DERIVATIVE AND RISK MANAGEMENT MCQ

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.

• short contract

• long contract

• hedge

• cross

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. (e) none of the above.

• securities that will be issued in the future

• the volatility of interest rates

• previously issued securities

• government regulations specifying allowable rates of return

• none of the above

Futures differ from forwards because they are

• used to hedge portfolios.

• used to hedge individual securities.

• used in both financial and foreign exchange markets.

• marked to market daily.

When the financial institution is hedging interest-rate risk on its overall portfolio, what is the hedge called?

• macro hedge

• micro hedge

• cross hedge

• futures hedge

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.

• sell securities in the future

• buy securities in the future

• hedge in the future

• close out his position in the future

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. (e) none of the above.

• taking a long position

• taking another short position

• taking additional long and short positions in equal amounts

• taking a neutral position

• none of the above

Financial derivatives include (a) stocks. (b) bonds. (c) futures. (d) none of the above.

• stocks

• bonds

• futures

• none of the above

When a financial institution hedges the interest-rate risk for a specific asset, what is the hedge called?

• macro hedge

• micro hedge

• cross hedge

• futures hedge

Financial derivatives include (a) stocks. (b) bonds. (c) forward contracts. (d) both (a) and (b) are true.

• stocks

• bonds

• forward contracts

• both (a) and (b) are true

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.

• reduces interest rate risk

• increases reinvestment risk

• increases exchange rate risk

• increases the probability of gains