Question 1

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 contract in which two parties agree to exchange cash flows, often related to interest rates, currencies or commodities. It can be used to manage risks or speculate on future market movements.

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 up front to buy or sell something at a defined price at a defined future date. This is in contrast to options (D), which give the right but not the obligation to buy at a specified price over a specified period of time, and futures (B), which are similar to forwards but are traded on exchanges and standardized. Interest cash flows (A) are not necessarily related to forwards.

Question 3

Which of the following statements is correct about accounting for financial liabilities?
A)Financial liabilities can only be accounted for using amortized cost.
B)Financial liabilities can only be accounted for using fair value though profit and loss.
C)Financial liabilities can be accounted for using historical cost.
D)Financial liabilities can be accounted for using amortized cost or fair value.

Accepted Answer

Financial liabilities can indeed be accounted for using either amortized cost or fair value, depending on the nature of the liability and the accounting policies of the entity. This allows for flexibility in financial reporting and ensures that the financial statements provide a true and fair view of the entity's financial position.

Question 4

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 5

What is speculation?

Accepted Answer

The answer of What is speculation?...

Question 6

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, typically a stock, at a pre-specified price. This means that the holder of the call option has the option, but not the obligation, to buy the underlying asset at the specified price on or before the expiration date of the contract.

Question 7

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. Option contracts can be for a variety of underlying assets or events, including stocks, commodities, foreign currencies, and more. The holder of the option has the option to exercise their right to buy or sell the underlying asset or event, but they are not obligated to do so.

Question 8

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 in accordance with their economic substance rather than their legal form. This approach ensures that the financial statements reflect the underlying transactions' true nature and economic realities.

Question 9

Describe the underlying quantity that the derivative instrument derives its value from?

Accepted Answer

The answer of Describe the underlying quantity that the derivative...

Question 10

Which of the following is correct regarding a call option?
A)The intrinsic value of a call option is the greater of zero and (K- S), the difference between the market price and the strike price.
B)The time value of an option reflects the probability that the future market price of the underlying instrument will not exceed the strike price.
C)The time value decreases with the length of time to expiration and the volatility of the underlying instrument (such as the share price).
D)The time value is always positive until the option expires, so the total value of an unexpired option is always greater than the intrinsic value.

Accepted Answer

The time value of an option is indeed always positive until the option expires, reflecting the potential for the option to gain in value. This means the total value of an option (intrinsic value plus time value) is always greater than just its intrinsic value before expiration.

Question 11

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

A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange. Choice D describes an interest rate swap, where one party agrees to pay a variable interest rate in exchange for receiving a fixed interest rate, fitting the definition of a swap. Choices A, B, and C describe options, futures contracts, and forward contracts, respectively, not swaps.

Question 12

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 on the Chicago Mercantile Exchange.
C)Commitment to buy $100,000 U.S. dollars in 120 days at US$ = 1.10 from another company.
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 commodity or financial instrument at a predetermined price at a specified time in the future, typically traded on an exchange like the Chicago Mercantile Exchange.

Question 13

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 on the Chicago Mercantile Exchange.
C)Commitment to buy $100,000 US dollars in 120 days at US$ = 1.10 from another company.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Accepted Answer

A forward contract is a commitment to buy or sell an asset at a specified future date for a price agreed upon today. Option C describes such a commitment to buy US dollars at a future date for a predetermined rate.

Question 14

Which of the following is an example of a "warrant"?
A)Right to buy 100 shares of CIBC at $50.00 per share over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 U.S. dollars in 4 months at US$ = 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, but not the obligation, to buy a company's stock at a specific price before the warrant expires. Choice A describes this scenario, where the holder can buy shares of CIBC at a set price over a period, which is exactly what a warrant entails.

Question 15

What is hedging?

Accepted Answer

The answer of What is hedging?...

Question 16

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 financial instrument that gives the holder the right, but not the obligation, to buy a share at a specified price over a specified period of time. It is similar to a call option, but is generally issued by the company itself and provides the holder with the right to buy shares directly from the company.

Question 17

Briefly explain the difference between a "forward" and a "future."

Accepted Answer

The answer of Briefly explain the difference between a "forward"...

Question 18

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 at a pre-specified price. It is essentially a form of insurance, allowing the holder to protect against potential losses if the market were to move against them.

Question 19

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 may be used in support of innovations designed to circumvent accounting standards.
D)All financial instruments are accounted for at fair value.

Accepted Answer

Financial instruments can indeed be used in innovative ways, sometimes with the intention of circumventing accounting standards. This can involve structuring transactions in a manner that achieves certain financial reporting outcomes without necessarily reflecting the underlying economic reality.

Question 20

What is a derivative and what are two reasons why parties would enter into a derivative contract?

Accepted Answer

The answer of What is a derivative and what are...

Quiz 4: Complex Financial Instruments

What is a "swap"?

What is a "forward"?

Which of the following statements is correct about accounting for financial liabilities?

What is a "future"?

What is speculation?

What is a "call" option?

What is an option?

Which statement is correct about accounting for financial instruments?

Describe the underlying quantity that the derivative instrument derives its value from?

Which of the following is correct regarding a call option?

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

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

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

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

What is hedging?

What is a "warrant"?

Briefly explain the difference between a "forward" and a "future."

What is a "put" option?

Which of the following is correct about financial instruments?

What is a derivative and what are two reasons why parties would enter into a derivative contract?