In a bull spread strategy using call options:
A) Both options have the same strike price
B) The option sold has a higher strike price than the option bought
C) The option sold has a lower strike price than the option bought
D) Both options have different expiration dates
Answer: B
Which of the following is an example of a derivative that provides leverage?
A) Futures contracts
B) Collateralized debt obligations (CDOs)
C) Treasury bills
D) Corporate bonds
Answer: A
Which of the following best describes a swap dealer?
A) An individual who trades swaps on a stock exchange
B) A financial institution that facilitates swap transactions
C) A government agency that regulates swap markets
D) A corporate entity that issues swap contracts
Answer: B
Delta hedging is a strategy used primarily to:
A) Eliminate transaction costs in options trading
B) Manage interest rate risk in bond portfolios
C) Reduce exposure to fluctuations in the underlying asset price
D) Speculate on changes in commodity prices
Answer: C
Which of the following statements about Black-Scholes model is true?
A) It is used to calculate the expected payoff of a futures contract
B) It assumes constant volatility over the life of the option
C) It is primarily used for valuing swaps
D) It is effective only for European options
Answer: B
The purpose of using Monte Carlo simulation in derivatives pricing is to:
A) Estimate the risk of default in swap contracts
B) Calculate the value of options with multiple exercise dates
C) Determine the optimal strike price for a call option
D) Assess the impact of interest rate changes on futures contracts
Answer: B
Which of the following is an advantage of using futures contracts over forward contracts?
A) Customization
B) Standardization
C) Longer maturity dates
D) Higher transaction costs
Answer: B
Which of the following best describes a straddle strategy using options?
A) Buying both a call option and a put option with the same strike price and expiration date
B) Buying a call option and selling a put option with different strike prices and expiration dates
C) Selling both a call option and a put option with the same strike price and expiration date
D) Selling a call option and buying a put option with different strike prices and expiration dates
Answer: A
The role of a clearinghouse in options and futures markets is primarily to:
A) Match buyers and sellers
B) Provide leverage to traders
C) Guarantee contract performance
D) Set margin requirements
Answer: C
Which of the following is a similarity between options and futures contracts?
A) They are both standardized contracts
B) They both have unlimited profit potential
C) They are both traded over-the-counter
D) They both require physical delivery of the underlying asset
Answer: A
Which of the following is true about an interest rate cap?
A) It provides the holder with the right to receive floating interest rate payments
B) It provides the holder with the right to receive fixed interest rate payments
C) It provides the holder with the right to make fixed interest rate payments
D) It provides the holder with the right to make floating interest rate payments
Answer: B
Which of the following is an example of a commodity swap?
A) A contract to exchange oil for dollars at a fixed exchange rate
B) A contract to exchange a fixed amount of wheat for a floating amount of euros
C) A contract to exchange stock for cash at a predetermined price
D) A contract to exchange bonds for stocks at market prices
Answer: B
The difference between an American option and a European option is primarily related to:
A) Exercise flexibility
B) Contract size
C) Settlement date
D) Underlying asset
Answer: A
Which of the following is true about the pay-off of a put option?
A) It increases as the price of the underlying asset increases
B) It decreases as the price of the underlying asset decreases
C) It is always positive
D) It is fixed at the strike price
Answer: B
Which of the following statements is true regarding the role of options in hedging?
A) Options are generally more effective than futures contracts in hedging risk
B) Options allow for precise hedging of risk because of their customizable nature
C) Options are only used for speculative purposes and not for hedging
D) Options are less liquid than futures contracts, making them less effective for hedging
Answer: B
Which of the following is not a type of derivative?
A) Options
B) Stocks
C) Futures
D) Swaps
Answer: B
A call option gives the holder the right to:
A) Sell an asset at a specified price
B) Buy an asset at a specified price
C) Buy an asset at market price
D) Sell an asset at market price
Answer: B
Futures contracts are typically settled:
A) At expiration
B) Daily
C) Monthly
D) Quarterly
Answer: B
Swaps are primarily used for:
A) Hedging interest rate risk
B) Hedging currency risk
C) Speculating on commodities
D) Speculating on stocks
Answer: A
The strike price of an option refers to:
A) The current market price of the underlying asset
B) The price at which the option holder can buy or sell the underlying asset
C) The price at which the option was originally purchased
D) The price at which the option expires
Answer: B
In options trading, the premium paid by the option buyer is:
A) The maximum loss
B) The maximum profit
C) The potential profit
D) The potential loss
Answer: A
Which of the following is true about a put option?
A) It gives the holder the right to buy an asset at a specified price
B) It gives the holder the right to sell an asset at a specified price
C) It requires the holder to sell an asset at a specified price
D) It requires the holder to buy an asset at a specified price
Answer: B
The delta of an option measures:
A) The sensitivity of the option price to changes in interest rates
B) The sensitivity of the option price to changes in the underlying asset price
C) The potential profit of the option
D) The time decay of the option
Answer: B
A call option with a strike price above the current market price of the underlying asset is:
A) At the money
B) Out of the money
C) In the money
D) Deep in the money
Answer: B
Which of the following is not a type of futures contract?
A) Stock futures
B) Commodity futures
C) Bond futures
D) Swap futures
Answer: D
Marking to market in futures trading refers to:
A) Adjusting the contract size
B) Adjusting the expiration date
C) Adjusting the margin requirement
D) Adjusting the contract price based on current market value
Answer: D
An interest rate swap involves exchanging:
A) Fixed interest rate payments for floating interest rate payments
B) Currency payments at a fixed exchange rate
C) Commodity deliveries at a fixed price
D) Equity positions at a fixed price
Answer: A
Which of the following is a characteristic of swaps?
A) They are traded on exchanges
B) They typically have high liquidity
C) They are customized contracts
D) They are standardized contracts
Answer: C
The main purpose of using derivatives is to:
A) Reduce risk
B) Increase transaction costs
C) Lower leverage
D) Avoid regulation
Answer: A
A forward contract differs from a futures contract in that it is:
A) Customized
B) Standardized
C) Traded on exchanges
D) Settled daily
Answer: A
The notional amount in a swap contract refers to:
A) The interest rate
B) The number of shares
C) The principal amount on which payments are based
D) The margin requirement
Answer: C
An option writer is:
A) The party who buys the option
B) The party who sells the option
C) The clearinghouse
D) The exchange
Answer: B
Which of the following is a disadvantage of using options?
A) Limited risk
B) Unlimited profit potential
C) Time decay
D) High liquidity
Answer: C
A collar strategy typically involves:
A) Buying a call option and selling a put option
B) Buying a put option and selling a call option
C) Buying both a call option and a put option
D) Selling both a call option and a put option
Answer: A
Which of the following is a benefit of using futures contracts for hedging?
A) Limited liquidity
B) Standardized contracts
C) Higher transaction costs
D) Subject to counterparty risk
Answer: B
Implied volatility in options trading refers to:
A) The actual volatility of the underlying asset
B) The volatility implied by the option’s market price
C) The historical volatility of the option
D) The volatility of interest rates
Answer: B
The gamma of an option measures:
A) The sensitivity of delta to changes in the underlying asset price
B) The sensitivity of the option price to changes in interest rates
C) The time decay of the option
D) The potential profit of the option
Answer: A
In a futures contract, the initial margin is:
A) The total cost of the contract
B) The minimum amount required to open a position
C) The amount paid daily to settle the contract
D) The interest rate applied to the contract
Answer: B
Which of the following best describes a naked option?
A) An option position that is unhedged
B) An option position with maximum profit potential
C) An option position with limited risk
D) An option position that expires worthless
Answer: A
The Vega of an option measures:
A) The sensitivity of the option price to changes in volatility
B) The sensitivity of the option price to changes in the underlying asset price
C) The time decay of the option
D) The potential profit of the option
Answer: A
Contango in futures trading refers to:
A) A market condition where futures prices are higher than the spot price
B) A market condition where futures prices are lower than the spot price
C) A market condition where futures prices remain unchanged
D) A market condition where futures are not traded
Answer: A
Which of the following is a disadvantage of swaps?
A) Customization
B) High liquidity
C) Counterparty risk
D) Standardization
Answer: C
The term “exercise” in options refers to:
A) The purchase of the underlying asset
B) The sale of the underlying asset
C) The expiration of the option contract
D) The utilization of the option’s right
Answer: D
In options trading, the time value of an option decreases as:
A) Volatility increases
B) Interest rates increase
C) Time to expiration decreases
D) Strike price increases
Answer: C
A forward rate agreement (FRA) is primarily used for:
A) Hedging interest rate risk
B) Hedging currency risk
C) Speculating on commodities
D) Speculating on stocks
Answer: A
Which of the following is true about American options?
A) They can only be exercised at expiration
B) They can be exercised at any time prior to expiration
C) They are only traded on American exchanges
D) They have lower liquidity compared to European options
Answer: B
The main difference between interest rate swaps and currency swaps is:
A) Interest rate swaps involve fixed and floating interest rates, while currency swaps involve different currencies
B) Interest rate swaps involve different currencies, while currency swaps involve fixed and floating interest rates
C) Interest rate swaps are standardized contracts, while currency swaps are customized contracts
D) Interest rate swaps are traded on exchanges, while currency swaps are traded over-the-counter
Answer: A
Which of the following is true about a long futures position?
A) It profits when the underlying asset price decreases
B) It requires delivery of the underlying asset at expiration
C) It profits when the underlying asset price increases
D) It is equivalent to selling the underlying asset
Answer: C
The purpose of an option collar strategy is to:
A) Maximize profit
B) Minimize risk
C) Eliminate transaction costs
D) Increase leverage
Answer: B
Which of the following is not a risk associated with options trading?
A) Market risk
B) Credit risk
C) Liquidity risk
D) Regulatory risk
Answer: D