Financial derivatives: mid 1
I. Answer the following questions:
1. What are derivatives?
2. What are options?
3. What are futures?
4. What is mark-to-market?
5. What is dividend?
II. Fill in the blanks answers:
1. Forward contract is a legally binding agreement between two parties to buy or
sell an asset at a predetermined price on a specified future date.
2. Buyers help increase market liquidity, as they provide the funds necessary for
sellers to sell their assets.
3. A broker is a person that facilitates transactions between traders, sellers, or
buyers
4. Call option is an option to buy assets at an agreed price on or before a particular
date.
5. Put option is an option to sell assets at an agreed price on or before a particular
date.
6. Hedging is a risk management strategy employed to offset losses in investments
by taking an opposite position in a related asset.
7. A straddle refers to an options strategy in which an investor holds a position in
both a call and a put with the same strike price and expiration date.
8. A swap is a derivative contract through which two parties exchange financial
instruments, such as interest rates, commodities, or foreign exchange.
9. Speculation is the act of trading in high-risk assets with the expectation of
substantial returns.
10. At the money option is an option where the strike price is roughly equal to the
current market price of the underlying asset.
III. Choose the correct options:
1) The payoffs for financial derivatives are linked to
(a) securities that will be issued in the future.
(b) the volatility of interest rates.
(c) previously issued securities.
(d) government regulations specifying allowable rates of return
2. Financial derivatives include
(a) stocks.
(b) bonds.
(c) futures.
(d) none of the above.
3. Financial derivatives include
(a) stocks.
(b) bonds.
(c) forward contracts.
(d) both (a) and (b) are true.
4. Which of the following is not a financial derivative?
(a) Stock
(b) Futures
(c) Options
(d) Forward contracts
5. By hedging a portfolio, a bank manager
(a) reduces interest rate risk.
(b) increases reinvestment risk.
(c) increases exchange rate risk.
(d) increases the probability of gains.
6. By hedging a portfolio, a bank manager
(a) reduces interest rate risk.
(b) increases reinvestment risk.
(c) increases exchange rate risk.
(d) increases the probability of gains.
7. Hedging risk for a long position is accomplished by
(a) taking another long position.
(b) taking a short position.
(c) taking additional long and short positions in equal amounts.
(d) taking a neutral position.
8. Hedging risk for a short position is accomplished by
(a) taking a long position.
(b) taking another short position.
(c) taking additional long and short positions in equal amounts.
(d) taking a neutral position.
9. A contract that requires the investor to buy securities on a future date is called a
(a) short contract.
(b) long contract.
(c) hedge.
(d) cross
10. A long contract requires that the investor
(a) sell securities in the future.
(b) buy securities in the future.
(c) hedge in the future.
(d) close out his position in the future
Mid-2:
1. What is call option?
2. What is put option?
3. What are swaps?
4. Write about market lot?
5. What are futures?
Fill in the blanks:
1. Futures are financial contracts obligating the buyer to purchase an asset or the
seller to sell an asset at a predetermined future date and price.
2. A call option is a contract that gives the option buyer the right to buy an
underlying asset at a specified price within a specific time period.
3. Hedgers are primary participants in the futures markets.
4. Buying a call option is a contract between a buyer and a seller that gives the
buyer the right to purchase a stock, bond, commodity, or other asset
5. Selling a call option, also known as writing a call option or shorting a call, is a
more advanced trading strategy that involves selling a contract that gives buyers
the right to buy a stock at a fixed price before a specific date.
6. Buying a put option gives you the right to sell a stock at a predetermined price,
called the strike price, by a specific date.
7. Selling a put option, also known as writing a put option, means the seller has an
obligation to buy a stock at a specific price.
8. A stock future is a financial contract that allows an investor to buy or sell a
specific quantity of an underlying equity share at a predetermined price on a
specific future date.
9. Index futures are financial contracts that allow traders to buy or sell a financial
index at a set price today and settle in the future Commodity
Choose the correct option:
1. A person who agrees to buy an asset at a future date has gone
(a) long.
(b) short.
(c) back.
(d) ahead.
2. A short contract requires that the investor
(a) sell securities in the future.
(b) buy securities in the future.
(c) hedge in the future.
(d) close out his position in the future.
3. A contract that requires the investor to sell securities on a future date is called a
(a) short contract.
(b) long contract.
(c) hedge.
(d) micro hedge.
4. If a bank manager chooses to hedge his portfolio of treasury securities by selling
futures contracts, he
(a) gives up the opportunity for gains.
(b) removes the chance of loss.
(c) increases the probability of a gain.
(d) both (a) and (b) are true.
5. To say that the forward market lacks liquidity means that
(a) forward contracts usually result in losses.
(b) forward contracts cannot be turned into cash.
(c) it may be difficult to make the transaction.
(d) forward contracts cannot be sold for cash.
6. A disadvantage of a forward contract is that
(a) it may be difficult to locate a counterparty.
(b) the forward market suffers from lack of liquidity.
(c) these contracts have default risk.
(d) all of the above.
7. Forward contracts are risky because they
(a) are subject to lack of liquidity
(b) are subject to default risk.
(c) hedge a portfolio.
(d) both (a) and (b) are true
8. The advantage of forward contracts over future contracts is that they
(a) are standardized.
(b) have lower default risk.
(c) are more liquid.
(d) none of the above.
9. The advantage of forward contracts over futures contracts is that they
(a) are standardized.
(b) have lower default risk.
(c) are more flexible.
(d) both (a) and (b) are true.
10. When interest rates fall, a bank that perfectly hedges its portfolio of Treasury
securities in the futures market
(a) suffers a loss.
(b) experiences a gain.
(c) has no change in its income.
(d) none of the above.
Strategic financial management: Mid-1
1. What is financial management?
2. What is meant by working capital?
3. what is IPO?
4. What is venture capital?
5. Write about capital structure. Fill in the blanks:
1. EBIT stands for Earnings before interest and taxes
2. EAT stands for Earnings after tax
3. IPO stands for Initial public offer
4. The amount owed by the borrower to the lender is called debt
5. Debt policy is a process that governments use to manage their debt to raise funds
at a low cost over time.
6. A merger occurs when two separate entities combine forces to create a new,
joint organization.
7. The exchange ratio measures the number of shares the acquiring company has to
issue for each individual share of the target firm.
8. the reduction in the percentage of existing shareholders is called dilution
9. accretion is the gradual increase in value of an asset or liability over time.
10. An acquisition is a transaction in which one company purchases most or all of
another company's shares to gain control of that company.
Choose the correct option:
Mid-2:
1. What are mergers?
2. What are acquisitions?
3. What are buy back of shares?
4. Write about Corporate valuation?
5. What is financial restructuring? Fill in the blanks:
1. Portfolio restructuring is the process of rebalancing a portfolio's asset mix to achieve
specific objectives.
2. Expansion financing is capital used to enlarge a company's assets by internal or
external means.
3. A contraction is a period when economic output declines.
4. Employee stock option plan is an employee benefit scheme that enables employees
to own shares in the company
5. OCO stands for One-Cancels-the-Other Order
6. Business diversification strategy is a growth strategy that involves expanding a
business into new markets, products, or services.
7. Financial planning involves looking at a client's entire financial picture and advising
them on how to achieve their short- and long-term financial goals.
8. Cash management is the monitoring and maintaining of cash flow to ensure that a
business has enough funds to function.
9. Income splitting is a tax policy of fictionally attributing earned and passive income of
one spouse to the other spouse for the purposes of assessing personal income tax.
10. A rights issue is when a company invites its current shareholders to buy more
shares at a discount.
Choose the correct option:
Portfolio management:
1. Write about Tradition theory?
2. What is portfolio?
3. Write about setting portfolio objectives?
4. What is diversification?
5. Write about sharpe index model.
Fill in the blanks:
1. Making a portfolio means putting one’s eggs in different baskets with varying
elements of risks and return
2. Portfolio management means selection of securities and constant shifting of
portfolio in the light of varying attractiveness of the constituents of portfolio
3. In a passive portfolio management, the portfolio manager deals with a fixed
portfolio designed to match the current market scenario
4. Dispersion is the degree of variation in the data.
5. An optimal portfolio is a collection of assets that balances risk and return to
maximize expected returns for a given level of risk, or minimize risk for a given
level of return
6. Beta is a measurement of a stock's volatility in relation to the overall market and
is used as a risk measure.
7. Market risk is the possibility of an investor experiencing losses due to factors that
affect the overall performance of the financial markets.
8. Liquidity refers to the efficiency or ease with which an asset or security can be
converted into ready cash without affecting its market price.
9. Portfolio risk is the possibility that an investor's total investment will not yield the
expected return, or that they may lose some or all of their original investment.
10. The Markowitz efficient set is a portfolio with returns that are maximized for a
given level of risk based on mean-variance
Choose the correct option:
Mid-2:
1. Write about portfolio selection?
2. What is risk?
3. Write principles of arbitrage.
4. Write about measures of return.
5. What is performance evaluation?
Fill in the blanks:
1. SML stands for Security Market Line
2. CAPM stands for CAPITAL ASSET PRINCING MODEL
3. CML stands for Capital market line
4. Arbitrage pricing theory is a pricing model that predicts a return using the
relationship between an expected return and macroeconomic factors.
5. portfolio manager is responsible for investing a fund's assets, implementing its
investment strategy, and managing the day-to-day portfolio trading.
6. Risk free rate is the minimum return an investor expects for any investment.
7. Liquidity risk is the risk that you will not be able to divest from a position quickly
before the price changes significantly
8. Jensen alpha measure is one of the ways to determine if a portfolio is earning the
proper return for its level of risk.
9. The Sharpe ratio is one of the most widely used methods for measuring risk-
adjusted relative returns
10. An equity portfolio is a collection of investments in equity securities, which are
also known as stocks.
Choose the correct option:
1. A
2. B
3. A
4. D
5. D
6. C
7. C
8. A
9. L 10.D
