Financial Derivatives

According to a recent survey, the top reason for using derivatives is for hedging market risk. Which of the following LEAST represents this reason?

• Markets are highly volatile and derivatives help reduce portfolio standard deviation.

• Markets offer opportunities for short-term arbitrage, trading and huge profits.

• Derivatives allows taking a short position and as a bonus, may potentially provide a positive return.

"Implementing investment strategy", followed by "increasing investment returns" are cited as amongst the top reasons for using derivatives. Which of the following does NOT help implement investment strategy and improve returns?

• The derivatives market is large and growing, which is an important revenue stream for banks selling these products.

• Risk management helps reduce portfolio standard deviation, although it may sometimes limit returns.

• Stock index futures may be a better way to access emerging and frontier markets if I do not have "on the ground" knowledge as it creates a proxy for investments to a country.

Which of the following regions has the highest turnover of derivatives in the market?

• North America and Europe

• North America and North Asia

• Europe and South America

Which of the following derivative types are the LEAST active by market size?

• Currency forwards and currency swaps

• Equity forwards and equity options

• Interest rate FRAs and swaps

Of the following derivative market segments defined by country and maturity/duration, which is likely to be the most active and liquid?

• USD contracts which have a maturity of 9 months

• EUR contracts which have a maturity of 5 years

• GBP contracts which have a maturity of 1 year

Which of the following is the most advanced and complex probabilistic model of option pricing?

• Binomial models which are based on probability trees.

• Garman-Kohlhagen modification which builds upon the Black-Scholes model.

• Monte Carlo simulations which use scenario analysis.

Assuming you are bearish on the market for a particular asset, which of the following options would you buy to hedge your risk? (Hint: Visualise the option payoff diagrams).

• Long call

• Short call

• Long put

• Short put

Which of the following is NOT a commonly accepted category of the Efficient Markets Hypothesis?

• Weak Form

• Mild Form

• Semi-Strong Form

• Strong Form

Which of the following categories of stocks would outperform the others in a downward trending (i.e. bearish) market?

• Value

• Growth

• Small Capitalisation

• Large Capitalisation

Which of the following provides evidence in support of the efficient market hypothesis?

• Small cap stocks tend to provide better upside during a market recovery

• Value stock pickers tend to do better than other investment styles

• Insider trading leads to negligible profits for large companies with small bid-ask spreads

• Earnings surprises tend to lead to upside risks in stock prices due to expansion of P/E multiples