FRM Mcq's

Introduction to Risk Management
1. Risk can be defined as
a. Variance in the operating income due to expected changes in some factors
b. Variance in the value of assets, liabilities and operating income due to

unanticipated
changes in some factors
c. The actual and potential loss suffered due to changes in some factors
d. Variance in the value of assets, liabilities and operating income due to

unfavorable
changes in some factors
e. All of the above.
2. A risk manager normally tries to cover the risk to
a. Earn more profits
b. Reduce known losses
c. Reduce the uncertainty of cash flows
d. Both (a) and (c) above
3. Which of the following is not a technique for measuring risk?
a. Variance.
b. Semi-variance.
c. Range.
d. Standard deviation.
e. None of the above.
4. Which of the following statements is/are true?
a. Risk is the possibility of a loss.
b. Peril is a cause of a loss.
c. Hazard is a factor that increases possibility of a loss.

d. Both (b) and (c) above.
5. The job of a Risk Manager involves identification of
a. The nature of risk
b. The remedial measures available for managing risk
c. The cost of managing risk
d. Both (a) and (b) above
6. Which of the following is not a tool for managing risk?
a. Avoidance.
b. Separation.
c. Transfer.
d. Loss control.
© ICFAI June, 2004. All rights reserved.Ref. No. FRMWB – 06200441
Financial Risk Management
7. Insurance is a _________ technique for managing risk.
a. Avoidance
b. Loss control
c. Separation
d. Combination
e. Transfer.
8. Insurance policy for vehicles covering third party risk is a ________ technique for
managing risk.
a. Separation
b. Combination
c. Transfer
d. Risk financing
9. The selection of suitable methods for risk management depends upon which of
the following?
a. Degree of risk acceptable to the management.
b. Firm’s expectation about the future outlook.
c. Extent of managing risk depending on the level of operations of the firm.
d. All of the above.
10. Options/Futures are __________ techniques for managing risk.
a. Loss control
b. Hedging
c. Transfer
d. Combination
e. Separation.
11. The objective function of the risk management policy of a banking firm is to
a. Aim at profitability through price matching
b. Ensure liquidity through maturity matching
c. Eliminate risks originating due to exchange rate fluctuations
d. Forecast the interest rate movements
e. Only (a), (b) and (d) above.
12. Which of the following statements defines risk?
a. Possibility of actual outcome being different from the expected outcome.
b. There are a number of specific, probable outcomes, but it is not certain as to

which
one of them will actually happen.
c. There are a number of probable outcomes, the outcomes being unknown and it is
not
certain as to which one of them will actually happen.
d. Only (a) above.
e. Both (a) and (b) above.
10
Part I
13. Identify the false statement.
a. Risk is generally measured using the concept of standard deviation.
b. The degree of risk present in a particular situation is an absolute, independent
amount.
c. Degree of risk is dependent on the level of information available with the entity
facing the risk.
d. As the market value of a firm’s shares is closely related to the profit earned by it,
corporate risk can also be termed as the possibility of a company’s actual Profits
After Tax (PAT) being different from the expected PAT.
e. Both (c) and (d) above.
Total Risk: Main Issues
14. Which of the following risks will not affect exchange risk?
a. Inflation risk.
b. Interest rate risk.
c. Sovereign risk.
d. Investment risk.
15. Which of the following statements is false?

a. A profitable firm will have little or no liquidity risk.
b. Market risk is also known as price risk.
c. Liquidity risk and incorrect capital structure are the prime reasons for financial
risk.
d. Liquidity risk may also refer to the possibility of a firm having excess funds but no
profitable avenues for deployment.
16. Which of the following is an internal business risk?
a. Market collapse.
b. Legal risk.
c. Processing risk.
d. Government policy.
17. Which of the following statements is true?
a. A firm that has borrowed money on a floating rate basis faces the risk of lower
profits in an increasing interest rate scenario.
b. In an increasing interest rate scenario, a firm having fixed rate assets will
encounter
a higher value for its investments.
c. A firm that has fixed rate borrowing and floating rate investments has a higher
risk
than a firm having fixed rate borrowing and fixed rate investments.
d. Both (a) and (c) above.
18. When there is a counterparty failure in performing repayment obligation, it

gives rise to low
quality assets, which in turn leads to
a. Financial risk
b. Default risk
c. Credit risk
d. Market risk
e. Legal risk.
11
19. In non-acceptable risks
a. Potential loss is minimal
b. Potential gain is minimal
c. Potential loss is substantial
d. Potential loss and gain are substantial
20. Pure risks are the type of
a. Acceptable risks
b. Unacceptable risks
c. Static risks
d. Dynamic risks
21. The costs, which are incurred to take precautions and limits on the chances of
recurrence of
risks is called
a. Loss control costs
b. Loss financing costs
c. Risk identifying costs
d. Residual uncertainty costs

22. Insuring one’s business covers the
a. Pure risks
b. Acceptable risks
c. Unacceptable risks
d. Dynamic risks
23. Business event risk may be
a. Disaster risk
b. Legal risk
c. Reputation risk
d. Taxation risk
24. Which of the following is a default risk?
a. Risk of non-recovery of sums due from outsiders.
b. Risk of a possible bankruptcy arising due to the inability of the firm to meet its
financial obligations.
c. Risk of having excess funds.
d. Risk of an adverse effect of interest rate movements on a firm’s profit or balance

sheet.
25. While taking up an overseas project, a company faces
a. Political risk
b. Sovereign risk
c. Inflation risk
d. Currency risk
12
Part I
26. Which of the following risks fall under the category of Interest Rate Risk?
a. Volatility risk.
b. Rate level risk.
c. Prepayment risk.
d. Reinvestment risk.
27. When the costs/yields of liabilities/assets are linked to a floating rate and there
is no
simultaneous movement in the interest rates, it leads to
a. Basis risk
b. Put risk
c. Prepayment risk
d. Real interest rate risk
e. Volatility risk.
28. The Beta (â) co-efficient is measured by
a. The non-diversifiable risk of an asset in relation to that of the market portfolio
b. The systematic risk of an asset in relation to that of the market portfolio
c. The market risk of a security in relation to that of the market portfolio
d. The systematic risk of an asset in relation to that of the unsystematic risk of an

asset
e. (a), (b) and (c) above.
29. The firm producing and selling in domestic market may face _______ risk when
the
economy is opened.
a. Operating risk
b. Transaction risk
c. Translation risk
e. Both (b) and (c) above.
30. Which of the following risks is absent for a buyer of a futures contract?
a. Market risk.
b. Counterparty risk.
c. Liquidity risk.
d. Business risk.
e. Financial risk.
31. Risk of the assets of a firm not being readily marketable is called
a. Market risk
b. Marketablity risk
c. Business risk
d. Financial risk
e. Exchange risk.
32. Which of the following is an external business risk?
a. Labor strike.
b. Machinery breakdown.
c. Changes in customer preferences.
d. Government policy.
13
33. Which of the following statements are false?

a. Hedging transactions are zero-NPV transactions when trading is costless and
markets are completely efficient.
b. When you buy or sell a futures contract the price is fixed today but payment is
made
at a later stage.
c. A holder of a financial futures contract is eligible for dividends and interest
payments made on the underlying security.
d. A holder of a futures contract forgoes the convenience yield on the underlying
commodity.
e. Purchasing a commodity in the futures market enables the holder to save on

storage,
insurance and wastage costs.
34. Which of the following statements is/are false?
a. A firm having fixed rate assets faces the risk of lower value of investments in
decreasing interest rate scenario.
b. A firm having fixed rate assets faces the risk of lower value of investments in an
increasing interest rate scenario.
c. Interest rate risk becomes prominent when the assets and liabilities of a firm do
not
match in their exposure to interest rate movements.
d. Exchange risk occurs due to interlinkages between the various markets.
e. Liquidity risk also refers to the possibility of having excess funds and no
profitable
avenues for deployment.
Corporate Risk Management

35. The aim of risk management is to
a. Maintain unsystematic risk at the desired level
b. Maintain systematic risk at the desired level
c. Cost to be kept minimum
36. Risk includes
a. Upside potentials
b. Downside movement
c. Certain losses
37. Which of the following investments do not have default risk?
a. Corporate deposit.
b. Corporate paper.
c. Company debenture.
d. Treasury bill.
e. Bonds issued by Financial Institutions.
38. Which of the following is a primary risk?
a. Regulatory risk.
b. Interest rate risk.
c. Counterparty risk.
d. Inflationary risk.
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© ICFAI June, 2004. All rights reserved.Ref. No.

FRMWB – 06200441
Part I
a. Primary risks to be borne by a firm to generate profit.
b. Secondary risks are not integrally related to business.
c. Primary risks can be covered to a large extent.
d. Secondary risks can be covered to a large extent.
40. A firm having floating rate liabilities has decided to invest in floating rate assets, such a
type of risk management is called
a. Loss control
b. Risk sharing
c. Combination
d. Separation
e. Risk transfer.
41. The concept of Value at Risk (VaR) is closely linked to concepts of
a. Normal distribution
b. Standard deviation
c. Mean
42. Logistics Manager may expose a firm to
a. Price risk
b. Foreign exchange risk
c. Liquidity risk
d. Product risk
e. Operating risk.
43. Which of the following is not an external hedging technique?
a. Forwards.
b. Swaps.
c. Futures.
d. Options.
e. Netting.
a. No risk management can be complete in itself.
b. Risk management has to be done in anticipation.
c. Risk management strategies should not be too rigid.
d. Risk management should aim at maintenance of risk at the minimal level.
45. Hybrid debt instruments can be tied-up with
a. Interest rate markets
b. Foreign exchange markets
c. Equity markets
d. Commodity markets
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FRMWB – 06200441
46. Which of the following statement(s) is/are true?
a. Risk retention refers to the attempt to reduce the possibility of a loss.
b. Risk is said to be retained when it is reduced or transferred.
c. Combination refers to the technique of combining more than one business activity to
reduce the overall risk of the firm.
d. Risk sharing is a combination of risk retention and risk transfer.
47. A particular portfolio having a VaR of X at 95% confidence level implies
a. There is a 95% probability of the portfolio’s value falling by more than X
b. There is a 5% probability of the portfolio’s value falling by more than X
c. There is a 5% probability of the portfolio’s value rising by more than X
d. There is a 95% probability of the portfolio’s value rising by more than X
e. There is a 5% probability of the portfolio’s value falling by less than X.
a. A firm trying to manage its risks can eliminate it completely.
b. Risk management should be done after the happening of the event.
c. A firm trying to manage its risks is exchanging certain unacceptable risks for risks,
which are acceptable to it.
d. Every risk management tool is foolproof in itself.
49. Which of the following is/are feature(s) of corporate risk management?
i. Corporates ignore the concept of risk management.
ii. It should be looked as a wholistic approach rather than an individual activity.
iii. All the risks of the corporates can be reduced.
iv. It helps the managers realize the implications of their actions on the firm’s risk level.
a. (i), (ii) and (iii) above.
b. (ii), (iii) and (iv) above.
c. (i), (iii) and (iv) above.
d. (i), (ii) and (iv) above.
e. All of (i), (ii), (iii) and (iv) above.
a. Both systematic as well as unsystematic risks have bearing on the required rate of
return.
b. Only unsystematic risk has bearing on required rate of return.
c. Only systematic risk is priced and has an influence on required rate of return.
d. Although unsystematic risk may have no bearing on the required rate of return in
the financial markets, unmanaged unsystematic risk can and often does hurt
hareholders.
51. Which of the following statements is/are true regarding Value at Risk (VaR)?
a. VaR is a statistical measure calculated over a specific investment horizon.
b. VaR measures the expected loss arising due to normal market movements in the
variables responsible for the portfolio’s risk.
c. VaR does not make a distinction between the downside movements and upside
movements of risk.
d. Both (a) and (b) above.
e. All of (a), (b) and (c) above.
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FRMWB – 06200441
Part I
52. Value at Risk (VaR)
a. Cannot be used to quantify the risk arising out of individual assets/liabilities
b. Can be used to lay down the policy for the level of overall risk that is acceptable to
the management
c. Does not measure ‘event’ risk
d. Both (b) and (c) above
e. Both (a) and (c) above.
53. Creation of exposures in the normal course of business which offset the existing exposures
is called
a. Exposure netting
b. Leading
c. Lagging
d. Hedging
54. Asset-liability management can be used to manage
a. Exchange risk
b. Interest rate risk
c. Default risk
d. Liquidity risk
e. (a), (b) and (d) above.
55. Which of the following statements is/are false?
a. Price of systematic risk is identical for all the participants in the financial market.
b. In terms of the discounted cash flow model of firm valuation, unsystematic risk may
lower the expected cash flows, even though it has no influence over the discount
rate.
c. Managing unsystematic risks is not necessary for a firm to enhance investor’s
wealth.
56. Identify the correct statement.
a. The interest rate on convertible debentures or debentures with warrants is typically
lower than that on straight debentures.
b. A call option cannot have a negative value.
c. Convertible debentures and debentures with warrants make sense when it is costly or
difficult to assess the risk characteristics of the issuing firm.
57. The inverse floating rate note issued by Sallie Mae in 1986 was a hybrid to manage
a. Commodity risk
b. Foreign exchange risk
c. Interest rate risk
d. Conflicts between bondholder and stockholders
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FRMWB – 06200441
58. Which of the following is the principal motivating factor for introduction of deep
discount/zero-coupon bonds in India?
a. Tax benefit.
b. Volatility of interest rates.
c. RBI restrictions.
59. The distance between the actual price of the warrant and its lower limit is a function of
which of the following factors?
a. Variance of the stock returns.
b. Time to expiration.
c. Risk-free interest rate.
Financial Engineering
60. Who, among the following, coined the term Financial Engineering?
a. Enthusiastic investors.
b. London Central Bank.
c. World Bank.
d. London’s Investment Banks.
e. Corporates.
61. The rationale behind the concept of “Financial Engineering” is ________.
a. To aid engineers to perform the finance functions of a firm
b. To look into the financial aspects of the financial projects effectively
c. To aid the market participants to react effectively to the rapidly changing Financial
market scenario
d. To make the Financial markets stable
e. To enhance further development of the Finance subject.
62. Which of the following does not come under the scope of “Financial Engineering”?
a. Corporate Finance.
b. Trading.
c. Investment Function.
d. Accounting and Bookkeeping
e. Risk Management.
63. Which of the following is not a ‘Conceptual Tool’ of a financial engineer?
a. Hedging Theory.
b. Accounting relationships.
c. Portfolio Theory.
d. Equities.
e. Valuation Theory.
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FRMWB – 06200441
Part I
64. Which of the following can be identified as ‘Physical Tools’ of a ‘Financial Engineer’?
i. Bonds.
ii. Weather Derivatives.
iii. Hedging Theory.
iv. Portfolio Theory.
v. Securities.
a. Only (i), (iii), (iv) above.
b. Only (i), (iv), (v) above.
c. Only (i), (ii), (v) above.
d. Only (iv) above.
e. Only (v) above.
65. Which of the following External/Environmental factors contribute to the growth of
Financial Engineering?
i. Regulatory Changes and increased competition.
ii. Transaction costs.
iii. Advances in Financial theory.
iv. Liquidity needs of firms.
a. Only (i), (ii) and (iii) above
b. Only (i), (ii) and (iv) above
c. Both (iii) and (iv) above
d. Only (ii), (iii), (iv) above
e. Only (iv) above.
66. The Internal/Intra-firm factors, which contribute to the growth of Financial Engineer are:
i. Agency Costs.
ii. Accounting Benefits.
iii. Tax Asymmetries.
iv. Quantitative sophistication and management training.
a. Both (i) and (iv) above
b. Both (i)and (iii) above
c. Only (iii) above
d. Only (i), (ii) and (iv) above
e. Only (iii) and (iv) above.
67. Which of the following is not a reason for the existence of Tax Asymmetries among the
firms?
a. Different countries impose different tax burdens.
b. Discrimination between Foreign and Domestic firms in a country’s Taxation Policy.
c. Tax sops provided to certain companies/sectors in order to encourage their
development and growth.
d. Tax exemptions or reductions given to a certain firm, based on its past performance
by a country
e. Firms’ inability or ability to pay taxes on the basis of their earned profits.
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FRMWB – 06200441
68. Which among the following innovation was not intended to suffice the “Liquidity Needs”
of a firm?
a. Sweep accounts.
b. Stock index futures.
c. Repos.
d. Money market funds.
e. Commercial Paper.
69. ______ is one of the important instruments for “Risk aversion”?
a. Collateralized Mortgage Obligations (CMOs).
b. Sweep accounts.
c. Floating rate notes.
d. Currency options.
e. Real yield securities.
a. Collateralized Mortgage Obligations (CMOs) were created to protect the investors
from prepayment risks.
b. CMOs are considered to possess a high level of credit quality due to the underlying
collateral’s quality.
c. CMOs take same cash flow that a conventional pass through certificates generates.
d. CMO is an innovation, which is intended to suffice the Liquidity needs of a firm.
e. CMO is an innovation, which will not suffice the Liquidity needs of a firm.
71. Which one of the following is not a characteristic of “Average Strike Rate Option?”
a. It is a type of floating rate option.
b. In this, the pay-off is determined by comparing the underlying price at the expiration
with a strike computed as the average of the underlying over the pre-specified time.
c. Its option strike is uncertain and not determinable until exercised.
d. It is more expensive than normal option.
72. Which of the following is not true regarding a “Financial Engineer”?
a. He manages risk and return of a financial transaction.
b. He looks after only the firm’s financial analysis part of a transaction.
c. He involves in the design, development and implementation of innovative financial
instruments and processes and formulates creative solutions to finance problems.
d. He works closely with Accountants, Tax Specialists and other functionaries.
e. His work is much sophisticated than Financial Analysts.
Derivatives
73. First currency futures was traded in
a. New York Futures Exchange
b. Chicago Mercantile Exchange
c. London International Financial Futures Exchange
d. Chicago Board of Financial Trade
e. London Securities and Derivatives Exchange.
20
c ICFAI June, 2004. All rights reserved.Ref. No. FRMWB . 06200441
Part I
74. Which is the most recently introduced derivatives contract in Indian market?
a. Interest rate futures.
b. Interest rate swaps.
c. Currency options.
d. Stock index futures.
e. Option forward contract.
75. Which of the following is/are Over-The-Counter (OTC) derivative?
a. Forward.
b. Futures.
c. Options.
d. Swaps.
e. Both (a) and (d) above.
76. The major difference between exchange-traded and OTC derivatives is in

respect to
a. Replacement risk
b. Price risk
c. Credit risk
d. Mark-to-market risk
a. Hedgers in derivatives market are exposed to risk due to their normal business
operations.
b. Speculators try to make profit by going against the market.
c. Arbitrageurs help in enhancing liquidity in the market.
d. Arbitrageurs make gain by trading in mispriced derivatives.
78. Which of the following is ﾁ enot ﾁ f the reason for popularity of derivatives?
a. Easy to take short position in the underlying asset.
b. Low transaction cost.
c. Leverage instrument.
d. High liquidity.
79. Derivatives are classified based on
a. Nature of contract.
b. Underlying assets.
c. Market mechanism.
80. Speculation on derivatives is an integral part of ___________.
a. Finance function
b. Forex function
c. Treasury function
d. The central bank function
21
81. Which of the following statement/s is/are true?
a. A derivative is a security whose price does not depend on an underlying asset.
b. A derivative means only a forward, or a future, or an option contract.
c. A derivative instrument does not derive its value from any asset.
d. A derivative is a contract for exchange of payments, whose value derives from

the
value of an underlying asset.

82. Who among the following is not a participant in the derivatives market?
a. Hedgers.
b. Speculators.
c. Central banks.
d. Arbitrageurs.
83. Which of the following activities are performed by hedgers?
i. Protect a position or an anticipated position in the spot market by using an

opposite
position in derivatives market.
ii. Eliminate or minimize or reduce the risk.
iii. Sell futures.
iv. Take a corresponding position in the derivatives market.
a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii) only
e. (i), (ii), and (iv) only.
84. Which one of the following statements is not a feature of derivatives?
a. It is easier to take short position in derivatives than in other assets.
b. Exchange traded derivatives are less liquid, and have high transaction costs.
c. It is possible to construct portfolio which is exactly needed, without having the
underlying assets.
d. There is a relation between the values of derivatives and their underlying assets.
85. The risks present in the OTC derivatives are

a. Credit risk
b. Counterparty risk
c. Interest risk
86. _________ act as a critical link between the derivatives market and the cash
market so that
both the markets synchronize to the extent that there cannot be much
disequilibrium in the
markets.
a. Hedgers
b. Speculators
c. Arbitrageurs
d. Investors
e. Central Banks.
22
Part I
87. Arbitrage means
a. Obtaining risk-free profits by simultaneously buying and selling identical or

similar
instruments in different markets
b. Obtaining profits by selling instruments in a costlier market
c. Obtaining losses by selling instruments in a cheaper market
d. Obtaining losses by simultaneously buying and selling instruments in different

markets

88. Which of the following derivative contracts is most widely used in India for
hedging?
a. Oil futures.
b. Pepper futures.
c. Cotton futures.
d. Currency forward contracts.
e. Currency futures.
89. Which of the following derivatives are not available in India?
a. Interest rate futures.
b. Stock index futures.
c. Currency forwards.
d. Energy futures.
Futures
a. Like options, valuation of index futures is easy to understand.
b. Unlike options, valuation of index futures is easy to understand.
c. Like options, valuation of index futures is not easy to understand.
d. Unlike options, valuation of index futures is not easy to understand.
e. Index futures cannot be valued accurately.
91. Which of the following can be considered as the advantages of controlling beta
by using
stock index futures?
a. The target beta can be achieved almost immediately.
b. Low transaction cost.
c. The optimal stock can be maintained.

92. The beta of a portfolio is 1.1. The investor who holds this portfolio foresees a
bearish phase
for the market in the short run and wants to reduce the beta of the portfolio to 0.6.
Which of
the following strategies can be adopted for achieving the desired level of beta?
i. Sell a part of the equity portfolio and invest the proceeds in debentures.
ii. Sell high beta stocks and buy low beta stocks.
iii. Short sell high beta stocks.
a. (i) only
b. (ii) only
c. (iii) only
d. Both (i) and (ii) above
e. All of (i), (ii) and (iii) above.
23
93. An index fund means
a. A type of fund designed to achieve a particular investment goal, by active

portfolio
management strategies
b. A portfolio that attempts to match the performance of some stock market index
by
investing in the same stocks and in the same proportions as those that comprise
the
selected market index
c. An investment portfolio that appreciates in value at least as rapidly as inflation

index

94. Which of the following statement(s) is/are true for index arbitrage?
a. It is a technique to earn abnormal returns incurring more risk.
b. It is a technique to earn abnormal returns incurring lower systematic risk.
c. It is a technique to earn abnormal riskless return by trading simultaneously in the
spot and future markets.
d. It is a technique to hedge risk.
95. The multiple attached with Nifty index futures
a. 25
b. 50
c. 100
d. 200
e. 250.
96. Which of following statement(s) is/are false for the index futures?
a. The initial and maintenance margins are applicable to both the buyers and
sellers.
b. The margins can be maintained in the form of cash or risk-free short date
Government Securities.
c. Cash customers position is marked to the market at the end of the cash
settlement period.
97. The process of earning abnormal risk by trading simultaneously in the spot and
futures
market is called
a. Stock index arbitrage

b. Basis trading
c. Program trading
98. An investor goes long on Nifty future contract at Rs.1,225. Initial margin was
5000 with
maintenance margin of 4500. If index closes at Rs.1,125 and multiple associated

with the
contract is 100, calculate the call money.
a. Rs.9,500
b. Rs.10,000
c. Rs.14,500
d. Rs.15,500
99. When futures prices are above cash prices, the algebraic value of the basis
a. Remains constant
b. Increases as the basis widens
c. Decreases as the basis widens
d. Is equated to zero
e. Is also above the cash price.
24
Part I
100. If, at the time of making a contract, no transaction is recorded in the books
because delivery
and payment are yet to take place, the transaction is called as a/an
a. Executary contract
b. Preliminary contract
c. Futures contract
d. Forward premium contract
101. Estimating the relation between changes in futures price and changes in the
spot price of the
underlying asset relates to
a. The liquidity premium theory
b. The principle of delta hedging
c. One of the rules propounded by Malkiel
d. The pure expectations theory
102. To change the beta of a portfolio from to ƒÀ to ƒÀ using futures, where S is the
spot price of
the index and F is the futures price, and ƒÀ > ƒÀ*,
a. A long position in (ƒÀ .ƒÀ* ) S
contracts is needed
b. A short position in (ƒÀ .ƒÀ* ) S
contracts is needed
c. A long position in (ƒÀ*.ƒÀ ) S
contracts is needed
d. A short position in ( ƒÀ*.ƒÀ ) S
contracts is needed
e. A long position in *
2F
. ƒÀ +ƒÀ .
..
..
Scontracts is needed.
103. One of the following is a substitute for physical delivery while settling futures
obligation.
a. Offsetting
b. Exchange of Futures for Physicals (EFP)
c. Alternative Delivery Procedure (ADP)
d. Cash settlement
e. There is no substitute for physical delivery while settling futures obligation.
104. A futures contract on bonds is now selling at 92.50 and any of the following
bonds can be
delivered under the contract. Which of the bonds is the cheapest to deliver?
Bond Quoted Price Conversion Factor
1 98.50 1.0292
2 101.50 1.0401
3 136.00 1.3453
4 120.75 1.2595
a. 1
b. 2
c. 3
d. 4
e. Information insufficient.
25
105. Value of a futures contract equals
a. Ratio of price per unit times the initial margin required to deposit times the
number
of commodity units in a contract
b. The market value of the futures contract
c. Total expected value of the futures contract times the per unit value of the
contract
d. Price per unit times number of commodity units in a contract
106. Which of the following formulae is required to describe a general cost of carry
price
relationship between the spot and futures price of any commodity?
CPt = Cash price at time t.
FPt,T = Futures price at time t for a futures contract requiring delivery at time T.
Rt,T = Annualized riskless interest rate at which funds can be borrowed at time t for
period (t . T).
Gt,T = The cost of storing the physical commodity per unit for the time period from
purchase of the commodity (t) to delivery at (T).
a. Cash price + Financing costs per unit + Storage cost per unit.
b. Cash price + Spot price of a commodity . Futures price of the commodity.
c. FPt,T = CPt + CPt x Rt,T
365
+ Gt,T
d. FPt,T = CPt x t
t,T
CP
x 365
107. A cash market is
a. The market in the actual financial instrument on which an options contract is

based
b. A multifaceted market involved in a variety of products and services
c. The market for short-term funds
d. The market in which financial securities are issued
e. The market which deals with on the spot delivery of currency.
108. A short hedge occurs when
a. Hedgers seek to eliminate or control the risk exposure that arises due to adverse
changes in prices
b. Hedgers seek to eliminate or control the risk exposure associated with the
quantity
that will be bought or sold at some future date
c. A firm that owns or plans to purchase a cash commodity sells futures to hedge
their
cash position against declining prices
d. A firm purchases futures to protect itself against a price increase in a commodity
prior to purchasing it in either the spot or forward market
e. Hedging is caused out for a period of 3 to 6 months.
109. The assets that can be delivered against a futures contract are called
a. Speculated assets
b. Hedged assets
c. Cash and carry arbitraged assets

d. Carriable assets
e. Deliverable assets.
26
Part I
110. High volume trading in a futures contract indicates
a. That a number of contracts have already been executed in the past
b. Presence of currently active buyers and sellers
c. Presence of traders already holding positions
d. That there will be buyers and sellers in future
111. Basis risk can be reduced by
a. Using the near month futures contract
b. Matching cash and futures obligations
c. Hedging with a futures contract that has a high price correlation
d. Netting the receivables
e. Only (a), (b) and (c) above.
112. When a position is over hedged, the profit or loss from the speculative futures
position will
depend upon
a. The ex ante minimum-variance hedge ratio
b. The ex post minimum-variance hedge ratio
c. The hedger ﾁ fs cash position
d. Open interest in that contract
e. Actual price movement.
113. When futures are used to hedge an exposure, the final price obtained by the
hedger can be
expressed as
a. The sum of spot price at the time of squaring off the hedge and the gain or loss
on
futures
b. The sum of (i) the difference between the spot prices on the day of hedging and
the
day of closing out the hedge and (ii) futures price on the day of squaring off
c. The sum of spot price at the time of hedging and the basis at the time of hedging
d. The sum of the futures price at time of hedging and the basis at the time of
squaring
off the hedge
e. Both (a) and (d) above.
114. If a related commodity on which a future is traded is used for hedging an asset
on which no
futures contract is traded it is called a
a. Buying hedge
b. Selling hedge
c. Perfect hedge
d. Rolling hedge
e. Cross hedge.
115. Example(s) of deferred delivery contract is/are
i. Futures contract
ii. Option contract
iii. Forward contract
a. (i) only
b. (ii) only
c. Both (ii) and (iii) above

27
116. A good rule of thumb regarding futures is to choose a delivery month that is as
close as
possible to, but later than the expiration date of the hedge. The basis of this rule is
based on
the assumption that
a. There is sufficient liquidity in contracts of all maturities
b. There is sufficient liquidity in contracts of short maturity only
c. The holder of the contracts does not want to get the asset delivered
e. None of (a), (b) and (c) above.
117. The market in which the futures price is greater than the cash price is referred
to as
a. Basis
b. Contango
c. Backwardation
d. Reverse cash and carry arbitrage market
e. Actual market.
118. The optimal hedge ratio for hedging with futures will be equal to 1.0 when
i. There is perfect positive correlation between the changes in the values of the
futures and
the assets hedged.
ii. There is perfect negative correlation between the changes in the values of the
futures and
the assets hedged.

iii. The standard deviation of the changes in values of the asset and the futures are
equal.
iv. The standard deviation of the changes in values of the asset and the futures are
unequal.
a. Both (i) and (iv) above
b. Both (i) and (ii) above
c. Both (i) and (iii) above
d. Only (ii), (iii) and (iv) above
119. Backwardation occurs when
a. Current spot price = futures price
b. Current spot price < futures
c. Futures price < current spot price
d. Futures price > current spot price
e. Current spot price . futures price.
120. The cash price of a ton rice on January 1, 2000 was Rs.1,500. The annualized
borrowing rate on
the same day was 12%. The cost of storing the rice is Rs.50 per month. Calculate
the following
with the help of the above information. What is the settlement price of November 1,
2000 rice
futures contract?
a. Rs.1,250
b. Rs.1,780
c. Rs.1,800
d. Rs.1,695
e. Rs.2,150.
28
Part I
a. The clearing members hold most of the margin deposit funds.
b. The clearing association holds all the funds.
c. The funds are held in equal proportion by the clearing members and the clearing
association.
d. Clearing associations hold the margin funds on a gross basis.
122. The minimum size of price movement which is specified by the London
International
Financial Futures Exchange (LIFFE) is also known as a/an
a. Index
b. Pip
c. Strip
d. Pick
e. Tick.
123. The mechanism for determining transaction prices in futures markets involves:
a. An auctioneer acting the for the exchange calling out bid and offered prices until
a
match is made in the market
b. A specialist offering to buy and sell at the highest and lowest prices in the market
c. Brokers seeking the highest sell and lowest buy prices available in the market
d. All of (a), (b) and (c) above
a. Hedging with futures means substituting the price risk with the basis risk.
b. Hedgers pass on their risk to the speculators.
c. Hedging is achieved either by paying a price or by foregoing a prospective profit.
125. An increase in volume associated with a decrease in open interest on futures

exchange
indicates that
a. Many operators are squaring up their positions
b. The price of underlying asset is likely to increase
c. The price of underlying assets are unlikely to change
a. If the variance of basis is equal to the variance of the cash price, the hedge would
be
optional.
b. The higher the variance of the basis, the lower the effectiveness of the hedge.
c. By hedging through futures, one swaps price risk with basis risk.
29
127. The price of a commodity future is quoted as
247 1/4 249 1/4 246 3/4 248 +2 275 220 121226
Which of the following statement/s is/are true?
a. 247 1/4 is the opening price.

b. 247 1/4 is the previous days closing price.
c. The settlement price is 248 on the day.
128. S1 and F1 represent spot and future prices at time t1 and S2 and F2 represent
spot and
future prices at time t2. If the basis has strengthened between time t1 and t2 (t1 <
t2), then
a. F2 . F1 = S2 . S1
b. F1/S1 = F2/S2
c. F2S2 = F1S1
129. In which of the following futures contracts, the holding cost can be negative?
a. Index futures.
b. Oil futures.
c. Silver futures.
d. Gold futures.
130. Due to mark-to-market, profits and losses are settled at the end of
a. Every day
b. Every month
c. Every week
d. Every three months
e. Life of the contract.
131. If an investor wants to trade in forwards contract he can do so through/with
a. A broker
b. Another forward contracts trader
c. A middleman who need not be a broker
d. An exchange
132. In futures the guarantee to fulfill the contract is given by
a. The buyer of the futures contract
b. The seller of the futures contract
c. Both the parties to the contract
d. The clearing corporation
30
Part I
133. At any given time the clearing house net position will be equal to
a. The net outstanding short positions
b. The net outstanding long positions
c. Zero
d. Positions not yet cleared by it, that is out-trades
134. Which of the following is false?
a. In inverted markets, the price of distant futures contract is less than the near
futures
contract.
b. At the time of expiration, the value of basis should be equal to or nearly equal to
zero.
c. In intra-commodity spread, the spread is between two economically related
commodities.
d. Inter-market cross margining refers to collecting margins centrally irrespective of
the positions of the traders spread over different markets or exchanges.
135. In futures trading, the margin is to be deposited by
a. Seller of the contract
b. Buyer of the contract
c. Both the parties to the contract
d. The broker
136. If the average daily price change is Rs.25 and the standard deviation of the
price changes is
Rs.3.00, the initial margin will be ______. Assume that there are 100 units per
contract.
a. Rs.3,400
b. Rs.3,700
c. Rs.4,000
d. Rs.4,100
e. Rs.4,200.
137. The margin deposited with the broker as a replenishment is referred to as
a. Vertical margin
b. Variation margin
c. Maintenance margin
d. Spread margin
138. Initial margin is also referred to as
a. Vertical margin
b. Variation margin
c. Performance margin
d. Spread margin
139. A futures trader can square up his position only by dealing in contracts which
are similar to
the one he bought or sold in characteristics like
a. Number of contracts
b. Commodity traded
c. Month of expiry of the contract
d. Delivery terms
31
140. In futures contract tick size refers to
a. The daily price limit
b. Minimum price fluctuation that is allowed per contract
c. Change in the price from the previous closing price
d. Maximum change allowed in the settlement price
141. A trader is long in the spot market and short in the futures market. If the basis
is positive
and widens, the trader stands to
a. Gain in futures market
b. Lose in futures
c. Insufficient data
d. Cannot be determined
142. A trader is short in the spot market and long in the futures market. If the basis
is positive
and narrows, the trader stands to
a. Lose
b. Gain
c. His wealth remains the same
d. Cannot be determined
143. Standardization of futures contracts in case of commodities is/are in terms of
a. Quality
b. Daily price movements
c. Expiration month
d. Quantity
144. Which of the following is/are true?
a. Volume traded in a particular session is equal to the number of contracts bought

and
number of contracts sold.
b. The settlement price is the price of the last trade on that day.
c. Open interest denotes the cumulative number of contracts due for delivery.
d. A broker who is not a member of the clearinghouse has to route his client ﾁ fs
order through
one who is a member of the clearinghouse.
145. Which of the following statement/s is/are example(s) of underlying asset(s) for
futures
contracts?
a. Bond index.
b. Stock index.
c. Currency.
d. Oil .
146. In which of the following forms can members of an exchange maintain the
margin relating
to transactions in futures?
a. Cash.
b. Treasury bills.
c. Letter of credit.
32
Part I
147. Which of the following statements is true, in the context of intra-commodity

spread?
a. Selling a spread means ﾁ gSale of near maturity contract and purchase of far
maturity
contract ﾁ h.
b. Selling a spread means ﾁ gPurchase of near maturity contract and sale of far
maturity
contract ﾁ h.
c. Buying a spread means ﾁ gPurchase of far maturity contract and selling a near
maturity ontract ﾁ h.
d. Selling a spread means ﾁ gSelling 2 contracts of different maturities ﾁ h.

Options
Options
148. Which of the following statement/s is/are incorrect?
i. Call options with lower strike prices are more valuable.
ii. If the current stock price is above the strike price of a call, the option has some
intrinsic value.
iii. Put options with lower strike prices are more valuable.
iv. If the strike price is equal to the current stock price, an option is said to be at the
money.
a. (i) only
b. (iii) only
c. (iv) only
e. Both (ii) and (iv) above.
149. Buying and selling call or put option with the same strike price but different
expiration
dates is called
a. Long hedge
b. Short hedge
c. Horizontal option spread
d. Nearby contract
150. Which one of the following is not true?
a. Price of a call option rises with increase in the value of underlying asset.
b. Price of put option rises with increase in the value of underlying asset.
c. Price of call option rises with increase in time until expiration.

d. None of the above.
151. Which of the following is not an assumption of Black-Scholes model?
a. The risk-free interest is constant over the life of the option.
b. All asset markets are perfectly efficient.
c. The option being valued can be exercised anytime before the expiration date.
a. Horizontal spreads involve buying an option and selling an option of the same
type
with same exercise price, but with a different time to expiration.
b. Bull vertical put spread is created by purchasing a put option with a low strike
price
and selling a put option with a higher strike price, both with the same expiration
date.
c. A bear vertical call spread is created by buying a call with lower strike price and
selling a
call with higher strike price, both with same expiration.
33
153. Which of the following statement/s is/are false?
i. The price of a call option is always more than the underlying stock price.
ii. The price of a call option cannot be less than the underlying stock price.
iii. The price of a put option cannot be more than the strike price.
a. (i) only
b. (ii) only
c. (iii) only
d. Both (i) and (iii) above
e. Both (ii) and (iii) above.
a. A straddle is bought when the speculator expects the underlying asset to be

volatile
but is not sure about the direction of the movement.
b. The writer of a naked put option must be bullish on the underlying asset.
c. The buyer of the call option is bearish on the underlying asset market.
a. Spread positions are generally less volatile.
b. Futures exchange normally allow lower margins for spread positions.
c. Spread trading is conservative form of speculation.
156. Among the instruments listed below, which is/are option like instruments?
i. Rights
ii. Warrrants
iii. Puttable and Callable bonds.
a. (iii) only
b. Both (ii) and (iii) above
c. (ii) only

e. (i), (ii) and (iii) of the above.
157. Anticipating a in significant change from the spot price, a dealer buys two calls
on dollars
at X2 and sells one call at X1 and one at X3. It implies
a. X1 < X2 < X3
b. X1 > X2 > X3
c. X2 > X1 > X3
d. X2 < X1 < X3
i. Black-Scholes valuation model gives identical relationship for valuing options on
dividend paying stocks or currencies.
ii. Black-Scholes model can be used to work out exact values of American put
options.
iii. The values of put and call options will be equal at a strike price which is equal to
the
forward rate for the same maturity.
a. (i) only
b. (ii) only
c. Both (i) and (ii) above
34
Part I
a. The price of the European option is normally higher than that of an American
option
on the same asset with same strike price.
b. The options are referred to as wasting assets.
c. The pay-off profile of options is symmetrical.
160. A covered call is
a. Simultaneous buying and writing call option at different strike price
b. Simultaneous buying a call and a put option at the same strike price
c. Buying a call option with a short position in the underlying asset
d. All of the above
e. None of (a), (b) and (c) above.
161. The binomial option-pricing model uses ________ time whereas the Black-
Scholes model
uses _________ time and further assumes that the underlying asset’s volatility
is_______
and that _______ computational methods are used to derive the option prices.
a. Discrete Continuous Constant Closed-form
b. Continuous Constant Closed-form Variable
c. Continuous Discrete Variable Numerical
d. Discrete Continuous Variable Closed-form
e. Continuous Discrete Variable Closed-form
162. Higher the volatility of the price of underlying asset, higher would be the price
of
a. A futures contract on the asset
b. A put option on the asset
c. A call option on the asset

163. If the value of the option is zero on the expiry date, then
a. The spot rate is less than or equal to strike price for a call option
b. The spot rate is more than or equal to strike price for a put option
c. The strike price is equal to spot price irrespective of whether it is a put option or
call option
164. A strangle involves
a. Buying a call and a put with same strike price and different maturities
b. Buying a call and a put with same expiration date and same exercise price
c. Buying a call and a put with same expiration date and different exercise prices
d. Buying two calls at same expiration date and different exercise prices
e. Buying two puts at different expiration date and same exercise prices.
35
165. The pay-off profile of a butterfly spread is
a. V shaped
b. U shaped
c. Z shaped
d. Inverted U shaped
e. Inverted L shaped.
166. Suppose a put option has an underlying asset of Rs.102 and the exercise price
is Rs.100.
What will be the value of the put in the following cases?
i. If the put is exercised

ii. If the stock trades at Rs.100
iii. If the stock trades at Rs.94.
a. –2, 0, 6
b. 0, –2, 6
c. 0, 0, 6
d. –2, –2, 6
e. 0, 0, 8.
167. Which of the following relationships correctly indicates put-call parity?
a. c – p = s + PV(X)
b. p – c = s – PV(X)
c. c – p = s – PV(X)
d. c + p = s – PV(X)
e. c = p – s + PV(X).
168. An option dealer took a short position in a call and put options on dollar at
strike price of
Rs.43.00. He received a premium of Rs.2.50 for each option. For dealer to make a
gain in
this option strategy price should remain in the range of
a. Rs.40.50 to Rs.43.00
b. Rs.43.00 to Rs.45.50
c. Rs.40.50 to Rs.45.50
d. Rs.38.00 to Rs.48.00
e. Rs.40.50 to Rs.45.00.
169. The minimum margin, which a customer must maintain with the member at all
times,
is known as
a. Initial margin
b. Maintenance margin
c. Variation margin
d. Margin call amount
170. What is the time value of a put option at the time of maturity if premium = 1,
strike price = 35 and spot price = 35.5?
a. 0
b. 0.5
c. 1.0
d. 1.5
e. 2.0.
36
Part I
171. With regard to vertical spread which of the following statement(s) is (are)
correct?
i. Is a non-directional strategy which requires the underlying to rise or fall
ii. Is a directional strategy which requires the underlying to rise or fall
iii. Can be constructed with only puts
iv. Can be constructed with only calls
v. Can be constructed with either puts or calls.
a. Both (i) and (v) above
b. Both (ii) and (v) above
c. (i), (iii) and (iv) above
d. (ii), (iii) and (v) above

172. A call option with strike price of 35 has a premium of 2. A call option with strike
price of
36 may have a premium of
a. 1
b. < 2
c. 3
d. 4
e. 5.
173. Going long on a currency and short on a call option results in the pay-off profile
of a
a. Put option buyer
b. Put option writer
c. Call option buyer
d. Call option writer
174. Going short on a currency and long on a call option results in the pay-off profile
of a
a. Put option buyer
175. Going long on currency and long on put option results in the pay-off profile of
a. Put option buyer

176. If you are an exporter expecting to receive $1,00,000 after three months, you
can hedge by
a. Buying call option
b. Selling put option
c. Buying put option
37
177. If you are an Indian importer, needing to remit $1,000,000 after three months,
you can
hedge exposure by
a. Buying call option
b. Buying put option
c. Selling call option
d. Selling put option
e. Either (a) or (d) above.
178. In which option does the buyer get the right to buy the underlying asset?
a. Call option.
b. Put option.
c. American option.
d. European option.
e. Asian option.
179. In which option does the buyer get the right to buy the underlying asset any
time during the
contract period?
a. Digital option.
b. Asian option.
c. American option.
d. European option.
180. Ms. Priya has bought a call option on MTNL at strike price of Rs.175 by paying
premium
of Rs.10. She is short on a call option on MTNL at a strike price of Rs.185 for Rs.6.
Calculate at what price of MTNL, Ms. Priya’s position will break even.
a. Rs.169
b. Rs.175
c. Rs.179
d. Rs.185
e. Rs.201.
181. The spot price of ITC is Rs.910. An exchange is trading the following option
contracts.
Strike price Premium
Call Put
905 15.00 5.50
910 11.50 7.50
915 9.00 9.00
920 7.50 11.50
925 5.50 15.00
An investor bought a call option at a strike price of 920 and a put option at strike
price of
Rs.910. The position created by the investor is called

a. Long straddles
b. Long vertical spread
c. Long strangles
d. Long horizontal spread
38
Part I
182. A _______ is created by going short on both put and call options, and the strike
price and
time to expiration of both the options are the same.
a. Synthetic put
b. Long straddle
c. Short straddle
d. Long strangle
e. Short strangle.
183. Suppose a June call option on a stock X is currently trading at Rs.31 with a
strike price
Rs.35. On the expiration date the price of the stock is Rs.32. Then, which of the
following
is correct?
a. Option is in-the-money.
b. Option is out-of-the-money.
c. Option is at-the-money.
d. Pay-off is Rs.3.
e. Pay-off is Rs.6.
184. There is a put option on a stock trading at Rs.2 its strike price is Rs.35. What
would be the
price of the put option with a strike price of Rs.34?
a. 1
b. 2
c. 3
d. < 2
e. Cannot be determined.
185. When you buy a call option on any underlying asset by paying Rs.3 as a
premium with
strike Rs.48, the price of the underlying asset should be ______ for you to obtain
profits?
a. 49
b. 50
c. 51
d. > 51
e. > 45.
186. For which of the following options, the time value will be maximum?
a. In-the-money options.
b. At-the-money options.
c. Out-of-the money options.
d. Deep-in-the-money options.
e. Deep-out-of-the-money options.
187. When the strike price of an option is equal to the spot price of the underlying
asset at the
expiration date/exercise date, then the option is said to be
a. Deep-in-the-money
b. In-the-money
c. Out-of-the-money
d. At-the-money
e. Either (a) or (b) above.
188. Synthetic long put can be created by which of the following combinations?
a. Long put + long on the underlying asset.
b. Long call + long on the underlying asset.
c. Long call + short on the underlying asset.
d. Long put + short on the underlying asset.
e. Long call + long put underlying asset.
39
189. A modest risk-taking speculator who expects wide variation in the exchange
rates can
a. Buy a butterfly spread
b. Buy a call option
c. Buy a put option
d. Sell a call option
e. Buy a straddle.
190. A synthetic long call is a combination of
a. Long put + long stock
b. Long call + long stock
c. Long call + short stock
d. Long put + short stock
e. Long call + short put.
191. The pay-off profile of a ‘fence’ strategy is equivalent to that of a
a. Butterfly spread
b. Straddle
c. Strangle
d. Bull spread
e. Ratio spread.
192. A straddle consists of
a. Buying a call and selling a put with identical strike rate
b. Writing a call and buying a put with identical expiration date
c. Buying a call and a put with identical strike rate and expiration date
d. Writing a call and put with identical strike rate but different expiration date
e. Buying a call with a farther maturity and writing a put with nearer maturity.
193. Stochastic process
a. Describes the change in the value of a variable over a period of time in a

predefined
way
b. Involves changes over a discrete intervals or continuous intervals of time
c. Describes the change in the value of a variable other than a period of time in an
uncertain way
194. Which of the following is/are assumptions of Black-Scholes approach?
a. Short sale of securities with full use of procards.
b. No dividend payment during the life of the derivative.
c. Risk-free rate is the same for all maturities.
195. If c and C represent prices of European and American call options and S
represents the
current stock price, then

a. C < S
b. C > S
c. C < c
40
Part I
196. Which of the following factors is/are not considered while valuing options on
stocks?
a. Current stock price.
b. Time to expiration.
c. Volatility of stock price.
d. Risk-free interest rate.
197. Which of the following is/are true?
a. The price difference between two American puts cannot exceed the difference in
exercise prices.
b. The price difference between two European puts cannot exceed the difference in
exercise prices.
c. The price difference between two American puts cannot exceed the difference in
the
present value of exercise prices.
198. The writer of the option is also known as a
a. Buyer of the option

b. Holder of the option
c. Seller of the option
d. Mediator of the option
199. The potential for loss for a put option writer is
a. Limited to the premium
b. Limited to the exercise price
c. Limited to the difference between the exercise price and the stock price at the
time
of exercise
d. Unlimited
a. An option holder will have a right to exercise but not the obligation of exercising.
b. An option writer will have a right to exercise the option but not obliged to do so.
c. If the writer of the option choses to exercise, the liability of the buyer becomes
unlimited.
d. The liability of option buyer is unlimited.
201. ‘American options’ are those
a. Options which are traded on New York Stock Exchange
b. That can be exercised at any time during a specified period
c. That can be exercised only at the specified period
d. That can be exercised even after the specified period
41

202. ‘European options’ are
a. Those options in which writer’s liability is limited
b. Those options which can be exercised at a specified time only
c. Those options which can be exercised during a specified period only
d. Those options which can be exercised only if the asset price crosses an agreed
limit
203. When the price of the stock is same as the price of the option
a. The put option is said to be out of the money
b. A call option is said to be at the money
c. A put option is said to be at the money
d. A call option is said to be out of the money
204. When the price of the stock is less than the exercise price of the option
a. Put option is said to be out of money
b. Call option is said to be at the money
c. Put option is said to be in the money
d. Call option is said to be in the money
e. Put option is said to be at the money.
205. ‘Covered Call Writing’ means
a. Buying a stock and a put option and writing a call option on the asset already
owned
b. Buying a call option and stock and writing a put option
c. Buying a call option and writing a put option
d. Buying a call option and purchasing a stock
e. Selling a call option and purchasing a stock.

206.
Pay-off
The above graph represents pay-off profile for a
a. Long call option
b. Short call option
c. Long put position
d. Short put position
e. Long call and short put.
42
Part I
207.
PPaayy--oofff f
The above graph represents pay-off profile for a
a. Long call option
b. Short call position
c. Long put position
d. Short put position
208.
Pay-off
The above graph represents a pay-off profile for a
a. Long put
b. Short put
c. Long call
d. Short call
209.
Pay-off
The above graph represents a pay-off profile for a
a. Long put
b. Short put
c. Long call
d. Short call
43
210. The value of a put option at the time of expiration is
a. Max (0, E – S)
b. Max (S – E, 0)
c. Max (E, S)
d. Max (S, 0)
e. Max (E, 0).
211. Put-call parity theorem states that
a. The pay-off from a call option is exactly equal to pay-off from a put option
b. The price of one of the options (put or call) is related to the price of the other
c. The pay-off from a call option is exactly equal to the pay-off from a put option and
buying a stock
d. The pay-off from a call option and buying a stock is exactly equal to the put
option
212. The value of an option

a. Increases as the time to expiration decreases
b. Increases as the time to expiration increases
c. Decreases as the volatility of stock price increases
d. Increases as volatility of stock price decreases
e. Both (b) and (d) above.
213. The value of a call option
a. Increases as the interest rate increases
b. Increases as the time to expiration increases
c. Increases as the stock price increases
d. Increases as the exercise price decreases
214. Which of the following is a shortcoming of the binomial model?
a. It cannot be used for call options.
b. It is not useful when possible inflows undergo continuous changes due to various
factors.
c. That it cannot be used as highest and lowest values of the stock cannot be
determined easily.
d. It cannot be used as there is a difference in lending and borrowing rates in real
world.
215. A long straddle involves
a. Buying a call with a higher exercise price and writing a call with a lower exercise
price
b. Buying a call with a lower exercise price and writing a call with a higher exercise
price
c. Buying a call and a put each of which has the same exercise price and same time
to
expiration
d. Buying two calls at the same exercise price and writing a put at a lower exercise
price
e. Buying a put and writing a call each of which has the same exercise price and
same
time to expiration.
44
Part I
216. A buyer of a straddle will not profit if
a. The price of the underlying asset only increases substantially
b. The price of the underlying asset only decreases substantially
c. The price of the underlying asset remains more or less stable up to the
expiration date
d. The price of the underlying asset remains in a narrow range
e. The price of the underlying asset is a circuit breaker.
217. Long strangle strategy involves
a. Buying a put and a call on the same underlying asset for the same exercise price
but
at different time to expiration
b. Buying a put and a call on the same underlying asset with the same exercise
price
but at different time to expiration
c. Buying a put and a call on the same underlying asset at different exercise price
and
different time to expiration
d. Buying a put and a call on the same underlying asset with the same expiration
period
but different exercise prices
e. Selling a put and buying a call of the same exercise price and time to expiration.
218. Which of the following statement/s is/are false?
a. The higher the ratio of the current price of the stock to the exercise price of the
call,
the higher the value of the call.
b. The longer the time to expiration on the call, the higher the value.
c. The higher the riskless rate of interest, the greater the value of the call.
d. The lower the ratio of the current price of the stock to the exercise price of the
call,
the lower the value of the call.
e. The longer the time to expiration on the call, the lower the value of call.
219. Given N(d1) = 0.5080 and N(d2) = 0.3707, the hedge ratio is
a. 0.5080
b. 0.3707
c. 0.8787
d. 0.1373
e. 0.5007.
220. The strategy of buying an option and selling another option of the same type
and time to
expiration but with different exercise price is known as
a. Vertical spread strategy
b. Horizontal spread strategy
c. Diagonal spread strategy
d. Straddle
e. Strangle.
221. Which of the following are risks of writing call options?

a. Risk of being assigned an exercise.
b. The covered call writer foregoes the opportunity to benefit from an increase in
the
value of the underlying asset.
c. The risk of writing multiple options exposes the writer to larger risks.
d. The credit risk.
45
222. Which of the following statements describes a short sellers’ profit?
a. The per share profit from short selling is limited to an amount equal to the price
at
which the shares were sold short.
b. The short seller earns Re.1 profit for every Re.1 fall in the price of the security.
c. Short seller must own the stock which he sold off.
223. An investor buys 100 6-month call of Reliance Industries at a strike price of
Rs.200, when
the current market price is Rs.180 per share.
The call price is Rs.5 per share, at the end of six months the maximum loss to the
investor
will be
a. Rs.500
b. Rs.1,800
c. Rs.2,000
d. Rs.2,500
e. Rs.3,000.
224. Which of the following strategies does not involve buying the underlying
security?
a. Covered call writing.
b. Protective put.
c. Spreads.
225. If an investor is long on a call option at a strike price of Rs.400, he will make
profit only
when the stock price is
a. Below Rs.400
b. Above Rs.400
c. Rs.400
d. Rs.500
e. Rs.600.
226. An investor is short on put at strike price of Rs.200. Determine his profit/loss, if
closing price is 200 and premium charged was Rs.5 and trading lot for put is 100.
a. Rs.500 profit
b. Rs.1,500 profit
c. Rs.2,500 profit
d. Rs.2,500 loss
e. Rs.3,500 profit.
227. An investor buys a call option contract for a premium of Rs.200. The exercise
price is
Rs.20 and the current market price of the share is Rs.17. If the share price after
three
months reaches Rs.25, what is the profit made by the option holder on exercising
the
option. Contract is for 100 shares. Ignore the transaction charges.
a. Rs.200
b. Rs.250
c. Rs.300
d. Rs.350
e. Rs.400.
46
Part I
228. An investor buys a call option contract for a premium of Rs.300. The exercise
price is
Rs.30 and the current market price of the share is Rs.26. If the share price after
three
months reaches Rs.30, the amount of loss to the investor will be ______.
a. Rs.300
b. Rs.350
c. Rs.400
d. Rs.450
e. Rs.500.
229. You wrote a put option contract for a premium of Rs.250. The exercise price of
option is
Rs.50 and the current market price is Rs.45. After a period of four months the price
of the
stock is Rs.53. If the option holder exercises the option, total loss will be Rs.______.
Ignore
the transaction costs and the contract is for 100 shares.
a. 50
b. 100
c. 250
d. 450
e. 550.
230. A put option was written at a premium of Rs.400. The current market price of
the stock is
Rs.38 and the exercise price of the contract is Rs.35. After a period of two months
the price
of the stock is Rs.30. The amount of the profit made by the option holder is
Rs.______.
(Assume that the contract is for 100 shares)
a. 325
b. 250
c. 150
d. 100
e. 75.
231. The determinants of the option values is/are
a. Volatility in the price of the underlying share
b. Remaining time for exercising the option
c. Current market price of the stock
d. Interest rates in the market
232. In options ‘out-trades’ are referred to as
a. Uncanceled short positions
b. Uncanceled long positions
c. Unmatched trades submitted by both the parties
d. Trades conducted outside the exchange premises

233. Margins are imposed on the writers of the option to provide immunity to
a. Buyer
b. Broker
c. Exchange
d. Options clearing corporation
47
234. The number of option contracts traded on a company’s stock in an exchange

has the
following effect:
a. The option holders become the rightful owners of the company
b. The option holders can cast their vote only in annual general meetings
c. The option holders will be treated as creditors to the company
d. Do not affect the company in any manner
235. The margin paid on long positions is ______.
a. The amount by which the option is ‘Out of money’
b. 10% of the market value per share on a contract
c. 20% of the market value per share on a contract
d. Sum of (a) and (c) above
e. Equal to the premium on the option contract.
236. Which of the following is false regarding ‘Options’?
a. The value of an option does not depend on price of the underlying asset.
b. Options give you the right, but not the obligation, to buy or sell an asset.
c. Options cannot be used to hedge commodities.
a. An option holder is the seller of the option.
b. Options represent a special kind of financial contract under which the option
holder
enjoys the right, but has no obligation to do something.
c. A European option can be exercised only on the expiration date.
d. An American option can be exercised on or before the expiration date.
238. Buying a range forward implies
a. Simultaneous buying of a call and selling of a put option with identical maturity
b. Simultaneous buying of a put and selling of a call option with identical maturity
c. Simultaneous buying of a call and a put option with identical maturity
d. Simultaneous selling of a call and a put option with identical maturity

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Introduction to Risk Management

1. Risk can be defined as

a. Variance in the operating income due to expected changes in some factors

b. Variance in the value of assets, liabilities and operating income due to

changes in some factors

d. Variance in the value of assets, liabilities and operating income due to

changes in some factors

e. All of the above.

2. A risk manager normally tries to cover the risk to

a. Earn more profits

b. Reduce known losses

c. Reduce the uncertainty of cash flows

d. Both (a) and (c) above

e. All of the above.

3. Which of the following is not a technique for measuring risk?

e. None of the above.

4. Which of the following statements is/are true?

a. Risk is the possibility of a loss.

b. Peril is a cause of a loss.

c. Hazard is a factor that increases possibility of a loss.

e. All of the above.

5. The job of a Risk Manager involves identification of

a. The nature of risk

b. The remedial measures available for managing risk

c. The cost of managing risk

d. Both (a) and (b) above

e. All of the above.

6. Which of the following is not a tool for managing risk?

e. None of the above.

© ICFAI June, 2004. All rights reserved.Ref. No. FRMWB – 06200441

Financial Risk Management

7. Insurance is a _________ technique for managing risk.

e. None of the above.

a. Degree of risk acceptable to the management.

b. Firm’s expectation about the future outlook.

c. Extent of managing risk depending on the level of operations of the firm.

d. All of the above.

e. None of the above.

10. Options/Futures are __________ techniques for managing risk.

a. Aim at profitability through price matching

b. Ensure liquidity through maturity matching

c. Eliminate risks originating due to exchange rate fluctuations

d. Forecast the interest rate movements

e. Only (a), (b) and (d) above.

12. Which of the following statements defines risk?

a. Possibility of actual outcome being different from the expected outcome.

b. There are a number of specific, probable outcomes, but it is not certain as to

certain as to which one of them will actually happen.

d. Only (a) above.

e. Both (a) and (b) above.

© ICFAI June, 2004. All rights reserved.Ref. No. FRMWB – 06200441

13. Identify the false statement.

a. Risk is generally measured using the concept of standard deviation.

b. The degree of risk present in a particular situation is an absolute, independent

facing the risk.

After Tax (PAT) being different from the expected PAT.

e. Both (c) and (d) above.

Total Risk: Main Issues

b. Interest rate risk.

e. None of the above.

15. Which of the following statements is false?

b. Market risk is also known as price risk.