IFE S9 Derivatives Markets

Which one of the following best describes a forward?

• Forwards are contracts to make an exchange on a date in the future at a price agreed now.

• Forwards are traded on exchanges and define a transaction to be carried out in the future with payment made now.

• A forward contract is an agreement to make an exchange on an agreed date at the spot price on that date.

• A forward is a non-binding agreement to make an exchange in the future on terms specified now.

Which one of the following statements is false?

• Equity index futures are physically settled by the transfer of shares.

• Most futures trades are settled by taking out a reverse trade before the expiry of the contract.

• A buyer can take physical delivery on the expiry of futures contracts.

• In the futures market, many contracts are not physically settled.

Which one of the following statements is false?

• Exchange traded derivatives carry less counterparty risk than OTC derivatives.

• All OTC derivatives must be settled within three months.

• OTC derivatives can be negotiated to be the right quantity and delivery date to suit each counterparty.

• Exchange traded derivatives are for standardised amounts and maturities.

Which one of the following is NOT a true statement?

• Clearing houses require an initial margin on contracts which must be topped up if prices move against the holder of futures.

• Marking to market means establishing the market prices of derivative contract.

• Marking to market is the recording the volume of sales of derivatives.

• Leverage is using debt or borrowed capital to undertake an investment.

Which one of the following is not a correct statement?

• A put option requires that the buyer put down an initial margin percentage on the transaction.

• A call option gives the right but not the obligation to purchase.

• Buyers of options have to pay a premium to the writer of the option.

• An option gives the right but not the obligation to buy or sell a financial instrument on specified terms.

Which one of the following statements is false?

• The premiums on options often cause a significant reduction in any gain.

• Exchange traded derivatives present a lower counter party risk of default than OTC derivatives.

• An interest rate cap is a contract allowing the holder to set a minimum rate of interest.

• Options limit the size of loss while allowing participation in gains.

Which one of the following statements about options is false?

• If the option premium is greater than the intrinsic value of an option, there is an element of time value.

• Intrinsic value is the amount pertaining to the holder of an option if the price of the underlying securities remains the same at expiry or exercise.

• Time value is the amount by which the intrinsic value exceeds the option price.

• An out-of-the-money option has no intrinsic value.

What advantage do over-the-counter derivatives have over exchange-traded derivatives?

• Over-the-counter contracts are more flexible.

• Over-the-counter contracts are always for short terms.

• There is less risk of default on over-the-counter contracts.

• Over-the-counter contracts are more readily tradable.

The buyer of a futures contract …

• goes short in the cash market because the contract requires her to deliver the underlying asset on the expiry date.

• goes long in the cash market because the contract requires her to take delivery of the underlying asset on the expiry date.

• goes short in the cash market because the contract requires her to take delivery of the underlying asset on the expiry date.

• goes long in the cash market because the contract requires her to deliver the underlying asset on the expiry date.

Futures contracts seldom lead to the delivery of the underlying asset because …

• sellers of contracts frequently default.

• buyers of contracts frequently default.

• holders of contracts reverse the contracts before delivery date.

• either the buyer or the seller cannot meet margins payments.