Question 1

A comparative advantage swap arises when:
A) two borrowers have the same strengths and weaknesses across various markets.
B) one borrower is stronger than the other in all markets.
C) one party is a borrower and the other is a lender.
D) two borrowers have different strengths and weaknesses in differing markets.

Accepted Answer

A comparative advantage swap occurs when two borrowers have different strengths and weaknesses in different markets, allowing them to benefit from each other's comparative advantages.

Question 2

If A is the position in the derivative, B is the position in the underlying security, and C is a fixed- interest loan, a short synthetic position in the underlying security is represented as:
A) C - A.
B) A - B.
C) - B.
D) C + B.

Accepted Answer

A

Question 3

Forward rate agreements (FRAs) are:
A) ET interest rate derivatives.
B) OTC interest rate derivatives.
C) OTC share derivatives.
D) ET share derivatives.

Accepted Answer

Forward rate agreements (FRAs) are over-the-counter (OTC) interest rate derivatives used to hedge against interest rate fluctuations.

Question 4

Which of the following is NOT one of the effects of derivatives?
A) Providing a means of dealing with market volatility.
B) Reducing the risk of financial transactions.
C) Increasing the integration of national and global financial markets.
D) Assisting the Reserve Bank to implement monetary policy.

Accepted Answer

Derivatives primarily serve to manage risk and enhance market efficiency, but they do not directly assist central banks like the Reserve Bank in implementing monetary policy.

Question 5

A position consisting of futures contracts settling on different dates is known as:
A) a strip.
B) comex trade.
C) cash- and- carry arbitrage.
D) a hedge ratio.

Accepted Answer

A strip is a position consisting of futures contracts that settle on different dates, typically used to manage risk or speculate on future price movements.

Question 6

The 'hedge ratio' refers to:
A) the price in the spot market divided by the price in the derivatives market.
B) the number of futures contracts needed to equate the gain on a futures position and the loss on the exposure.
C) the difference between a derivative position and the underlying fixed- rate loan.
D) the contract rate in a FRA less the benchmark rate.

Accepted Answer

The hedge ratio is the number of futures contracts needed to offset the risk of a position, ensuring that gains on the futures position equate to losses on the exposure.

Question 7

Which of the following is NOT included in the specification of a FRA?
A) The settlement date.
B) A benchmark interest rate.
C) The broker's fee.
D) A guaranteed interest rate.

Accepted Answer

The broker's fee is not part of the FRA specification, which typically includes the settlement date, a benchmark interest rate, and a guaranteed interest rate.

Question 8

If A is the position in the derivative, B is the position in the underlying security, and C is a fixed- interest loan, if a player holds B and wishes to hedge her position then she can:
A) buy A.
B) buy C.
C) sell C.
D) sell A.

Accepted Answer

The answer of If A is the position in the...

Question 9

A 'floating rate' means:
A) an interest rate that is indexed to the exchange rate.
B) a variable interest rate such as the bank bill rate.
C) an interest rate swap.
D) an interest rate that is outside the control of the Reserve Bank.

Accepted Answer

A 'floating rate' refers to a variable interest rate that can change over time, often linked to a benchmark rate like the bank bill rate.

Question 10

The phrase 'yield pick- up' refers to:
A) a capital gain that the holder of a swap enjoys when the RBA decreases interest rates.
B) a gain that comes by switching from interest bearing to dividend bearing derivatives.
C) an arbitrage profit that a trader picks up by buying and selling two swap contracts simultaneously.
D) an increased floating rate yield obtained by investing in a high- yield bond and swapping into a floating- rate investment.

Accepted Answer

Yield pick-up refers to the increased yield obtained by investing in a higher-yielding bond and then swapping it into a floating-rate investment, typically to benefit from the higher interest rates.

Question 11

Cash- and- carry arbitrage involves:
A) buying in the options market and selling in the futures.
B) buying in the cash market and selling in the forwards.
C) buying in the forward market and selling in the futures.
D) buying in the swaps market and selling in the cash market.

Accepted Answer

Cash-and-carry arbitrage involves buying the underlying asset in the cash market and simultaneously selling it in the forward market to exploit price discrepancies.

Question 12

An instrument that involves the exchange with a notional principal of $100 million of floating rate for fixed- rate obligations with eight settlement dates is an example of:
A) a share option.
B) a forward rate agreement.
C) an interest futures contract.
D) an interest rate swap.

Accepted Answer

An interest rate swap involves exchanging fixed-rate obligations for floating-rate obligations, typically with a notional principal and multiple settlement dates.

Question 13

In the infamous Barings Bank disaster, the losses came about due to:
A) contagion.
B) mismanagement.
C) margin calls.
D) speculation.

Accepted Answer

Barings Bank's losses were primarily due to mismanagement, particularly the unauthorized trading activities of Nick Leeson.

Question 14

Program trading:
A) is a computerised method of arbitrage between physical, futures and options markets.
B) has been criticised for contributing to the October 1987 stock market crash.
C) ensures SPI futures are priced correctly.
D) all of the above.

Accepted Answer

Program trading involves computerized trading strategies that can include arbitrage across different markets, and it has been criticized for its role in market volatility, such as during the 1987 crash. It also helps in maintaining pricing efficiency in futures markets.

Question 15

The growth of derivatives:
A) in recent years has gone into reverse.
B) did not live up to early expectations.
C) took the Reserve Bank by surprise.
D) was a response to increased volatility of financial markets following deregulation.

Accepted Answer

The growth of derivatives was largely driven by the need to manage increased financial market volatility that followed deregulation.

Question 16

To hedge a share portfolio we can:
A) buy SPI futures.
B) sell SPI futures adjusted for the portfolio beta.
C) buy and sell offsetting amounts of SPI futures.
D) borrow an amount equal to the face value of the portfolio.

Accepted Answer

Selling SPI futures adjusted for the portfolio beta is a common hedging strategy to protect against potential declines in the value of a share portfolio.

Question 17

Options on company shares are available via:
A) banks.
B) the Sydney Futures Exchange.
C) the Australian Stock Exchange.
D) all of the above.

Accepted Answer

The answer of Options on company shares are available via:
A)...

Question 18

A fixed- rate derivative:
A) creates an obligation to transact at an agreed price in the future.
B) is also known as an option.
C) cannot be used by speculators because its price is fixed.
D) none of the above.

Accepted Answer

A fixed-rate derivative, such as a forward contract or a futures contract, creates an obligation to transact at an agreed price in the future.

Question 19

A forward contract involves:
A) a buyer who is willing to bear all the risk of the agreement.
B) a seller who agrees to deliver a certain amount of a commodity on a specified future date.
C) a trader who will act as broker for the client on the floor of the exchange.
D) a clearing house institution that agrees to guarantee all contracts.

Accepted Answer

A forward contract is a private agreement between a buyer and a seller to exchange a specific amount of a commodity or asset at a predetermined price on a specified future date.

Question 20

The Share Price Index (SPI) contract traded on the SFE has a face value equal to:
A) $1000 × (All Ordinaries index).
B) $25 × (S&P/ASX 200 index).
C) $1000 × (SFE index).
D) $100 × (S&P/ASX 100 index).

Accepted Answer

The SPI contract on the Sydney Futures Exchange (SFE) is based on the S&P/ASX 200 index and has a face value of $25 times the index.

Quiz 10: Fixed Rate Derivatives

A comparative advantage swap arises when:

If A is the position in the derivative, B is the position in the underlying security, and C is a fixed- interest loan, a short synthetic position in the underlying security is represented as:

Forward rate agreements (FRAs) are:

Which of the following is NOT one of the effects of derivatives?

A position consisting of futures contracts settling on different dates is known as:

The 'hedge ratio' refers to:

Which of the following is NOT included in the specification of a FRA?

If A is the position in the derivative, B is the position in the underlying security, and C is a fixed- interest loan, if a player holds B and wishes to hedge her position then she can:

A 'floating rate' means:

The phrase 'yield pick- up' refers to:

Cash- and- carry arbitrage involves:

An instrument that involves the exchange with a notional principal of $100 million of floating rate for fixed- rate obligations with eight settlement dates is an example of:

In the infamous Barings Bank disaster, the losses came about due to:

Program trading:

The growth of derivatives:

To hedge a share portfolio we can:

Options on company shares are available via:

A fixed- rate derivative:

A forward contract involves:

The Share Price Index (SPI) contract traded on the SFE has a face value equal to: