INDIAN INSTITUTE OF QUANTITATIVE FINANCE

PRACTISE QUESTIONS:
FINANCIAL MARKETS AND
PRODUCTS
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q1) ______________ serves as “reassurance” of performance on the

contract

a. Mark to Market

b. Margin Payments

c. Collateral requirements

d. Netting

Q2) An investor believes that Euro will strengthen against the dollar
over the next three months. Hence the investor goes long on Euros for
a notional of 350,000 euros. The current spot rate is 1.50 $ to 1 Euro
and 3m forward rate is 1.5050 $ to 1 Euro. The initial margin paid is
USD 12,000. Compute the profit on the trade if the spot rate after 3m
is 1.5225.

a. USD 6125

b. EUR 6125

c. USD 18125

d. EUR 18125

Q3) Which of the following statement is/are FALSE

1. American options will never be worth less than European options

2. The bid price is the “quoted bid”, or the highest price for which a
dealer is willing to pay to purchase a security.

3. Arbitrageurs take offsetting positions in financial instruments in order to

lock in a riskless profit.

a. 1 only

b. 2 and 3

c. 1 and 3

d. None of the above

 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q4) Which of the following statements is/are false ?

1. Open interest is the total number of long positions in a given futures
contract and it also equals total number of short positions in the futures
contract.

2. Basis = spot – futures price

3. Futures price must equal the spot price at expiration

a. 1 only

b. 1 and 2

c. 1 and 3

d. None of above

Q5) Strengthening of basis is said to occur when

a. Spot price decreases slower than the futures price over hedging
horizon

b. Spot price decreases faster than the futures price over hedging
horizon

c. Future price increases faster than the spot price

d. Spot and future prices both rise in the same proportion

Q6) Compute hedge ratio given the following, correlation between spot
and futures is 90%, annual standard deviation of the spot price is
$0.15 and annual standard deviation of the futures price is $0.21.
a. 0.643

b. 1.260

c. 1.555

d. 0.794
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q7) If the beta of stock A is 1.10 , the variance of futures price is

$0.0225 , variance of spot price is $0.0081, Calculate the correlation
between the spot and futures price ?
a. 1.8333

b. 0.8333

c. 0.1667

d. 1.1667

Q8) Vinisha holds a portfolio of USD 15 million with a beta of 1.25. the
futures is trading at 1250 and with a multiplier of 200. What will your
suggestion be to Vinisha with regards to hedging of the portfolio.
a. Short 1200 contracts

b. Long 1200 contracts

c. Short 75 contracts

d. Long 75 contracts

Q9) Vishal holds a portfolio of USD 40 million and has gone short 65
contracts (multiplier 500) to obtain a complete hedge. If the futures is
trading at 1200, what is the portfolio beta ?
a. O.975

b. 0.667

c. 1.267

d. 1.075

Q10) Nisha owns a USD 20 million portfolio with a beta of 1.20, The
current value of index is 1050 (multiplier 250) , Nisha wishes to
reduce the risk by 50%, kindly suggest a appropriate transaction.
a. Short 46 lots
b. Short 45 lots
c. Long 45 lots
d. Long 46 lots
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q11) The quarterly compounded rate at 6% is equivalent to

__________ compounded continuously
a. 5.96%

b. 6.04%

c. 5.50%

d. 1.49%

Q12) A loan is obtained at 14% annual rate which is continuous

compounded. Interest is paid monthly. Calculate the equivalent rate
with monthly compounding.
a. 16.11%

b. 14.08%

c. 14.46%

d. 14.11%

Q13) Value of a call option ________ as the Spot price goes up.
a. Increases

b. Decreases

c. No change

d. None of these

Q14) Value of an American call option increases as:

a. Risk free rate increases

b. Time to Expiration increases

c. Both a and b

d. None of these
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q15) Which of the following describes Put Call Parity?

a. C – P = S – PV(K)

b. P – C = S – PV(K)

c. C + P = S – PV(K)

d. C + P = S + PV(K)

Q16) Which of these is a synthetic long forward?

a. Buy Call + Sell Put

b. Buy Put + Sell Call

c. Sell Call + Buy all

d. Sell Put + Buy Put

Q17) Which of the following represents a Bull Call Spread?

a. Buy Call @ 80 and Sell Call @ 100

b. Buy Call @ 100 and Sell Call @ 80

c. Buy Put @ 80 and Sell Put @ 100

d. Buy Put @ 100 and Sell Put @ 80

Q18) Compute the price of a 3yr option free bond (face value -100)
bearing a coupon of 6% payable semiannually using the given
annualised spot rates.
0.5 yrs – 2.5%
1.0 yrs – 2.6%
1.5 yrs – 2.7%
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

2.0yrs – 2.8%
2.5yrs – 2.9%
3yrs – 3%
a) 112.53

b) 110.53

c) 108.53

d) 106.53

Q19) If 1yr rate is 2.6% and 2yr rate is 2.55%, the 1yr forward rate
for year 2 is:
a) –o.o5%

b) – 2.55%

c) 2.55%

d) 2.50%

Q20) Estimate the effect of a 100bps point increase on a 5yr, 8%

coupon bearing option free bond currently trading at par. The bond
has duration of4.25yrs and convexity of 90
a) 3.8%

b) 3.6%

c) -3.8%

d) -3.6%

Q21) ___________ rates are computed using the bootstrapping

methodology
a) Forward rates

b) Future rates

c) Zero rates

d) None of the above

 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q22) A $100 face value, 1 year 8% semi annual bond is trading at

price of 101.8643 If the annualised spot rate for 6m is 4%, what is 1
yr spot rate? (assume spot rates are continuously compounded)
a) 6%

b) 5.5%

c) 5%

d) 4.5%

Q23) A bond pays semi annual coupon of 5 and has a current value of
$102, The next payment on the bond is 4 months from now. The
interest rate is 7%. Using continuous time model, the price of 6m
forward contract on the bond is closest to ____________
a) 100.4672

b) 101.2452

c) 99.2452

d) 98.5422

Q24) Assume an investor is about to deliver a short bond position and

has four options to chose from. The settlement price is 92.50.
determine which bond is cheapest to deliver
Bond Quoted Price conversion factor
1 98 1.02
2 122 1.27
3 105 1.08
4 112 1.15

Q25) As dividend increases, the value of a put option will

____________
a) Increase

b) Decrease

c) Not change

d) Cannot be determined
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q26) Which of the following statements is false ?

1) Increase in interest rate will cause value of a American put
option to decline

2) Increase in strike rate will cause value of European call option to

fall

3) Increase in time will cause option price to rise in case of both

American calls and American puts

4) Increase in volatility will cause value of all options to rise

Q27) Upper bound for a European put option is

a) So

b) X e^-rt

c) X

d) None of the above

Q28) Compute the lowest possible price for 4 month American 100
puts on a stock that is trading at 95, given risk free rate as 5%
a) 5

b) 4.92

c) 4.85

d) 5.12

Q29) Consider a 1yr European put option that is currently valued at $8

on a $40 stock and strike of 44$. The 1 yr risk free rate is 6%. Which
of the following is closest to the value of a corresponding call option ?
a) 23.85

b) 6.56

c) 8.56

d) 7.56
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q30) Collar is
a) Bull call spread + bear put spread

b) Covered call + protective put

c) Strategy involving buying 2 calls and 1 put

d) Strategy involving buying 1 put and 2 call

Q31) Calendar spread is

a) Selling short dated option and buying long dated option at
same strike

b) Selling short dated option and buying long dated option at

different strike

c) Selling long dated option and buying short dated option at

same strike

d) Selling Long dated option and buying short dated option at

different strike

Q32) a Short strip is made using

a) Buy 1 call and 2 puts at same strike

b) Short 1 call and short 2 puts at same strike

c) Short 2 call and short 1 puts at same strike

d) Buy 1 put and 2 calls at same strike

Q33) variance of spot is 7%, while variance of futures price is 6%,

variance of basis is 2%, Compute the hedge effectiveness measure.
a) 0.666

b) 0.714

c) 0.286

d) None of the above

 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q34) if at the inititation of the contract, Mr jignesh

- Shorts the commodity

- Lend the proceeds at market interest rates

- Buys future contract at market prices

And at contract expiration

- Collects loan proceeds

- Takes delivery of the commodity and cover the short sale

commitment.

This process is better called as

a) Cost of carry model

b) Speculation

c) Cash and carry arbitrage

d) Reverse cash and carry arbitrage

Q35) Calculate 12 month forward rate for a commodity that has a spot
rate of 100 and an annual lease rate of 7% given the continuous
compounding annual rate is 9%
a) 102.02

b) 109.42

c) 107.25

d) 117.35

Q36) Suppose we plan on buying crude oil in one month to produce

gasoline and kerosene for sale in two months. The one month futures
price for crude oil is trading at $60 a barrel and the 2 month futures
price for gasoline and heating oil are trading at $82 a barrel and $63 a
barrel. Calculate the 5 – 3- 2 crack spread
a) 72 per barrel

b) 7.2 per barrel

 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

c) 14.4 per barrel

d) 144 per barrel

Q37) Suppose the return on investment in India is 8% while in US is

4%, The USD INR is trading at 46.00, calculate the 6m forward rate.
a) 47.77

b) 44.30

c) 46.50

d) 46.75

Q38) An MYRA for a $100 mio loan with a sovereign has the following
features
- Maturity extended upto 3 yrs

- Principla amortisation for two years at 50% per year

- Grace period for 1 yr

- Upfront fee – 1%

- Loan rate 5%

- Bank Discount rate – 5.50%

If the original loan had a value equal to its par, the concessionality attached to this
MYRA is closest to
a) 474,000

b) 494,000

c) 240,000

d) 140,000
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q39) Which of the following statements are false

a) A debt for equity swap would create a new long term
position on the company’s balance sheet

b) The major benefits of using bond for loan swaps are the
transformation of LDC into liquid and highly marketable
securities.

c) The sale of LDC loans eliminates the loan from the banks
balance sheet

d) MYRAs are used when a country is unable to maintain its

payment schedule and the financial institutions opts to
keep the loan off its balance sheet

Q40) Which of the following are not the methods of retiring a bond
before maturity
a) Call provision

b) Tender offers

c) Maintenance and replacement fund

d) None of the above

Q41) An investor enters into a short position in a gold futures contract

at USD 294.20. each futures contract controls 100 try ounces. The
initial margin is USD 3200, and maintenance margin is USD 2,900. At
the end of the first day, the futures price drops to USD 286.6, which of
the following is the amount of the variation margin at the end of the
first day.
a) 0

b) USD 34

c) USD 334

d) USD 760
 INDIAN INSTITUTE OF QUANTITATIVE FINANCE
624, Mastermind IV, Royal Palms IT Park, Goregaon (E), Mumbai – 400065
Phone: +91-22-28797660 Web: www.iiqf.org

Q42) which of the following is the riskiest form of speculation using

option contracts
a) Setting up spread using call option

b) Short Butterfly strategy

c) Writing naked call options

d) Writing Naked put options

Q43) Early exercise of American call option is most beneficial when

a) Spot is > strike

b) Spot < strike

c) Negative interest rates in the markets prevail

d) Positive interest rates in the market prevail

Q44) A long position in a FRA 12 x 15 is equivalent to following

positions in the spot market
a) Borrowing in 12 months to finance 15 month investment

b) Borrowing in 15 months to finance a 12 month investment

c) Borrowing in twelve months to finance 3 month investment

d) None of the above

Q45) To hedge against future, unanticipated, and significant increase

in the borrowing rates, which of the following alternatives offer the
greatest flexibility for the borrower
a) Interest rate collar

b) Fixed for floating swap

c) Call Swaption

d) Interest rate floor