Derrivativesr M1-5

Which of the following statements regarding exchange-traded derivatives is least accurate?Exchange-traded derivatives

• are backed by a central clearinghouse
• are illiquid
• often trade in a physical location

Answer explanation

Qbank Q1

Josh Amie purchases a one-year interest rate forward contract based on the marketreference rate (MRR). At settlement, the MRR has risen and Amie will have

• a loss on the forward contract
• a gain on the forward contract
• neither a loss nor a gain on the forward contract

Answer explanation

Qbank Q3

Party A takes a position in a forward contract to purchase 200 shares of Squealer Inc.(Squealer) for $40 per share three months from now. Party B takes the opposite position to sell 200 shares of Squealer for $40 per share three months from now. The relevant discountrate is 5%. The value of the forward contract to Party A at the initiation of the contract is closest to

• 7900
• 0
• 8000

Answer explanation

Qbank Q4

A forward contract specifying that only the gains and losses are exchanged at settlement is called a:

• deliverable contract
• cash-settled contract
• netted contract

Answer explanation

Qbank Q6

For exchange-traded derivatives, the role of the central clearinghouse is to

• maintain private insurance that can be used to provide funds if a trader defaults
• stabilize the market price fluctuations of the underlying commodity
• guarantee that all obligations by traders will be honored

Answer explanation

Qbank Q8

In futures markets, the primary role of the clearinghouse is to

• reduce transaction costs by making contract prices public.
• act as guarantor to both sides of a futures trade
• prevent arbitrage and enforce federal regulations

Answer explanation

Qbank Q9

Montau AG is a German capital goods producer that manufactures its products domestically and delivers its products to clients globally. Montau’s global sales manager shares the following draft commercial contract with his Treasury team. Which of the following types of derivative and underlyings are best suited to hedge Montau’s financial risk under the commercial transaction?

• Montau AG should consider a firm commitment derivative with currency as an underlying, specifically the sale of KRW at a fixed EUR price.
• Montau AG should consider a contingent claim derivative with the price of the machine as its underlying, specifically an A-series laser cutting machine.
• Montau AG should consider a contingent claim derivative with currency as an underlying, specifically the sale of EUR at a fixed KRW price.

Answer explanation

CFAI (Difficult)

Montau AG is a German capital goods producer that manufactures its products domestically and delivers its products to clients globally. Montau’s global sales manager shares the following draft commercial contract with his Treasury team. If Montau enters into a centrally cleared derivative contract on the OTC market, which of the following statements about credit risk associated with the derivative is most likely correct?

• Montau faces credit risk associated with the possibility that its counterparty to the contract may not fulfill its contractual obligation.
• Montau poses a credit risk to its counterparty because it may fail to fulfill its contractual obligation.
• Montau poses a credit risk to a derivative contract end user holding a contract with the opposite features of Montau’s.

Answer explanation

CFAI (Expert)

Which of the following most accurately describes a risk of derivative instruments

• Derivatives make it easier for market participants to take short positions
• The underlying of a derivative might not fully match a position being hedged
• Volatility in underlying asset prices is implied by the prices of options on those assets

Answer explanation

Schweser Module 70.1 Q1

Uses of derivatives by investors most likely include

• hedging against price risk for inventory held
• modifying the risk exposure of a securities portfolio
• stabilizing the balance sheet value of a foreign subsidiary

Answer explanation

Schweser Module 70.1 Q2