F1B3C04

Leverage obtained from derivatives can cause losses to reach catastrophic levels if controls are not at place.

A) True
B) False

Arbitrage involves:

A) Earning from the price differences of a security in different markets
B) Making a fixed deposit of long maturity
C) Hedging
D) Taking more risks to increase profits.

Which of the following is incorrect?

A) Hedgers use derivative to reduce risks
B) Speculators use futures due to low margin requirements
C) Options have asymmetric payoff
D) Futures have linear relationship with underlying

A call option give the buyer:

A) Right to buy at a certain price
B) Right to sell at a certain price
C) Obligation to sell at a certain price
D) Obligation to buy at a certain price

Mr Salman is short on call option (Strike price $130) of Kat Ltd, Priced at $10 at the time of entry. At the maturity, price of stock of Kat Ltd hit all time high of $200. Payoff to Mr. Salman at maturity is

A) 70.0
B) -70.0
C) 60.0
D) 0

read the following statements about options and choose the correct option.

Statement 1: Options have a linear payoff

Statement 2: Volatility of underlying plays no role in value of option

A) Statement 1 is incorrect
B) Statement 2 is incorrect
C) Both the statements are correct
D) Both the statements are incorrect

Payoff for a short position in a put option is calculated as:

A) Min (K – ST, 0)
B) Max (ST – K, 0)
C) Max (K – ST, 0)
D) Min (ST – K, 0)

Mike and Ross are discussing about types of options we have in exchanges. Read the following statements made by Mike and choose the correct option from below.

Statement 1: European options can be exercised anytime till expiration.

Statement 2: Seller of a call option is obligated to sell underlying at the set price.

A) Statement 1 is incorrect
B) Statement 2 is incorrect
C) Both the statements are correct
D) Both the statements are incorrect

Mr Rajnikant, Long Put on X Ltd Stocks option at strike price $50 having the maturity Jan 2020 end paid a premium of $5. At maturity price of stock $56. What is a payoff at maturity

A) 6.0
B) -6.0
C) 1.0
D) 0

Which one of the following is incorrect regarding derivatives?

A) Futures is obligation to short and right for the long
B) Futures is the right to the short and obligation for the long
C) Premium paid for the Futures is always higher than the forward premium.
D) Premium paid for option contract is always higher than premium paid for futures irrespective of market volatility.

Options trade on exchanges as well as OTC markets.

A) True
B) False

Which of the following statements are incorrect about futures?

A) There is always a risk of default in counterparties involved in a future contract.
B) Futures cannot have cryptocurrencies as underlying
C) They are traded on exchange
D) They are standardized contracts

Company X enters a forward contract to buy 100kg of gold, 1 year from now for $1600/kg. Suppose gold is trading at $1800/kg after 1 year, what is payoff for company X?

A) $20000
B) -$20000
C) $200
D) $1800

Which of the following is not traded on exchange?

A) Equity shares
B) Future contracts
C) Forward contracts
D) ETF

Plain vanilla option is

A) Option to short and obligation to long
B) Option to long and obligation to short
C) Option to both short and long
D) Obligation to short and long

Which one of the following statement is least likely to be correct?

A) Derivatives security is a financial security whose value is derived from another security character
B) Market maker is ready to buy or sell lots of said security at publicly quoted prices
C) Underlying of the derivative must be assets like stocks or commodities and not option
D) Call option is right to buy for the buyer but not the obligation

Which of the following is not a use of derivative contracts?

A) To manage risk arising from fluctuations in foreign currency
B) It can be added to corporate bonds for bond issuers to repay early.
C) To lock-in prices of a commodity for an oil producer
D) To exchange goods between two parties using a derivative.

Size of OTC market is much bigger than exchange traded market?

A) True
B) False

Which of the following is an advantage of an exchange trading system on an Over-the-counter system.

A) Terms are not specified
B) Trades are made in such a way to reduce credit risk
C) Calls are recorded between parties to avoid misunderstanding
D) Participants have flexibility to negotiate

F1B3C04

Shashank 14th May 2020

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