Derivatives Markets: Types, Uses, and Risk Management

Question 1

Which of the following is NOT a key function of derivatives markets?

Accepted Answer

Direct ownership of underlying assets

Answer

Managing risk exposure

Answer

Providing leverage for investment returns

Answer

Facilitating speculation and arbitrage

Question 2

Which instrument is NOT considered a derivative?

Accepted Answer

Equities

Answer

Options

Answer

Futures

Answer

Forwards

Question 3

What is the primary objective of a forward contract?

Accepted Answer

Risk mitigation

Answer

Return enhancement

Answer

Price speculation

Answer

Inflation protection

Question 4

Which characteristic is unique to an option contract?

Accepted Answer

Grants the holder the right, but not the obligation, to buy or sell an underlying asset

Answer

Obligates the holder to buy or sell the underlying asset

Answer

Settles exclusively in cash upon expiration

Answer

Inherently involves a zero-sum outcome

Question 5

What is the primary purpose of the Black-Scholes model?

Accepted Answer

Option pricing

Answer

Risk hedging

Answer

Stock price forecasting

Answer

Bond yield calculation

Question 6

What is the definition of a synthetic forward?

Accepted Answer

A combination of an option and a forward contract

Answer

A type of complex derivative

Answer

A futures contract settled in cash

Answer

A derivative designed for inflation protection

Question 7

In financial markets, what are the potential advantages and disadvantages of derivatives markets?

Accepted Answer

Derivatives markets offer risk management tools, price discovery, and enhanced capital allocation.

Answer

Derivatives markets solely increase volatility and speculative trading, harming financial stability.

Answer

Derivatives markets have no real economic value and should be restricted or banned.

Answer

Derivatives markets have no impact on the underlying assets they are based on.

Question 8

A forward contract is an example of a:

Accepted Answer

Over-the-counter derivative

Answer

Traded derivative

Question 9

Which of the following is the primary purpose of using derivatives?

Accepted Answer

Risk management

Answer

Price discovery

Question 10

Which type of option gives the holder the right to buy an underlying asset at a predetermined price?

Accepted Answer

Call option

Answer

Put option

Question 11

The process of calculating the value of a derivative using mathematical models is known as:

Accepted Answer

Derivative pricing

Answer

Financial modeling

Question 12

The London Stock Exchange (LSE) is a:

Accepted Answer

Stock exchange

Answer

Bond market

Question 13

Which regulatory body oversees derivative markets in the United Kingdom?

Accepted Answer

Financial Conduct Authority (FCA)

Question 14

Which of the following is NOT a common type of derivative?

Accepted Answer

Shares

Answer

Forwards

Answer

Futures

Answer

Options

Question 15

What is the primary purpose of using derivatives in financial markets?

Accepted Answer

To mitigate risk

Answer

To increase risk

Answer

To generate income

Answer

To lower transaction costs

Question 16

What is the distinction between a call option and a put option?

Accepted Answer

Call options grant the buyer the right to buy, while put options grant the buyer the right to sell the underlying asset.

Answer

Call options give the buyer the obligation to buy, while put options give the buyer the obligation to sell the underlying asset.

Answer

Call options are always in-the-money, whereas put options are always out-of-the-money.

Answer

There is no difference between call and put options.

Question 17

What is the process known as 'hedging' in derivatives markets?

Accepted Answer

Using derivatives to reduce risk

Answer

Using multiple investments to reduce risk

Answer

Avoiding risk altogether

Answer

Increasing risk exposure

Question 18

Which of the following is a regulatory body responsible for overseeing derivatives markets in the United Kingdom?

Accepted Answer

Financial Conduct Authority (FCA)

Answer

Bank of England (BoE)

Answer

Prudential Regulation Authority (PRA)

Answer

London Stock Exchange (LSE)

Question 19

What is the distinction between an over-the-counter (OTC) derivative and an exchange-traded derivative?

Accepted Answer

OTC derivatives are customizable, while exchange-traded derivatives are standardized.

Answer

OTC derivatives are standardized, while exchange-traded derivatives are customizable.

Answer

OTC derivatives are traded on regulated exchanges, while exchange-traded derivatives are traded privately.

Answer

There is no difference between OTC and exchange-traded derivatives.

Question 20

Which of the following is an example of a financial instrument used to manage foreign exchange risk?

Accepted Answer

Forward exchange contract

Answer

Option

Answer

Bond

Answer

Stock

Question 21

What type of derivative gives the buyer the right, but not the obligation, to purchase an underlying asset at a predetermined price on a specific date?

Accepted Answer

Call option

Answer

Forward contract

Answer

Swap

Answer

Put option

Question 22

What measure indicates the sensitivity of a derivative's value to changes in the price of the underlying asset?

Accepted Answer

Delta

Answer

Theta

Answer

Vega

Answer

Gamma

Question 23

What is a key characteristic of an organized derivatives exchange?

Accepted Answer

Standardized contracts

Answer

Over-the-counter trading

Answer

Limited liquidity

Answer

Negotiated terms

Question 24

Which type of derivative gives the holder the right to sell an underlying asset at a predetermined price on a specific date?

Accepted Answer

Put option

Answer

Call option

Answer

Forward contract

Answer

Swap

Question 25

Which derivative involves a contract to deliver a specific quantity of an underlying asset at a predetermined price on a set date?

Accepted Answer

Futures contract

Answer

Option contract

Answer

Forward contract

Answer

Swap contract