Note: Attempt all questions The question paper cotains &0 MC0 type questions.

Each question caries

1% marks. Select the answer and fll the appropriate circle corresponding to that question in the
attached OMR sheet

1. Hedging risk for a long position is 4. By selling short a futures contract of $100,000
accomplished by : at price of 115 you
a are agreeing
todeliver
taking another long position.
(A)
(A) $100,000 face value securities for
(B)taking a short position. $115,000.

(B) $115,000 face value securities for

(C) taking additional long and short
positions in equal amounts. $110,000
(C) $100,000 face value securities for
taking a neutral position.
$100,000.

2 If a bank manager chooses to hedge his $115,000 face value securities for
portolio of treasury securities by selling ftures $115,000.
contracts, he:
. To hedge the interest rate risk on $4 million
(A)gives up the opportunity for gains. of Treasury bonds with $100,000 futures
contracts, you would need to purchase
(B) removes the chance of loss.
(A) 4 contracts.

(C) increases the probability of a gain.

) 20 contracts.

both (A) and (B) are true. (C) 25 contracts.

)
(D). 40contracts.
3 Forward contracts are of limited usefulness
tofinancial institutions because: 6. Options on individual stocks are refered to
as
(A) of default risk.
(A) Stock Options.
(B) it isimpossible to hedge risk.
(B) Futures Options.

(C) of lack of liquidity. (C) American Options.

) Both (A) and (C) ) Individual Options.

190831) [KMBEMOS1 [Page-3]

 If you buy a call option on treasury futures at 0. A disadvantage of using swaps to control The Forward contracts at the maturity gives 17. Euro-Indian Rupee Futures is traded at
13
115, and at expiration the market price is110:
interestrate risk is that: to the counterparties to meet the MCXSX
contract:
A) the call wil be exercised. swaps cannot be written for long
(A) True
(A
horizons. (A) Obligation
B) False
(B) the put will be
exercised
(B) Option Ambiguous statement
(B) Swaps are more expensive than )
(C) the call will not be exercised. restructuring balance sheets. Right
() None of the above

the put will not be exercised. D) Opinion

(C) swaps, like forward contracts, lack 18. One of the following is not a characteristic
counter party
liquidity. 4. Which of the following has less of a Forward Contract
8. If, for a $1000 premium, you buy a $100,000 default risk?
call option of $100 on bond futures with a (D) all of the above are (A) Counterparty risk
disadvantages
strike price of 110, and at the (A) Forward
expiration date of swaps
Based on underlying asset
the price is 114 (B)
(B) Future
1. Which of the following is not a participant in Standardized contract
(A your profit is $4000. derivatives market ? No such risk in both (C)

Equal risk in both (D) Customized contract

(B) your loss is $4000. (A) Hedger (D)
Initial margin is not required in Forwards.
(B) Speculator
15. Forward contracts can easily be transferred 19.
your profit is $3000. or sold at the exchange.
(A) True

C) (A) True
(D) your loss is $3000 Arbitrageurs (B) False
(B) False
) Gamblers Ambiguous statement
9 All other Ambiguous statement
(C)
things
held constant, premiums on
(C)
call options will increase when
the 12 For the buyer of a Forward contract, gain None of the above () None of the above
P)
will be
20. Which of the following has a daily settlement
A). exercise price falls. 16. The term Bullion is used for:
(A) Spot Rate-Forward (contract) Rate (A) Forward
(A) Bilionaires
(8) volatility of the underlying asset falls.
(B) Forward (Contract) Rate-Spot Rate Bullish market (B) Future
(B)
(C) term to maturity decreases. Spot Rate = Forward Rate Gold and silver (C) Both of the above
C)
() futures price increases. D) Natural gas, electricity and D) None of the above
(D) None of the above
petroleum
[190831]
[KMBFMOS] [Page-51
[Page-4] [190831] [KMBTM05)
 When a person tries to eam profitby buying 30. When futures are traded at a discount to the
The amount a trader is required to keep in24. A firm receives anexport order of $ 100,000 27.
21 underlying, the cost of cary can go negative.
At the time of and selling contracts simultaneously, he is
account due to changes in the price of the for delivery in 3 months.
contract the INR is Rs. 65 per US $.Suppose engagedin
contract True
rate (A)
at the time of delivery the exchange

changes to Rs. 62 per US $.

The value of (A) Hedging
(A)-Initialmargin order at the time of delivery will be.
(B) False

B) Arbitrage
B) Maintenance margin (C) Ambiguous statement
(A) Rs. 62
Speculation
(C) Daily margin (0) None of the above
Rs.6200000
B)
() Swaps Stock futures differ from commodity futures
Account margin (C) Rs. 6500000 31.
in which of the following points
28. In arbitrage a person makes profit utlizing
22 BIS stands for D)Rs.65
the price differencés in market value and
(4) Stock futures can not be setled in
25. A hrm receives an export order of $ 100,000 derivatives value.
(A) Bank for International Setlements the same ways as commodity
for delivery in 3 months. At the time of
futures
contract the INR is Rs.66 per US S. Suppose (A) True
(B) Bank of Indian Standards
at the time of delivery the exchange rate
(B) Stock futures are not traded in stock
changes to Rs. 62 per US $. The exporter B) False
(C) Bureau of Intemational Setlements exchanges like commodity futures
will incur
C) Ambiguous statement
Board of Intemational Setlements Loss of Rs. 30000 (C) Both (A) and (B)
A)
(D) None of the above
Afirm receives an export order of $ 100,000 B) Profit of Rs. 30000 ) None of the above
for delivery in 3 months. At the time of model assumes that
29
contractthe INR is Rs.65 per US S. Suppose (C) Loss of Rs. 300000
arbitrage between cash market and future 32. Which is true in case of options
at the time of delivery the exchange rate market eliminates all imperfections in
(D) Profit of Rs. 300000
changes to Rs. 62 per US $. The value of (A) Many options are standardized and
pricing:
order at the time of order will be 26. To deal with the loss situation arising out of are traded at options exchange
export, atradershould opt Black Scholes
(A)
(B) Options can also be customized
(A) Rs.65
A) Arbitrage among two parties
(B) Cost of carry
B) Rs. 650000
(B) Hedging () Both (A) and (B)
C) Perfect price
(C) Rs. 6500000 (C) Speculation
(D) Neither (A) nor (6)
Arbitrage
() Rs.6200000 (D) Term deposit

[190831
KMBFM0S] Page-6] [Page-7)
[190831] KMBEMOS
 to profit from At the maturity, if the stnke price is
more 44. Stock pays no dividends is assumption
fa trader is buying and selling 40 an

33 The party who buy the option is known as

37, in: the of Black Scholes
changing prices, he is engaged than actual stock price are same, model
Option Writer.
of holder of put option will be said:
position
(A) True
(A)True (A) Speculation
In the money
(A) (B) False
False
Arbitrage Out of the money
(8) (B) Ambiguous statement
(C)
C) Ambiguous statement
At the money
(C) Swap (C) (D) None of the above
D) None of the above None of the above
(D)
Who has more power in an options contract?
(D) Hedging is less than
45 Black Scholes Model can sometimes
34. At the maturity, if the strike price option involving high dividend
41 misprice an

actual stock price are same, the position of

(A Option Writer 38. In an options contract, the option writer has stocks
holder of call option will be said :
the obligation to buy or sell the underlying
(B) Option Holder A True
at the will of option holder. In the money
(A)
(C) Both have equal power B) False
(B) Out of the money
(A) True
No power is in their hands (C) Ambiguous statement
(C) At the money
(B) False
value is the current value of D) None of the above
() None of the above
the underlying asset in an option: Ambiguous statement
C) 46. Financial derivatives include
42 The premium is paid at the . of

A) Intrinsic an option contract

(D) None of the above (A) stocks
Principal A) Starting
B) bonds
39. At the maturity, if the strike price and actual
C) Premium
stock price are same, the position of holder
) Exercising
(C)futures.
(D) Stike ofoption will be said (C) Maturity
none of the above.
(D)
36. Arbitrage can be born due to: (A) In the money (D) Lapse
47. By hedging a portfolio, a bank manager

(A) Market inefficiencies 43. Primary factors affecting options price are
(8) Out of the money (A) reduces interest rate risk.
(A) Underlying assef's price
(B) Price mismatches
increases reinvestment risk.
S)
) At the money
3) Time pericd to maturity
(C Changing exchange rates incie 23es exchange rate risk.
(C
D) None of the above Frice fluctuaiens (vo'ablit)
(D) All of the above in cre2ses the prohab:lity of gains.
D
(D A of the above

[190831] [KMBFM05 [KMBTMOS] Page -9)

[Page-8]
 A8. Which of the following is a reason to hedge 51. Forward contracts are risky because they
a portfolio ?
54 Futures markets have grown rapidly 57 Which of the following features of futures
becausefutures: contracts were not designed to increase

A) To increase the
(A) are subject to lack of liquidity liquidity?
probability of gains. are standardized
(A)
(B) To limit exposure to risk. (B) are subject to default risk. (A) Standardized contracts
(B) have lower default risk.
TO profit from capital gains when (B) Traded up until maturity
(C) (C) hedge a portfolio.
interest rates fall. (C) are liquid
(C) Not tied to one specific type of bond
(D) both (A) and (B) are true. all of the above
(D) Al of the above. (0) (D) Marked to market daily

49. A contract that requires

the investor to
52 The advantage of forward contracts over 55. On the expiration date of a futures contract, 58. If a firm has to pay for imports in foreign
buy the price of the contract
futures contracts is currency, it should hedge its foreign
secunties on a future date is called a that they:
exchange rate risk by:
(A) always equals the purchase price
(A) short contract (A) are standardized
of the contract. A) selling foreign exchange futures
(B) long contract (5) have lower default risk. short.
(B) always equals the average price
over the life of the contract B) buying foreign exchange futures
hedge. (C) are more flexible.
long.
cross (C) always equals the price of the
(D) both (A) and (B) are
true underlying asset. C) staying out of the exchange futureS
market.
50 To say that the forward market lacks liquidity
means that 53. Hedging in the futures market (D) always equals the average of the
(D) none of the above.
purchase price and the price of
(A) forward contracts usually result in underilying asset.
(A) eliminates the opportunity for
losses.
gains. 59. Optionsare contracts that give the
purchasers the:
(B eliminates the opportunity for 56. The number of futures contracts outstanding
B) forward contracts cannot be turned
losses is called: (A) option to buy or sell an underlying9
into cash.
as set.

it may be difficult to make (C) increases the earnings potential of (A liquidity

(C) the the obligation to buy or sell an
the portfolio. B)
transaction to tum them to cash. volume
() underlying asset
D) forward contracts () does both (A) and (B) of the above.
cash.
cannot be sold for float ) the right to hold an underlying asset.

) te right to switch payment streams

(D) open interest
[190831)
IKMBFMO05] [Paee 10] [KMETM05] [Page-11]
[190831]
 The main reason to buy an option ona 70.
67. lain Vanilla
60. The price specified on an option that the 64 A call option gives holder the 0
futures contract rather than the futures swap enables the parties to
holder can buy or sell the underlying asset a financial instrument at the exercise
contract is: (A) Exchange the fixed interest rates
iscalled the price within a specified period of time:
with flexible rates and
viceversa
A) premium. to reduce transaction cost.
(A) Right, buy (A) Exchange of principal and interest
B) call. rates in one turrency for same
B)to preserve the possibility for gains.
the
(C)strikeprice. (B Right, sell in another Currency

(D) put. to limit losses. Pay for each other

C Obligation, buy C)
61. The seller of an option has the :
remove the possibility for gains. (D None of the above.
) Obligation, sell (D)
(A) right to buy or sell the underlying 71. The price of which contract remains fixed ill
asset. 65 The seller of option has the obligation to
A tool for managing interest rate risk that maturity?
68.
B)the obligation to buy or sell the perform the contract on the will of option
holder.
requires exchange of payment streams is
underlying asset. (A) Forwards
a

(C) ability to reduce transaction risk.

(A) Iue Futures
) futures contract.
right to exchange one
payment (A)
stream for another. (B) False (C Both of the above
forward contract.
62 f you are
buying an option, the price you
(B) 0) None of the above
will pay is known C) Depends on Stock Exchange
as:
Swap /2. Futures contracts can be setledthrough
(A) Discount (D) Depends on RBI
A) Cash
B) Premium microhedge. (B) Delivery
66. If you buy a put option on treasury futuresat
C) Commission Offseting
115, and at expiration the market (C)
price is110: 69. Over the counter derivatives are
(O) Exercise price () All ofthe above

63. An American option can (A) the call will be 73. An option strategy in which the investor
be excercised exercised (A) Based on some underlying asset
holds a position in both a call and a put with
A) On the date of date,
maturity. ()the put will be exercised same strike price and same expiration
Customized as per need of parties
After the date of B) paying both the premiums is known as
maturity.
When (C) the call will not be (A) Strangle
the Stock
Exchange directs. exercised C) Standardized contracts
) Stradie
(D) Any time before
maturity (D) the put will not be
exercised (C) Spreads
Both (A) and (5)
Buterily
[190831]
[KMBFMOS] Pe-13
Page-121 TKAMREMO51
 74 Black Scholes model Selling a foreign exchange swap.
is associated with (C)
(A) Retums on an (D) Buying swaptions.
Opton
(B) Pricing of a Future The most common type of interest rate swap
78
C Pricing of an Option iS

(D) Retums on a Future (A) The plain vanilla swap.

75 t is assumed that the future

price and spot (B) The basic swap.
price becomes equal till maturity. However,
the difference may arise due to (C) The swaption.

(A) Cost of cary () The notional swap.

(B) Binomial factors

79 The disadvantage ofswaps is that they
(C) Cost of equity
(A) Lack liquidity.
(D) Cost of credit
(B) Are difficult to arrange for a
76. A swap that involves the
exchange of a set counterparty
of payments in one
currency for a set of
payments in (C) Suffer from default risk
another currency is a(n)
(D) All of the above
(A) Interest rate swap.

(B) Currency swap

80 In pricing an Interest Rate Swap, first thing
that should be kept in mind is
(C) Swaptions.
(A) The notional principal
() National swap.
(B) Cost of carTy
77. A firm that sells goods to oreign countries
The present value of cash flows
on a regular basis can avord exchange rate from both payments should be
risk by:
equal.
(A) Buying stock options. (D) The present value of cash flows
from both payments should be
(B) Selling puts on financial futures.
unequal.

190831J [KMBFM05] [Page - 14]