Question 1

What is a "future"?
A)A contract in which two parties agree to exchange cash flows (e.g.interest cash flows).
B)A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date.
D)A contact that gives the right,but not the obligation,to buy a share at a specified price over a specified period of time.

Accepted Answer

A future is a contract where one party agrees to buy or sell a commonly traded item at a set price and a defined future date. This is different from an option (choice D), which gives the right but not the obligation to buy or sell a share at a specific price over a specific period of time. Choice A is describing an interest rate swap, not a future. Choice C is a partial definition of a future, but it is missing the commonly traded item component.

Question 2

What is a "forward"?
A)A contract in which two parties agree to exchange cash flows (e.g.interest cash flows).
B)A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date.
D)A contact that gives the right,but not the obligation,to buy a share at a specified price over a specified period of time.

Accepted Answer

A forward is a contract in which one party commits upfront to buy or sell something at a defined price at a defined future date. This differs from a futures contract (which is similar but standardized and traded on an exchange) and an option (which gives the right, but not the obligation, to buy or sell at a specified price over a specified period of time).

Question 3

Which of the following is not a financial instrument?
A)Stock warrants.
B)Preferred shares.
C)Deferred tax asset.
D)Options.

Accepted Answer

A deferred tax asset is not a financial instrument. It is an accounting concept that represents a future tax benefit that a company can claim on its tax returns. Financial instruments are assets that can be traded such as stocks, bonds, options, and futures contracts.

Question 4

Which of the following is correct about financial instruments?
A)Accounting for financial instruments has been consistent.
B)There is no economic substance to financial instruments.
C)They are often designed to circumvent accounting standards.
D)All financial instruments are accounted for at fair value.

Accepted Answer

Financial instruments are often designed with complexity, including features that can be used to circumvent or exploit accounting standards for various purposes, such as tax benefits or to achieve desired financial reporting outcomes.

Question 5

What is a "warrant"?
A)A contract in which two parties agree to exchange cash flows (e.g.interest cash flows).
B)A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date.
D)A contact that gives the right,but not the obligation,to buy a share at a specified price over a specified period of time.

Accepted Answer

A warrant is a contract that gives the holder the right to buy a share at a specified price over a specified period of time, but without the obligation to do so. It is a type of derivative security typically issued by companies or financial institutions to raise capital.

Question 6

Which of the following is an example of a "swap"?
A)Right to buy 100 shares of CIBC over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 US dollars in 4 months at US$=1.10.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Accepted Answer

Choice D is an example of a "swap" because it involves exchanging one type of interest payment for another. In this case, the party is paying interest at a higher rate (prime +3%) in exchange for receiving interest at a lower rate (5%). Choices A, B, and C are not examples of swaps as they do not involve the exchange of one type of financial instrument or obligation for another.

Question 7

Which statement is correct about accounting for financial instruments?
A)All financial instruments are accounted for at fair value through profit or loss.
B)All are accounted for in accordance to their economic substance.
C)All financial instruments are accounted for at amortized cost.
D)All financial instruments are accounted for at fair value through OCI.

Accepted Answer

Financial instruments are accounted for according to their economic substance rather than their legal form. This principle ensures that the financial statements reflect the underlying transactions' true nature and economic realities. Options A, C, and D are incorrect because not all financial instruments are accounted for in the same way; the accounting treatment depends on the classification of the financial instrument, which can vary.

Question 8

What is a "call" option?
A)A contract that gives the holder the right to sell an instrument at a pre-specified price.
B)A contract that is derived from some other underlying quantity,index,asset or event.
C)A contract that gives the holder the right to acquire an instrument at a pre-specified price.
D)A contract that gives the holder the right to buy or sell something at a specified price.

Accepted Answer

A "call" option is a contract that gives the holder the right to acquire an instrument at a pre-specified price. This means that the holder has the option to buy the underlying asset at the pre-specified price, but is not obligated to do so. It is essentially a bet on the future price of the asset - if the price goes up, the holder can exercise the option and buy the asset at a lower price, thereby realizing a profit.

Question 9

Indicate whether the following statements are true or false with respect to characteristics of stock options.

Accepted Answer

The answer of Indicate whether the following statements are true...

Question 10

In the table below,choose the financial instrument that best explains the example on the right side.Types of financial instrument to select from: Financial asset,financial liability,equity,compound instrument,basic option,swap,forward,future,warrant,put option,or call option.

Accepted Answer

The answer of In the table below,choose the financial instrument...

Question 11

Which of the following is an example of a "warrant"?
A)Right to buy 100 shares of CIBC over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 US dollars in 4 months at US$=1.10.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Accepted Answer

A warrant is a financial instrument that gives the holder the right to buy a certain number of shares at a predetermined price within a specified time frame. Choice A is an example of a warrant, as it gives the holder the right to buy 100 shares of CIBC over the next 5 years. The other choices do not involve warrants; choice B is a commitment to purchase oil, choice C is a commitment to buy a certain amount of US dollars at a certain exchange rate, and choice D is an interest rate swap.

Question 12

What is a "swap"?
A)A contract in which two parties agree to exchange cash flows (e.g.interest cash flows).
B)A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date.
D)A contact that gives the right,but not the obligation,to buy a share at a specified price over a specified period of time.

Accepted Answer

A swap is a financial contract in which two parties agree to exchange cash flows. This can include interest rate cash flows, currency exchange cash flows, or other types of cash flows.

Question 13

Which of the following is an example of a "future"?
A)Right to buy 100 shares of CIBC over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 US dollars in 4 months at US$=1.10.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Accepted Answer

A future is a standardized contract to buy or sell a specific quantity of a commodity or financial instrument at a predetermined price at a specified time in the future. Option B describes such a contract for oil.

Question 14

How should warrants on the company's own common shares be accounted for?
A)Fair value.
B)Fair value through profit or loss.
C)Amortized cost.
D)Historical cost.

Accepted Answer

The answer of How should warrants on the company's own...

Question 15

What is an option?
A)A contract that gives the holder the right to sell an instrument at a pre-specified price.
B)A contract that is derived from some other underlying quantity,index,asset or event.
C)A contract that gives the holder the right to acquire an instrument at a pre-specified price.
D)A contract that gives the holder the right to buy or sell something at a specified price.

Accepted Answer

An option is a contract that gives the holder the right to buy or sell something at a specified price. Choices A and C are specific types of options, while choice B is a broad definition of a derivative contract which may include options. However, the most accurate and concise definition of an option is provided by choice D.

Question 16

Which of the following is not an underlying?
A)Price of oil on New York Exchange.
B)Bank of Canada interest rate.
C)Conversion into 10 common shares.
D)US dollar exchange rate.

Accepted Answer

The underlying refers to the asset, index, or instrument upon which a derivative product is based. Options, futures, and other derivatives contracts are based on underlying assets, such as commodities, stocks, or currencies. Conversion into 10 common shares is not an underlying, but rather a process of exchanging one asset for another. A, B, and D are all examples of underlying assets for derivatives contracts.

Question 17

Explain how bonds issued with warrants alleviate adverse selection problem.

Accepted Answer

The answer of Explain how bonds issued with warrants alleviate...

Question 18

Which of the following is an example of a "forward"?
A)Right to buy 100 shares of CIBC over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 US dollars in 4 months at US$=1.10.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Accepted Answer

The answer of Which of the following is an example...

Question 19

What is a "put" option?
A)A contract that gives the holder the right to sell an instrument at a pre-specified price.
B)A contract that is derived from some other underlying quantity,index,asset or event.
C)A contract that gives the holder the right to acquire an instrument at a pre-specified price.
D)A contract that gives the holder the right to buy or sell something at a specified price.

Accepted Answer

A "put" option is a contract that gives the holder the right to sell an instrument, such as a stock or bond, at a pre-specified price. This is different from a "call" option, which gives the holder the right to buy an instrument at a pre-specified price.

Question 20

Explain how convertible bonds alleviate moral hazard.

Accepted Answer

The answer of Explain how convertible bonds alleviate moral hazard....

Quiz 14: Complex Financial Instruments

What is a "future"?

What is a "forward"?

Which of the following is not a financial instrument?

Which of the following is correct about financial instruments?

What is a "warrant"?

Which of the following is an example of a "swap"?

Which statement is correct about accounting for financial instruments?

What is a "call" option?

Indicate whether the following statements are true or false with respect to characteristics of stock options.

In the table below,choose the financial instrument that best explains the example on the right side.Types of financial instrument to select from: Financial asset,financial liability,equity,compound instrument,basic option,swap,forward,future,warrant,put option,or call option.

Which of the following is an example of a "warrant"?

What is a "swap"?

Which of the following is an example of a "future"?

How should warrants on the company's own common shares be accounted for?

What is an option?

Which of the following is not an underlying?

Explain how bonds issued with warrants alleviate adverse selection problem.

Which of the following is an example of a "forward"?

What is a "put" option?

Explain how convertible bonds alleviate moral hazard.