DERIVATIVE PRODUCTS

1) Under the Treasury operations the derivatives are used:
a) To manage Risk as including ALM Risk.
b) To meet the requirements of corporate customers.
c) For taking trading position in derivative products d) All the above
2) The kinds of Derivatives are:
a) Cross currency derivatives b) Rupee derivatives
c) (a) and (b) both d) All these
3) The features of a Derivative are:
a) It does not have independent value.
b) The value of a Derivative is derived from an underlying market_
c) Derivatives are used in both the financial and commodity markets d) All the above
4) Financial market consists of:
a) Foreign Exchange b) Debt Instruments c) Equities d) All the above
5) Which of the followings are not derivatives?
a) Forward Contract b) Corporate Bonds c) Swaps d) Options
6) Forward contracts are used by:
a) Exporters b) Importers c) Banks d) All of these
7) Derivative is an instrument where:
a) Value is derived from spot prices in an underlying market.
b) Price depends upon future market conditions
e) (a) and (b) both d) None of these
8) A derivative product can be structured based on the following criteria:
a) Risk Appetite b) Size of Transactions
c) Maturity Requirements d) All of these
9) What is an over the counter product?

a) An instrument which can be directly negotiated and obtained from Banks and investment institutions.
b) An instrument which is settled over the counter.
c) (a) and (b) both d) None of these
10) Which of the followings are over the counter product?
a) Forwards b) Currency and interest rate options
c) Swaps d) All of these
11) Which of the followings are Exchange Traded Products?

a) Currency b) Stock/Index options c) Futures d) All of these
12) The features of over the counter product are:
a) Contracts of any size and maturity can be structured.
b) The product has counterparty risk.
c) Banks are the major players in the OTC market. d) All of these
13) Which of the following is not a feature of OTC product?
a) Cost of option is to be paid up front.
b) Cost is not loaded in the agreed rates.
c) Market is not liquid.
d) Cancellation of contract may become expensive.
14) The features of Exchange traded product are:
a) The contract is of standard size
b) Delivery dates are fixed
c) Price fluctuates according to market. d) All of these
15) The Exchange Traded products have the following features:
a) There is no counterparty Risk.
b) Only members of Exchange can Trade.
c) Minimum margin is maintained d) All of these
16) Which of the following is not correct regarding Exchange Traded products?
a) Positions are marked to market daily
b) Market is illiquid
c) The prices are determined by the market.
d) All Trades are exchange protected.
17) Which of the followings is not correct?
a) Banks mostly use OTC products
b) Volume of Trade in OTC products is much lesser
c) Options and futures are Exchange Traded Products d) All these
18) The contract of an option is:
a) Where the Buyer of an option has a right but no obligations to exercise a contract.
b) The price fixed in advance is called strike price
c) Specified time is known expiry date d) All of these
19) The features of an option are:
a) The option can either be a put option or call-option
b) Call option gives a right to the Holder to buy on underlying product at a pre fixed rate and time.
c) Put option gives a right to the holder to sell the Asset at a specified rate and date.
d) All the above
20) Which of the followings is correct regarding option contract?
a) An option which can be exercised any time before the expiry date is known as American option
b) An option which can be exercised only on expiry of date is called European option.
c) (a) and (b) both d) None of these
21) Suppose a Dollar put option on JPY for USD 1 million with strike price at 105 and
expires after 3 months:What is the course available to Holder?
a) The Holder has right to sell USD at the rate of 105 JPY per dollar on expiry date.
b) On expiry date if market rate is 108, the option holder will not exercise the put option.
c) If the market rate is below 105, the option Buyer will exercise the option on expiry date.
d) All the above
22) Which of the followings is correct?
a) If strike price is same as the spot price of the currency the option is known at the money.
b) If strike price is less than the forward rate in a call option, it is called in the money.
c) If strike price is more than forward Rate in case of a put option, the option is called
out of the money d) All these
23) What is intrinsic value?
a) The difference between the strike price and current forward rate of the currency is known as intrinsic value.
b) At the money and out of the money contracts do not have intrinsic value
c) The option price less than the intrinsic value is the time value of option
d) The Time value is maximum for an At the money option.
24) Which of the followings is correct?

a) As the Buyer of the option has the right but no obligation to exercise option at the strike price, he has more profit
opportunities.
b) The seller of the option is obliged to Buy/Sell to the Holder of option at the strike price, he may incur unlimited loss.
c) (a) and (b) both d) None of these
25) The feature of an option are:
a) The option is based on an amount which is only notional. .
b) When Holder exercises the option, the Seller of option -pays only the difference between the strike price and market
price.
c) Payment of difference as per*(b) is known as cash settlement. d) All these
26) What is option premium?
a) It is the price of the option payable to the option seller upfront.
b) The premium amount depends on market volatility expiry date and strike price.
c) The longer the maturity, higher is the option premium.
d) Option premium increases with the volatility of market.
27) Suppose a put option for 1000 Reliance shares at Rs. 500 with expiry on 3151-Jufyr----
2005. What a strike option holder will do?
a) If Reliance shares are trading below Rs. 500 on expiry date, the option holder can sell the shares at Rs. 500.
b) If the market price is above the strike price of Rs. 500, the option holder would prefer to sell in the
market and hence would not exercise the option
c) (a) and (b) of the above d) None of these
28) The features of a stock index are:
. a) A put option provides protection to the Holder against a fall in the index.
b) A call option on the index protects a Buyer from rise in the index.
c) (a) and (b) both d) None of these
29) Which of the following statements is not correct?
a) in India we have European type of option.
b) Options do not cover hedge against price fluctuations.
c) A person who sells USD put option to the exporter and a USD call option to the importer would be
mitigating mutual Risk.
d) Option is like a insurance against adverse movement of prices.
30) The features of a forward contract are:
a) Settlement of a contract on maturity is essential.
b) Holder of a forward contract can not benefit if market rate is better on day of settlement
c) There is no price for a forward contract — interest differentials of two currencies is
loaded into the forward rate. d) All these
31) What is an embedded option?
a) When a call option gives issuer the right to repay the debt before specified date.
b) A convertible option may give bond holder option of converting debt into equity on specified terms.
c) (a) and (b) both d) None of these
32) The features of futures contract are:
a) It is a forward contract where Seller agrees to deliver to the Buyer a specified security on a specified date.
b) Futures contracts are of standard size with pre-fixed settlement date.
c) The contracts are traded in a futures exchange d) All these
33) Which of the followings are financial futures?
a) Currency futures b) Interest Rate Futures
c) Stock/Index futures d) All of these
34) In which of the following currencies futures are traded in terms of US Dollar?
a) Euro b) GBP and Japanese Yen
c) An Australian and Canadian Dollar d) All of these
35) Suppose there is a contract of GBP 25000 traded at the Exchange for delivery on
30th June at 1.8650 as against spot exchange rate of 1.80. What does this contract imply?
a) The contract implies that seller would deliver to the holder of contract, GBP 25000 against payment of equivalent USD
at 1.8650.
b) On the settlement date, if market rate of GBP is more than 1.8650, the seller will pay to the holder the difference in
contracted price and spot price.
c) If the market price is less than the contracted price, the
36) Which of the followings is essential in a futures contract?
a) The contract must be executed by both the parties.
b) The Trading is done through the members of the Exchange.
c) The Exchange is the counterparty for each transaction d) All of these
37) Which of the followings is a distinct feature of a futures contract?
a) The contract are marked to market daily.
b) The members are required to pay margin equivalent to daily loss.
c) In case of default by any member the Exchange will meet the payment obligation.
d) All the above
38) Which of the following statements is correct?
a) Futures are issued by Banks in Foreign Exchange Business.
b) Exporters and Importers prefer forward contracts as they can cover risk in terms of size and duration.
c) Futures are traded by traders and speculators with large volumes. d) All these
39) What are the Interest Rate Futures?
a) -These are the contracts written on fixed Income securities of a specified size.
b) The interest rates can be of a short term, medium term and long term
c) They are used to hedge interest rate risk d) All these
40) Which of the followings are relevant to interest futures?
a) T. Bill futures are traded with US Treasury Bills and notes.
b) Euro Dollar bonds are traded on the basis of LIBOR or Inter-Bank deposit Rate.
c) The contract size, delivery terms and Trading practices differ from Exchange to Exchange.
d) All the above
41) The Hedging of interest rates Risk depends on:
a) It is based on inverse relationship between interest rates and bond prices.
b) If the interest rate goes up the bond price comes down.
c) Bond price would move up if interest rates decline. d) All these
42) What is an interest rate swap?
a) It is a process where interest flows on an underlying assets or liability are - exchanged
b) The value is the notional amount of swap.
c) The interest is changed according to requirement of a lender or borrower d) All these
43) Interest rate swap are shifted as under:
a) Floating rate to fixed rate b) Fixed rate to floating rate
c) Floating rate to floating rate d) Any of these
44) Flow the interest rates are calculated?
a) Interest rates are calculated on notional amount which is equal to face value of debt instrument.
b) The notional amount is not exchanged.
c) The actual payment of interest is netted out on interest payment date d) All these
45) What are the features of Benchmark rate?
a) it is a Risk free interest rate determined by the market.
b) It is objective and transparent.
c) The issuer of debt paper and the lending bank link interest rate to a benchmark rate
d) All the above
46) The following is the Benchmark Rate:
a) For US dollars, it is LIBOR
b) For Indian Rupee Market, it is MIBOR
c) MIFOR for foreign currency Borrowings swapped in to Rupee d) All these
47) Which of the followings is correct?
a) LIBOR is a rate charged by US federal Reserve for lending to banks.
b) MIBOR is announced by-N-SE.
c) MIFOR is announced by Reuters d) All these
48) What is significant about MIBOR?
a) It is one day money market rate in the Inter-Bank market being announced by NSE daily ate 9.50 a.m.
b) NSE Pool the rate from various participating Banks and averages out after extreme top and bottom rates.
c) It is a base rate for short term and medium term lending also. d) All these
49) What is a floating to floating rate swap?
a) It involves change of benchmark rate.
b) If a corporate has opted for T-Bill linked rate and later prefers to have MIBOR, it can enter a swap and receive—T-Bill rate

and pay MIBOR linked equivalent rate
c) (a) and (b) both d) None of these
50) Which of the following statements is correct?
a) Under the Quanta swaps, payment of interest in home currency at rates applicable to foreign currency are allowed.
b) In the coupon swaps floating rates in one currency are exchanged to fixed rate of another currency.
c) Swaptions are swaps which collapse at a knock out level of market rates and swaps
with built in options d) All these
51) What is IRS (Interest Rate Swaps)?
a) It is an OTC instrument generally issued by a Bank.
b) This facilitates conversion-of floating rate into fixed and vice-versa.
c) IRS is also used in Treasury operations to fill the Asset-Liability mismatch
d) All the above
52) The feature of currency swap are:
a) It is a process of exchanging cash flows in one currency with that of another currency.
b) The cash flows may be in connection with repayment of principal or interest of a loan.
c) It can be either principal only or interest only swap. d) All these
53) The process of currency swap is:
a) The currency swap arises when loan raised in one currency is actually required to be used in another currency.
b) The different corporates can raise the loan relatively at a lower rate in their home currency and both can exchange the
proceeds
c) On due date, payment will be made by each-other d) All these
54) Suppose 'A' company raises a loan of USD 100 million for 5 years at 4% p.a.
(interest payment — semi-annual) with bullet payment and swaps the loan into rupee with the Banker 'B'.
Thus 'A' pays 'B' USD 100 million and receive Rs. 450 crore from 'B'. What would be the further process?
a) B will service the interest on USD loan pays interest at 4% to A who pays interest to the lending Bank.
b) A pays interest on rupee loan half yearly to B at swap rate of 6.5%
c) On maturity date A and B exchanges principal amount and reverse :..he exchange.
d) All the above
55) The kinds of currency swaps are:
a) Principal only swap b) Interest only swap
c) Principal plus interest swap d) Any of these
56) What is ISDA master agreement?
a) Ms a standardized agreement formulated by international swap and derivatives association.
b) The agreement has been approved by FEDAI.
c) Master agreement coves all the transactions between two counterparties globally
d) All of these
57) Which of the following terms of the contract are covered under ISDA master
agreement?
a) Valuation norms b) Netting out c) Cross default d) All these
58) What are the RBI guidelines for the development of interest rate swaps (IRS)
a) Banks can use IRS for hedging and Trading both
b) MIFOR is a benchmark for IRS
c) Under ISDA agreement Banks can opt for dual jurisdiction i.e. Indian as well as common law
d) All the above
59) The features of MIFOR are:
a) It combines LIBOR and forward premium
b) It is based on active forex market dealings
c) It is linked to domestic and global markets d) All these
60) Which of the following statements is correct?
a) Exporters and importers can use forward contracts for the trade transactions
b) Contracts can be booked on declaration basis
c) Options and forwards booked to hedge loans, once cancelled can not be rebooked
d) All the above
61) Which of the following is correct?
a) Margin is like a security for credit Risk_
b) Plain vanilla swaps are currency and interest rate swaps with basic structure without inbuilt options

c) Managing market Risk inherent in the Assets and Liabil ities of a Bank is called
Balance Sheet Management d) All these



Answers

1 D 2 C 3 D 4 D 5 B 6 D 7 C 8 D 9 A 10 D
11 D 12 D 13 B 14 D 15 D 16 B 17 B 18 D 19 D 20 C
21 D 22 D 23 A 24 C 25 D 26 A 27 C 28 C 29 B 30 D
31 C 32 D 33 D 34 D 35 D 36 D 37 D 38 D 39 A 40 D
41 D 42 A 43 D 44 A 45 D 46 D 47 D 48 D 49 C 50 D
51 D 52 D 53 D 54 D 55 D 56 D 57 D 58 D 59 D 60 D