Question 1

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

B

Question 2

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 be structured in a way to manipulate financial reporting, which leads to regulatory concerns. This is called financial innovation, which can be used to circumvent accounting standards. Options, futures, swaps, credit default swaps, and other financial instruments are commonly used in this manner. The other options are not correct since accounting standards for financial instruments have varied over time, financial instruments have economic substance and can create value for investors, and not all financial instruments are accounted for at fair value. Some are accounted for under other valuation models such as amortized cost or cost plus accrued interest.

Question 3

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

Accepted Answer

That underlying quantity is something implicitly part of the asset that is related to the derivative.The quantity varies.Examples: the price of a share,the value of a stock index,the exchange rate,the temperature.

Question 4

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 financial instrument that gives the holder the right, but not the obligation, to buy a specific number of shares at a specified price, within a specified time frame. It is essentially an option to purchase shares at a certain price, and is often issued by companies as a way to raise capital.

Question 5

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 (but not the obligation) to buy or sell something at a specified price, known as the strike price. The holder can choose to exercise the option or let it expire. Option contracts can be used for a variety of underlying assets including stocks, bonds, commodities, and currencies.

Question 6

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 7

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 contract in which two parties agree to exchange cash flows, such as a fixed interest rate for a variable one, or one currency's interest payments for another's.

Question 8

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. Unlike options, forwards involve an obligation to transact at the specified price and date.

Question 9

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 contract that gives the holder the right to buy or sell an underlying asset at a specific price before a certain date. In this case, the right to buy 100 shares of CIBC at $50.00 per share over the next 5 years is an example of a warrant.

Question 10

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 11

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 of the option can choose to purchase the underlying asset (such as a stock or commodity) at the predetermined price, regardless of how much the market price may have increased since the option was originally purchased. The holder of a call option profits if the market price of the underlying asset goes up, since they can buy it at the lower pre-specified price and sell it at the higher market price.

Question 12

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 is a contract between two parties to buy or sell an asset at an agreed-upon price and date in the future. Choice C is an example of a forward because it involves a commitment to buy US dollars at a fixed exchange rate on a future date. Choice A is an example of an option, choice B is an example of a futures contract, and choice D is an example of an interest rate swap.

Question 13

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 14

What is hedging?

Accepted Answer

The answer of What is hedging?...

Question 15

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

Accepted Answer

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

Question 16

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...

Question 17

What is speculation?

Accepted Answer

The answer of What is speculation?...

Question 18

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 be accounted for using either amortized cost or fair value. The choice of accounting treatment depends on the characteristics of the financial liability and the entity's business model for managing financial risks. Both methods have advantages and disadvantages, and the choice of method can affect an entity's financial performance and position. Historical cost is not an appropriate method for accounting for financial liabilities because it does not reflect changes in their fair value.

Question 19

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 20

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.

Quiz 4: Complex Financial Instruments

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

Which of the following is correct about financial instruments?

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

What is a "warrant"?

What is an option?

What is a "future"?

What is a "swap"?

What is a "forward"?

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

Which statement is correct about accounting for financial instruments?

What is a "call" option?

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

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

What is hedging?

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

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

What is speculation?

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

Which of the following is correct regarding a call option?

What is a "put" option?