Multiple Choice Questions – Derivatives
State whether each of the following statements is True (T) or False (F)
(i) Derivatives are securities similar to shares and debentures.
(ii) Underlying assets of a derivative must be a physical asset.
(iii) Standardised forward contracts may be called futures.
(iv) Forward contracts are traded only at computerised stock exchanges.
(v) All futures contract must be settled by delivery of the asset.
(vi) In case of futures, the counterparty guarantee provided by the exchange.
(vii) Futures contracts do have a theoretical price.
(viii) Seller of a futures contract incurs a loss when the future price increases.
(ix) Option premium is the price for getting a right against other party.
(x) In options, the option writer has a right against the option holder.
(xi) Options contract is only an extended version of a futures contract.
(xii) Call options and put options are inverse of each other.
(xiii) American options can be exercised only on the strike date.
(xiv) There is no fixed strike date in European options.
(xv) Option premium is one time non-refundable amount.
(xvi) Expiry date of an option contract is mutually decided by the parties.
(xvii) Loss of the call options holder is always limited.
(xviii) Loss of the put option holder is always limited.
(xix) Excess of call option market price over the strike price is called intrinsic value.
(xx) Intrinsic value of an option is non-negative.
(xxi) Swap deals with the delivery of a physical asset.
(xxii) Swap arrangements are always standardised.
(xxiii) All derivatives contracts on NSE are cash settled.
(xxiv) Futures and Options are available on the shares in India.
[Answers (i) F, (ii) F, (iii) T, (iv) F, (v) F, (vi) T, (vii) T,
(viii T, (ix) T, (x) F, (xi) F, (xii) F, (xiii) F, (xiv) F, (xv) T,
(xvi) F, (xvii) T, (xviii) T, (xix) T, (xx) T, (xxi) F, (xxii) F,
(xxiii) T, (xxiv) T]
Multiplehoice Questions – Contd
1. A Futures contract is standardized version of a
(a)Put option,(b)Call option,(c)Call + Put,(d)Forward contract
2. Margins are imposed on options sellers to safeguard the interest of
(a)Exchange,(b)Brokers, (c)Buyers,(d) d) All of the above
3. In Futures trading, the margin in payable to the broker by
(a)Buyer of Futures,(b)Sellers of Futures,(c)None of (a) and (b),(d)Both of (a) and (b)
4. A contract which gives the holder a right to buy a particular asset at a particular rate on or before a specified date is known as (a) European Option, (b) Straddle,
(c) American Option, (d) Strangle
5. In India, derivatives in interest rates are regulated by
(a) Securities and Exchange Board of India,(b) Forward Market
Commission,(c) Reserve Bank of India,(d) Ministry of Finance
6. The maximum loss of a call option holder is equal to
(a) Strike-Spot Price,(b) Spot Price,(c) Premium,(d)So + Premium
7. The maximum loss of a put option writer is equal to
(a)Strike Price – Premium,(b)Strike Price,(c)Spot Price,(d)Strike Price plus premium
8. Intrinsic Value of a ‘out of money’ call option is equal to
(a)Premium,(b)Zero,(c)Spot Price,(d)Strike Price
9. Holder of an American call option can
(a)Buy the asset only on expiration,(b)Sell the asset on or before expiration,(c)Buy the asset on or before expiration, (d)Sell the asset only on expiration
10. How the increase in volatility in asset price, will affect the value of the option?
(a)Increase the value,(b)Decrease the value,(c)May not affect,(d)Any of the above
11. Holder of European put option can
(a) Sell the asset on or before expiry,(b)Sell the asset on or after expiry,(c)Sell the asset on expiry only (d) Sell the asset before expiry only
12. Maximum gain of a put option holder is restricted to
(a)Strike Price,(b)Spot Price,(c)Spot Price – Premium,(d)Strike Price – Premium
13. Break-even of a call option occurs when spot price is equal to
(a)Strike Price + Premium,(b)Strike Price – Premium,(c)Premium, (d)None of the above
14. Break-even of a Put option occurs when spot price is equal to
(a)Strike price + Premium,(b)Strike Price – Premium, (c)Premium,(d)None of the above
15. Before expiry date, the time value of a call option is
(a)Strike Price – Spot Price,(b)Spot Price – Strike Price,(c)Market Premium – Intrinsic Value,(d) Intrinsic Value
16. Out of 4 factors i.e.,(i) Dividend Yield, (ii) Market Interest,
Rates, (iii) Time to Expiry, and (iv) Price volatility, which affect the premium of an option?(a) (i), (ii), and (iv),(b), (ii),(iii)and (iv),(c) (ii) and (iv),(d) (i), (iii) and (iv)
17. In Futures, the terms and conditions are standards with reference to
(a)Rate and Date only, (b)Quantity only,(c)Place of delivery only,(d)All of the above
18. In call options, which of the following has an relation with its value?
(a)Volatility,(b)Time to Expiry,(c)Strike Price, (d)Spot Price
19. If Strike price is more than the spot price of the asset, the call option is known as
(a)American Option,(b)European Option,(c)Out of Money Option,(d)In the Money Option
[Answers l.(d), 2. (d), 3. (d), 4. (c), 5. (c), 6. (c), 7(a),
8(b), 9. (c), 10. (a), 11. (c), 12. (d), 13. (a), 14. (b), 15
(c), 16(d), 17. (d), 18. (c), 19. (c)]