115,000 face value securities for $115,000.

75) By selling short a futures contract of $100,000 at a price of 96 you are agreeing to
deliver
a) $100,000 face value securities for $104,167.
b) $96,000 face value securities for $100,000.
c) $100,000 face value securities for $96,000.
d) $96,000 face value securities for $104,167.

76) By buying a long $100,000 futures contract for 115 you agree to pay
a) $100,000 for $115,000 face value bonds.
b) $115,000 for $100,000 face value bonds.
c) $86,956 for $100,000 face value bonds.
d) $86,956 for $115,000 face value bonds.

77) On the expiration date of a futures contract, the price of the contract
a) Always equals the purchase price of the contract.
b) Always equals the average price over the life of the contract.
c) Always equals the price of the underlying asset.
d) Always equals the average of the purchase price and the price of underlying asset.
e) Cannot be determined.

78) The price of a futures contract at the expiration date of the contract
a) Equals the price of the underlying asset.
b) Equals the price of the counterparty.
c) Equals the hedge position.
d) Equals the value of the hedged asset.
e) None of the above.
79) If you purchase a $100,000 interest-rate futures contract for 110, and the price of the
Treasury securities on the expiration date is 106
a) Your profit is $4000.
b) Your loss is $4000.
c) Your profit is $6000.
d) Your loss is $6000.
e) Your profit is $10,000.

80) If you purchase a $100,000 interest-rate futures contract for 105, and the price of the
Treasury securities on the expiration date is 108
a) Your profit is $3000.
b) Your loss is $3000.
c) Your profit is $8000.
d) Your loss is $8000.
e) Your profit is $5000.

81) If you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury
securities on the expiration date is 106
a) Your profit is $4000.
b) Your loss is $4000.
c) Your profit is $6000.
d) Your loss is $6000.
e) Your profit is $10,000.

82) If you sell a $100,000 interest-rate futures contract for 105, and the price of the
Treasury securities on the expiration date is 108
a) Your profit is $3000.
b) Your loss is $3000.
c) Your profit is $8000.
d) Your loss is $8000.
e) Your profit is $5000.

83) If you sold a short futures contract you will hope that bond prices
a) Rise.
b) Fall.
c) Are stable.
d) Fluctuate.

84) A tool for managing interest rate risk that requires exchange of payment streams is a
a) futures contract.
b) forward contract.
c) swap.
d) micro hedge.
e) macro hedge.
85) A financial contract that obligates one party to exchange a set of payments it owns for
another set of payments owned by another party is called a
a) hedge.
b) call option.
c) put option.
d) swap.

Figure 1

86) In figure 1, with a expiration price of 110, the best return is obtained by
a) Buying futures.
b) Buying a call option.
c) Selling futures.
d) Buying a put option.
e) None of the above.

87) In figure 1, with a expiration price of 120, the best return is obtained by
a) Buying futures.
b) Buying a call option.
c) Selling futures.
d) Buying a put option.
e) None of the above.
 Figure 2

88) In figure 2, with a expiration price of 110, the best return is obtained by
a) buying futures.
b) buying a call option.
c) selling futures.
d) buying a put option.
e) none of the above.

89) In figure 2, with a expiration price of 120, the best return is obtained by
a) buying futures.
b) buying a call option.
c) selling futures.
d) buying a put option.
e) none of the above.

90) A swap that involves the exchange of one set of interest payments for another set of
interest payments is called a(n)
a) interest rate swap.
b) currency swap.
c) swaptions.
d) national swap.
91) A firm that sells goods to foreign countries on a regular basis can avoid exchange rate
risk by
a) buying stock options.
b) selling puts on financial futures.
c) selling a foreign exchange swap.
d) buying swaptions.

92) The most common type of interest rate swap is

a) the plain vanilla swap.
b) the basic swap.
c) the swaption.
d) the notional swap.
e) the ordinary swap.

93) If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it
can reduce interest rate risk with a swap that requires Second National to
a) pay fixed rate while receiving floating rate.
b) receive fixed rate while paying floating rate.
c) both receive and pay fixed rate.
d) both receive and pay floating rate.

94) If a bank has more rate-sensitive assets than rate-sensitive liabilities

a) it reduces interest rate risk by swapping rate-sensitive income for fixed rate income.
b) it reduces interest rate risk by swapping fixed rate income for rate-sensitive income.
c) it increases interest rate risk by swapping rate-sensitive income for fixed rate income.
d) it neutralizes interest rate risk by receiving and paying fixed-rate streams.
e) it cannot reduce its interest rate risk.

95) If Second National Bank has more rate-sensitive liabilities then rate-sensitive assets, it
can reduce interest rate risk with a swap that requires Second National to
a) pay fixed rate while receiving floating rate.
b) receive fixed rate while paying floating rate.
c) both receive and pay fixed rate.
d) both receive and pay floating rate.

96) One advantage of using swaps to eliminate interest rate risk is that swaps
a) are less costly than futures.
b) are less costly than rearranging balance sheets.
c) are more liquid than futures.
d) have better accounting treatment than options.

97) A advantage of using swaps to hedge interest rate risk is that swaps
a) are less costly than futures.
b) can be written for long horizons.
c) are not subject to default risk.
d) are more liquid than futures.
e) have better accounting treatment than options.
98) The disadvantage of swaps is that they
a) lack liquidity.
b) are difficult to arrange for a counterparty.
c) suffer from default risk.
d) all of the above.

99) A disadvantage of using swaps to control interest rate risk is that

a) swaps cannot be written for long horizons.
b) swaps are more expensive than restructuring balance sheets.
c) swaps, like forward contracts, lack liquidity.
d) all of the above are disadvantages of swaps.
e) only (a) and (b) of the above are disadvantages of swaps.

100) The problems of default risk and finding counterparties for interest rate swaps has
been reduced by
a) government regulation.
b) writing complex contracts.
c) commercial and investment banks serving as intermediaries.
d) all of the above.
e) both (b) and (c) of the above.