Learning Module 3 Derivative Benefits, Risks, and Issuer and Investor Uses

Which of the following is NOT typically an operational advantage of trading futures rather than the equivalent cash underlying?

An issuer wants to lock in the future EUR proceeds it will receive in 75 days for a KRW-denominated export contract. Which derivative best directly hedges the issuer's currency risk and helps achieve hedge accounting for forecasted cash flows?

Which risk describes the possibility that a derivative’s cash flows settle at different times than the hedged cash flows, potentially causing liquidity pressure from margin calls?

An investor buys a six-month European call option on an index with strike X and pays premium c0. Under which condition at maturity does the option buyer achieve a positive profit ignoring time value of money?

A put option seller receives premium p0 on an option with strike X = 30. What is the seller's maximum possible profit and maximum possible loss (assume underlying cannot be negative)?

Which of the following best describes basis risk in hedging?

A one-year forward on a non-dividend stock has forward price F0(T) = S0(1 + r)^T. If today S0 = 50 and the annual risk-free r = 4% (discrete), what must be the forward price for T = 1 year to prevent arbitrage?

Procam can store gold at no cost. Spot gold S0 = 1,770; annual r = 2%; forward price for 3 months is observed at 1,792.13. Is there an arbitrage? If so, what action creates a riskless profit?

How does a convenience yield affect commodity forward prices compared with spot prices?

Which statement correctly contrasts counterparty credit risk for a long forward versus a purchased call option?

Which is the correct no-arbitrage relationship for an equity index forward with continuous dividend yield i and continuous risk-free rate r?

An equity investor holds stock and writes a call at strike X for income (covered call). Which payoff best describes the covered call relative to a naked long stock position at maturity?

Which factor tends to increase the forward price of a commodity all else equal?

An FX forward quote uses S0_f/d = units of foreign currency per 1 unit domestic. If rf > rd (foreign rate higher than domestic), what happens to F0_f/d(T) versus S0_f/d under no-arbitrage?

Which best explains why futures and forwards might have different prices even for the same underlying and maturity?

If interest rates are constant over the life of a contract, how do forward and futures prices compare for that underlying?

Which market participant is most likely to prefer exchange-traded derivatives (ETDs) over OTC derivatives?

A six-month equity futures contract on a non-dividend stock has S0 = 100 and r = 3% (annual, discrete). Compute the fair futures price at inception.

Which of these best describes central clearing’s effect on OTC derivative counterparty credit risk?

An FRD (forward rate agreement) is initiated to lock a future three-month deposit rate starting in nine months. Which of the following statements is true about an FRA?

Which of the following best defines implicit leverage in derivative strategies?

A swap fixed rate is defined as the par swap rate. Which statement best describes how that fixed rate is determined at inception?

Which hedge accounting designation would most likely apply when an issuer uses an interest rate swap to convert floating-rate debt into a fixed-rate liability?

If an investor receives a net gain from widening CDS spreads on an issuer without owning the issuer's bond, what position has the investor taken in the CDS market?

An investor enters a long forward on 1,000 shares of a stock at F0(T) = 120 and the spot at maturity ST = 110. What is the forward buyer's payoff and what is the profit if the buyer paid no premium?

Which of the following statements about option sellers is correct?

A futures contract requires posting initial margin and is marked to market daily. How does this affect counterparty credit risk compared with an OTC forward that settles only at maturity?

An investor enters a long futures contract with initial margin 5,000. During day 1 futures price falls causing MTM loss 700 removed from margin. Which best describes the investor's position?

Which derivative is most directly equivalent (in cash flows) to simultaneously being long the underlying and short a forward on that underlying, ignoring financing costs?

An investor holds an equity position with expected cash dividend before forward maturity. How does the present value of dividends affect the forward price?

Which is the correct description of a net investment hedge?

Suppose zero rates are z1 = 2.4% for 1y and z2 = 3.42% for 2y. Compute the 1y1y implied forward rate (one-year forward rate starting in one year).

Which of the following best describes a covered call's payoff at maturity relative to strike X and premium c0?

A long forward and a long call with exercise price equal to forward price are compared. For which ST range will the option profit exceed the forward profit, assuming the option premium is c0?

Which of the following best characterizes systemic risk in derivatives markets as discussed in the chapter?

In Example 4 (Esterr Inc. swap to fixed), Esterr pays fixed 2.05% and receives floating MRR on CAD250 million. If MRR rises significantly after inception, what happens to the swap MTM from Esterr's perspective?

When bootstrapping zero rates from coupon bond prices, which principle ensures no-arbitrage pricing of a zero-coupon claim?

Which of these best characterizes the convexity bias between interest-rate futures and FRAs?

Which is true about the present value formula for the mark-to-market value of a forward contract on an underlying with known cash incomes and costs?

Which of the following most accurately describes a CDS protection seller?

An investor compares entering a forward sale of shares in 6 months vs buying a put option for protection. Which is true if the investor expects the stock to rise but wants downside protection?

Which of the following best captures the operational efficiency argument for why derivative markets improve market efficiency generally?

A structured note guarantees 80% principal protection plus upside linked to an index above a 5% threshold and is sold at 102% of par. Compared with buying a stand-alone call replicating the upside, what additional investor risks are highlighted?

Which of the following best explains why an issuer might prefer OTC forwards over exchange-traded futures for hedging a specific commercial exposure?

When would an investor prefer to buy a call option rather than enter a forward purchase on the same underlying?

Which statement best describes how futures price discovery can help cash market participants?

If a futures price is positively correlated with interest rates and interest rates rise, what is the likely relative attractiveness and price relationship between futures and forwards?

A portfolio manager will receive a large foreign currency cash inflow in three months and wants to lock the conversion rate now. Which derivative achieves this most precisely and why?

Which of the following is the most accurate description of margin calls in futures markets?

Consider a pay-fixed, receive-floating interest rate swap. Which cash-market position replicates this swap economically?