Derivatives and Hedging Practice Exam Quiz

Derivatives and Hedging Practice Exam Quiz

1. What is a derivative in financial terms?
A. A financial instrument whose value depends on another asset
B. A fixed-income security
C. A type of stock
D. A savings account

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2. Which of the following is NOT a common type of derivative?
A. Forward contract
B. Swap
C. Futures contract
D. Certificate of deposit

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3. What is the primary purpose of hedging?
A. To maximize returns
B. To speculate on market movements
C. To reduce the risk of adverse price movements
D. To avoid all financial losses

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4. In a futures contract, the buyer is obligated to do what?
A. Buy the underlying asset at a set price on a future date
B. Sell the underlying asset immediately
C. Cancel the agreement at any time
D. Pay a premium for the contract

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5. Which of the following is true about options contracts?
A. The buyer has the obligation to buy the underlying asset.
B. The seller is obligated to buy the asset if exercised.
C. The buyer has the right but not the obligation to buy or sell the asset.
D. Options contracts are always settled in cash.

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6. What is a strike price in options trading?
A. The current market price of the underlying asset
B. The agreed price at which the asset can be bought or sold
C. The premium paid to enter the contract
D. The price of the option on its expiration date

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7. A forward contract differs from a futures contract because it:
A. Is traded on an exchange
B. Has standardized terms
C. Is customizable and traded over-the-counter
D. Requires initial margin payments

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8. What is the main risk associated with forward contracts?
A. Market risk
B. Counterparty risk
C. Liquidity risk
D. Exchange risk

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9. A company wants to hedge against rising interest rates. Which derivative is most appropriate?
A. Currency swap
B. Interest rate swap
C. Commodity futures
D. Stock options

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10. In a call option, the buyer benefits when:
A. The price of the underlying asset falls
B. The price of the underlying asset remains unchanged
C. The price of the underlying asset rises
D. The option expires worthless

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11. A put option is profitable for the buyer when:
A. The underlying asset’s price increases
B. The underlying asset’s price decreases
C. The underlying asset’s price stays the same
D. The option expires out-of-the-money

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12. What does “hedging effectiveness” measure?
A. The cost of implementing a hedge
B. The profit gained from speculative trades
C. The degree to which a hedge offsets risk
D. The liquidity of the derivative instrument

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13. A company enters a foreign exchange forward contract. What is the company hedging against?
A. Interest rate risk
B. Currency exchange rate fluctuations
C. Equity price changes
D. Default risk

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14. What is the primary role of a swap dealer?
A. To speculate on the direction of asset prices
B. To facilitate swap transactions between parties
C. To regulate swap contracts
D. To trade swaps on exchanges

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15. What does “delta” measure in options trading?
A. The time until expiration
B. The sensitivity of the option’s price to changes in the underlying asset price
C. The risk-free interest rate
D. The implied volatility

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16. Which derivative is most appropriate for hedging commodity price fluctuations?
A. Currency options
B. Commodity futures
C. Interest rate swaps
D. Equity forward contracts

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17. In a zero-cost collar, what does the investor achieve?
A. Unlimited upside potential
B. Protection against both upside and downside risks
C. Downside protection with limited upside potential
D. Speculation on asset price movements

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18. What is the purpose of marking to market in futures contracts?
A. To settle gains and losses daily
B. To fix the strike price
C. To assess counterparty risk
D. To determine the notional value of the contract

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19. What is the “notional value” of a derivative?
A. The current market value of the contract
B. The amount of the underlying asset specified in the contract
C. The profit or loss from the derivative
D. The premium paid for the contract

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20. What is the role of an arbitrageur in the derivatives market?
A. To speculate on price movements
B. To facilitate transactions between counterparties
C. To profit from price inefficiencies across markets
D. To provide liquidity for hedgers

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21. What is the main feature of an interest rate cap?
A. It sets a maximum interest rate for the borrower.
B. It guarantees a fixed interest rate.
C. It eliminates interest rate fluctuations entirely.
D. It sets a minimum interest rate for the lender.

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22. What is the main advantage of using derivatives for hedging?
A. They eliminate all risks.
B. They are low-cost instruments.
C. They provide leverage to amplify returns.
D. They help manage specific financial risks.

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23. Which of the following is true for a swap agreement?
A. It involves a one-time payment.
B. It is a tradeable security.
C. It is an agreement to exchange cash flows over time.
D. It is a standardized contract traded on an exchange.

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24. What is the underlying asset in an equity derivative?
A. Bonds
B. Commodities
C. Stocks
D. Foreign currency

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25. Which type of derivative can protect a portfolio from market downturns?
A. Call option
B. Put option
C. Forward contract
D. Swap

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26. What happens if a futures contract is not closed before expiration?
A. The contract becomes worthless.
B. Physical delivery or cash settlement occurs.
C. The premium is refunded.
D. The contract is automatically rolled over.

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27. What is gamma in options trading?
A. The rate of change in delta relative to changes in the underlying asset price
B. The time decay of the option
C. The volatility of the option
D. The interest rate impact on the option price

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28. What is the primary risk associated with speculative derivatives trading?
A. Hedging ineffectiveness
B. High transaction costs
C. Significant financial losses
D. Lack of counterparties

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29. What is the term for a situation where the price of a derivative equals its intrinsic value?
A. At the money
B. In the money
C. Out of the money
D. Overvalued

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30. Which entity typically regulates derivative markets?
A. Central banks
B. Securities and Exchange Commission (SEC)
C. International Monetary Fund (IMF)
D. Commodity Futures Trading Commission (CFTC)

31. Which of the following is a characteristic of futures contracts?
A. They are traded over the counter.
B. They are standardized and traded on an exchange.
C. They have no margin requirements.
D. They can be canceled without penalty.

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32. What is the “basis” in the context of futures trading?
A. The difference between the spot price and the futures price
B. The initial margin required for a futures contract
C. The premium paid for an option
D. The notional value of the futures contract

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33. Which type of derivative contract gives the buyer the right but not the obligation to sell an asset?
A. Call option
B. Put option
C. Futures contract
D. Swap

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34. What is the primary risk associated with swaps?
A. Basis risk
B. Counterparty credit risk
C. Volatility risk
D. Margin call risk

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35. When is a call option considered “in the money”?
A. When the strike price is higher than the market price of the underlying asset
B. When the strike price is lower than the market price of the underlying asset
C. When the premium is equal to the strike price
D. When the option is close to expiration

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36. A company enters into a commodity futures contract to lock in the price of raw materials. This is an example of:
A. Speculation
B. Arbitrage
C. Hedging
D. Diversification

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37. In options trading, what does “theta” measure?
A. The sensitivity of the option price to changes in the underlying asset price
B. The rate of time decay of the option’s value
C. The implied volatility of the option
D. The intrinsic value of the option

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38. What is the purpose of using a currency swap?
A. To hedge interest rate risk
B. To lock in exchange rates for future transactions
C. To speculate on currency fluctuations
D. To reduce the cost of borrowing

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39. Which of the following describes a covered call strategy?
A. Buying a call option while holding the underlying asset
B. Selling a call option while holding the underlying asset
C. Buying a put option to hedge a position
D. Selling a put option to generate income

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40. What happens to the premium of an option as volatility increases?
A. The premium decreases
B. The premium remains unchanged
C. The premium increases
D. The premium becomes negative

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41. Which type of swap allows two parties to exchange fixed and floating interest rate payments?
A. Currency swap
B. Equity swap
C. Interest rate swap
D. Commodity swap

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42. What is a “margin call” in futures trading?
A. A request for additional funds when the margin falls below the maintenance level
B. A penalty for early contract termination
C. A profit-sharing mechanism for traders
D. A requirement to close all open positions

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43. In derivatives trading, what does “vega” measure?
A. The impact of interest rate changes on an option’s value
B. The sensitivity of the option’s price to changes in volatility
C. The time decay of the option’s value
D. The rate of change in delta

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44. What is the “underlying asset” in a derivatives contract?
A. The premium paid for the derivative
B. The asset upon which the derivative’s value is based
C. The collateral required for the derivative
D. The market value of the derivative

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45. What is the main advantage of a forward contract over a futures contract?
A. Standardization of terms
B. Tradeability on exchanges
C. Customization of contract terms
D. Reduced counterparty risk

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46. Which of the following is an example of a derivative with physical settlement?
A. An oil futures contract delivering barrels of oil
B. A currency swap settled in cash
C. An interest rate swap
D. A call option on equity shares

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47. What is the “notional principal” in a swap contract?
A. The market value of the swap
B. The amount used to calculate payments in the swap
C. The premium paid for the swap
D. The total profit from the swap

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48. Which of the following risks is NOT associated with derivatives?
A. Market risk
B. Credit risk
C. Operational risk
D. Inflation risk

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49. In an options contract, what is the “expiry date”?
A. The date the option becomes worthless
B. The last date to exercise the option
C. The date the option is issued
D. The date the underlying asset is delivered

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50. What does “delta hedging” aim to achieve?
A. Eliminate the impact of time decay
B. Reduce the sensitivity of a portfolio to price changes in the underlying asset
C. Maximize the option’s premium
D. Minimize transaction costs

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51. Which type of option strategy involves buying and selling options at different strike prices?
A. Covered call
B. Straddle
C. Spread
D. Collar

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52. Which of the following is an example of a contingent claim derivative?
A. Futures contract
B. Options contract
C. Forward contract
D. Swap

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53. What is the intrinsic value of a call option with a strike price of $50 when the underlying asset’s market price is $60?
A. $10
B. $50
C. $60
D. $0

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54. In a swap contract, the “floating leg” refers to:
A. A fixed interest rate payment
B. A payment based on a variable interest rate or index
C. The total principal amount of the contract
D. The premium paid to enter the swap

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55. What is the primary benefit of using derivatives in portfolio management?
A. Guaranteed profits
B. Risk mitigation
C. Elimination of market volatility
D. Increased diversification

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56. Which of the following describes a synthetic position in derivatives trading?
A. A position created using a combination of derivatives and underlying assets
B. A position held directly in the underlying asset
C. A strategy to eliminate counterparty risk
D. A technique to avoid margin requirements

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57. What does “implied volatility” indicate in options pricing?
A. The historical volatility of the underlying asset
B. The market’s expectation of future volatility
C. The delta of the option
D. The gamma of the option

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58. What is the primary risk of a long position in a call option?
A. Unlimited loss
B. Loss limited to the premium paid
C. Unlimited gain potential
D. Obligations to deliver the underlying asset

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59. In a currency forward contract, what does the “forward rate” represent?
A. The spot rate at the time of the contract
B. The agreed exchange rate for the future transaction
C. The average historical exchange rate
D. The market value of the currency

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60. What is the payoff of a short futures contract if the market price decreases?
A. The payoff is positive.
B. The payoff is negative.
C. The payoff is zero.
D. The payoff depends on the initial margin.

61. Which of the following best describes a credit default swap (CDS)?
A. A contract to exchange fixed and floating interest payments
B. A derivative used to hedge against the default risk of a borrower
C. A derivative to lock in foreign exchange rates
D. A contract for the physical delivery of an asset

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62. What is the “strike price” in an options contract?
A. The current market price of the underlying asset
B. The price at which the underlying asset can be bought or sold
C. The premium paid for the option
D. The future value of the option

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63. Which of the following is NOT a use of derivatives?
A. Speculation
B. Hedging
C. Asset creation
D. Arbitrage

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64. A company enters into an interest rate swap where it pays a fixed rate and receives a floating rate. What is the company hedging against?
A. Rising interest rates
B. Falling interest rates
C. Currency exchange rate risk
D. Commodity price risk

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65. In the Black-Scholes model, which of the following is NOT a factor influencing the price of an option?
A. Time to expiration
B. Strike price
C. Market capitalization of the underlying asset
D. Volatility of the underlying asset

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66. What is the primary purpose of a forward rate agreement (FRA)?
A. To hedge interest rate risk
B. To lock in a future currency exchange rate
C. To speculate on equity prices
D. To mitigate counterparty risk

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67. Which of the following best describes a swaption?
A. A combination of a swap and a futures contract
B. An option to enter into a swap agreement
C. A derivative based on multiple currencies
D. A standardized contract traded on an exchange

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68. Which term describes a derivative whose payoff depends on the performance of multiple underlying assets?
A. Exotic derivative
B. Basket derivative
C. Plain vanilla derivative
D. Callable derivative

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69. Which of the following derivatives is traded only over the counter (OTC)?
A. Futures
B. Options
C. Swaps
D. Exchange-traded funds

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70. What does “mark-to-market” mean in the context of futures trading?
A. Settling gains and losses daily based on market prices
B. Closing out a futures contract before expiration
C. Transferring ownership of the underlying asset
D. Calculating the intrinsic value of the contract

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71. What is the key difference between American and European options?
A. American options can only be exercised on the expiration date.
B. European options can be exercised anytime before the expiration date.
C. American options can be exercised at any time before or on the expiration date.
D. European options involve no transaction fees.

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72. What is the main purpose of a zero-cost collar strategy?
A. To eliminate all market risk
B. To hedge downside risk while capping upside potential
C. To maximize profit from volatile markets
D. To speculate on future asset prices

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73. What is the primary feature of an equity-linked swap?
A. It is based on the performance of an equity index or stock.
B. It involves the exchange of fixed and floating interest payments.
C. It guarantees the physical delivery of shares.
D. It requires margin deposits like futures.

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74. Which of the following is a benefit of using derivatives for hedging?
A. Unlimited profit potential
B. Increased leverage
C. Reduced exposure to risk
D. Elimination of counterparty risk

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75. What is “gamma” in options pricing?
A. The sensitivity of delta to changes in the underlying asset price
B. The rate of time decay of the option’s value
C. The premium paid for the option
D. The expected profit of the option

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76. What is a “plain vanilla” derivative?
A. A complex derivative with multiple embedded features
B. A simple and standardized derivative
C. A derivative with no expiration date
D. A derivative used for physical settlement

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77. Which of the following is true for a forward contract?
A. It is a standardized agreement traded on an exchange.
B. It has daily mark-to-market adjustments.
C. It is a customized contract settled at maturity.
D. It eliminates all credit risk.

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78. What is “basis risk” in hedging?
A. The risk of the underlying asset becoming worthless
B. The risk that the hedge will not perfectly offset the exposure
C. The risk of margin calls in futures trading
D. The risk of a swap agreement defaulting

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79. What is the role of a clearinghouse in futures trading?
A. To set the market prices for futures contracts
B. To match buyers and sellers in the OTC market
C. To guarantee the performance of contracts and reduce counterparty risk
D. To calculate the value of futures positions

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80. What does “delta neutral” mean in options trading?
A. The option has no intrinsic value.
B. The portfolio’s delta is zero, minimizing sensitivity to price changes.
C. The delta of the option equals one.
D. The option is neither in the money nor out of the money.

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81. What is a synthetic forward contract?
A. A forward created by combining options
B. A forward created by using futures contracts
C. A forward that guarantees physical delivery
D. A forward contract with no counterparty risk

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82. In an option pricing model, which factor does NOT directly influence the premium?
A. Volatility of the underlying asset
B. Interest rates
C. Time to expiration
D. Trading volume of the option

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83. What is the “upfront payment” in a credit default swap called?
A. Notional amount
B. Premium
C. Fixed rate
D. Initial margin

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84. Which of the following best describes a commodity swap?
A. A derivative used to exchange commodities for financial assets
B. A contract exchanging cash flows based on commodity prices
C. A forward contract for physical delivery of commodities
D. An exchange-traded derivative

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85. What is the main risk in naked options trading?
A. Limited upside potential
B. Unlimited potential loss
C. Time decay of the option
D. Lack of liquidity

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86. In derivatives markets, what does “rollover” mean?
A. Closing a position and opening a new one with a longer maturity
B. Switching from futures to options
C. Exercising an option early
D. Converting a cash-settled derivative to physical delivery

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87. What is the “convexity adjustment” in interest rate derivatives?
A. A correction for non-linear price movements
B. A measure of counterparty risk
C. An adjustment for changes in volatility
D. A hedging strategy for futures

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88. Which of the following is true for cash-settled derivatives?
A. The underlying asset must be physically delivered.
B. The contract is settled by the exchange of cash.
C. They involve no counterparty risk.
D. They require no margin deposits.

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89. Which of the following is a hybrid derivative?
A. A swaption
B. A currency option
C. A callable bond
D. A basket option

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90. What is the “moneyness” of an option?
A. The profitability of exercising the option
B. The total premium received for selling the option
C. The current market value of the option
D. The relationship between the strike price and the underlying asset price

91. What is a key characteristic of a forward contract?
A. It is traded on an exchange.
B. It is settled daily through margin adjustments.
C. It is a customized agreement between two parties.
D. It has a standardized contract size.

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92. Which of the following is true for an in-the-money call option?
A. The strike price is equal to the underlying asset price.
B. The strike price is higher than the underlying asset price.
C. The strike price is lower than the underlying asset price.
D. The option has no intrinsic value.

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93. What is the purpose of a put option?
A. To allow the holder to sell an asset at a specified price.
B. To allow the holder to buy an asset at a specified price.
C. To hedge against rising interest rates.
D. To speculate on increasing market volatility.

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94. What does “implied volatility” measure in options pricing?
A. Historical price movements of the underlying asset
B. The market’s expectation of future volatility
C. The rate of time decay of an option
D. The sensitivity of the option price to interest rates

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95. What is the primary risk of a leveraged derivative position?
A. Limited upside potential
B. Increased exposure to losses
C. Reduced counterparty risk
D. Decreased transaction costs

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96. What type of derivative is used to hedge exposure to rising commodity prices?
A. Call option on the commodity
B. Put option on the commodity
C. Interest rate swap
D. Currency swap

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97. Which of the following is a feature of over-the-counter (OTC) derivatives?
A. Standardized contracts
B. Traded through an exchange
C. Customizable terms and conditions
D. Daily margin adjustments

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98. What is the purpose of a hedge ratio?
A. To determine the potential profit from a hedge
B. To calculate the intrinsic value of a derivative
C. To measure the proportion of exposure hedged
D. To set the premium for an options contract

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99. What is the payoff for a long position in a forward contract at maturity?
A. Spot price minus forward price
B. Forward price minus spot price
C. Notional amount multiplied by interest rate
D. Spot price divided by forward price

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100. What is “theta” in options pricing?
A. The sensitivity of an option’s price to changes in volatility
B. The sensitivity of an option’s price to changes in interest rates
C. The rate at which an option’s value declines over time
D. The expected return of the option

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101. What is the role of a market maker in derivatives trading?
A. To eliminate counterparty risk
B. To provide liquidity by quoting buy and sell prices
C. To guarantee the performance of futures contracts
D. To determine the strike price of options

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102. What is the key advantage of using futures over forward contracts?
A. Customization of terms
B. Standardization and reduced credit risk
C. Lower transaction costs
D. Guaranteed physical delivery of the underlying asset

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103. What is a “knock-in option”?
A. An option that becomes active only if the underlying asset reaches a specific price
B. An option that expires if the underlying asset reaches a specific price
C. An option that provides a fixed payout regardless of the underlying price
D. An option traded only over the counter

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104. What is a key difference between futures and options contracts?
A. Futures have a strike price, while options do not.
B. Futures provide the right but not the obligation to buy or sell.
C. Options require an upfront premium, while futures do not.
D. Options are always physically settled, while futures are cash-settled.

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105. What is the purpose of a “protective put” strategy?
A. To speculate on a rising asset price
B. To hedge against potential losses in a long position
C. To increase leverage in a portfolio
D. To lock in profits from a short position

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106. What does the term “basis” refer to in futures trading?
A. The difference between the spot price and the futures price
B. The margin required to trade futures contracts
C. The underlying asset in a futures contract
D. The price of an options premium

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107. What is the “underlying asset” in a derivative?
A. The margin requirement for the derivative
B. The asset that determines the value of the derivative
C. The premium paid for the derivative
D. The counterparty to the derivative contract

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108. What is “vega” in options trading?
A. The sensitivity of the option price to changes in volatility
B. The sensitivity of the option price to changes in interest rates
C. The rate of time decay of an option
D. The notional value of the option

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109. In a swap agreement, what is typically exchanged?
A. Principal amounts
B. Cash flows based on fixed and floating rates
C. Shares of stock
D. Physical assets

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110. What does “margin call” mean in futures trading?
A. A request to close a futures position
B. A demand for additional funds to maintain a position
C. The final settlement of a futures contract
D. A calculation of profit or loss

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111. What is a barrier option?
A. An option that has a predetermined expiration date
B. An option that activates or deactivates when a price level is reached
C. An option that pays a fixed amount regardless of the underlying price
D. An option traded only on exchanges

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112. What is the key purpose of a currency swap?
A. To lock in a fixed exchange rate for future transactions
B. To exchange interest payments in different currencies
C. To hedge against commodity price fluctuations
D. To eliminate counterparty risk

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113. What is the term for a derivative with no initial cost?
A. Zero-cost collar
B. Synthetic forward
C. Exotic option
D. Plain vanilla option

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114. Which of the following best describes a total return swap?
A. A contract exchanging the total return of an asset for a fixed or floating rate
B. A derivative used exclusively for hedging foreign exchange risk
C. A futures contract on a basket of assets
D. An option with no intrinsic value

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115. What is “gamma risk” in options trading?
A. The risk of changes in the option’s delta
B. The risk of time decay in the option’s value
C. The risk of changes in interest rates affecting the option
D. The risk of changes in the underlying asset price

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116. What is the main risk of entering into a derivative contract?
A. Liquidity risk
B. Counterparty risk
C. Operational risk
D. All of the above

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117. Which derivative is most suitable for hedging currency exchange rate fluctuations?
A. Interest rate swap
B. Currency option
C. Equity-linked swap
D. Commodity future

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118. What is the intrinsic value of an option?
A. The market price of the option
B. The difference between the spot price and the strike price
C. The premium paid for the option
D. The time value of the option

119. What is a key advantage of using derivatives in portfolio management?
A. Derivatives are risk-free investments
B. Derivatives can be used to hedge against potential risks
C. Derivatives are only useful for speculative purposes
D. Derivatives guarantee a return on investment

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120. What does “delta” represent in options pricing?
A. The sensitivity of the option price to changes in interest rates
B. The sensitivity of the option price to changes in the price of the underlying asset
C. The rate of time decay of the option
D. The implied volatility of the option

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121. Which of the following best defines a “call option”?
A. The right to sell an asset at a specified price
B. The obligation to buy an asset at a specified price
C. The right to buy an asset at a specified price
D. The obligation to sell an asset at a specified price

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122. What is the primary purpose of a currency hedge?
A. To protect against changes in interest rates
B. To protect against fluctuations in foreign exchange rates
C. To increase the return on foreign investments
D. To speculate on future exchange rates

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123. Which of the following is a feature of a swap agreement?
A. It involves the exchange of principal amounts
B. It involves the exchange of cash flows based on interest rates or currencies
C. It is traded on an exchange
D. It has no counterparty risk

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124. What is a “straddle” in options trading?
A. A strategy involving the purchase of two options with the same strike price and expiration date
B. A strategy involving the purchase of two options with different strike prices
C. A strategy involving the sale of two options with the same strike price
D. A strategy involving the purchase of a futures contract and an options contract

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125. What is the “notional amount” in a derivative contract?
A. The value of the derivative at expiration
B. The amount of money exchanged at the time of settlement
C. The principal amount on which payments are based
D. The market value of the underlying asset

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126. What is the primary risk in trading futures contracts?
A. Default risk
B. Liquidity risk
C. Market risk (price fluctuations)
D. Counterparty risk

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127. Which of the following describes the concept of “mark-to-market” in futures trading?
A. Adjusting the value of a futures contract to reflect the current market price
B. Settling a futures contract at its face value
C. Adding margin to a futures contract
D. Calculating the option premium for a futures contract

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128. What is a key characteristic of a “vanilla” option?
A. It has a highly complex payoff structure
B. It is a standardized contract with no special features
C. It is only available for commodity assets
D. It is traded exclusively over-the-counter

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129. Which of the following options strategies is used to limit both potential losses and gains?
A. Protective put
B. Covered call
C. Straddle
D. Iron condor

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130. What is a “long futures position”?
A. A position where an investor profits if the underlying asset price decreases
B. A position where an investor profits if the underlying asset price increases
C. A position where the investor has sold a futures contract
D. A position where the investor has purchased a put option

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131. What is the role of a “clearinghouse” in derivatives trading?
A. To ensure the delivery of physical assets at expiration
B. To guarantee that both parties meet their financial obligations
C. To set the strike price of options contracts
D. To set the margin requirements for futures contracts

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132. What is the key difference between an option and a futures contract?
A. An option gives the holder the obligation to buy or sell the underlying asset.
B. A futures contract gives the holder the right but not the obligation to buy or sell.
C. An option gives the holder the right but not the obligation to buy or sell.
D. A futures contract has no expiration date.

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133. What is the purpose of a “collar” in options trading?
A. To speculate on large price movements in the underlying asset
B. To protect a position by creating a limited range of possible outcomes
C. To maximize the return on an investment regardless of price movements
D. To neutralize market volatility

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134. What is a “swaption”?
A. A type of forward contract
B. An option to enter into a swap agreement
C. A derivative based on an underlying commodity
D. A contract to exchange fixed interest payments for floating interest payments

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135. Which type of option allows the holder to exercise only at expiration?
A. American option
B. European option
C. Bermudan option
D. Exotic option

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136. In the context of hedging, what is the “hedge ratio”?
A. The number of contracts needed to fully offset the exposure
B. The ratio of an option’s price to the underlying asset price
C. The difference between the strike price and the underlying asset price
D. The margin required for a futures contract

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137. What is “basis risk” in the context of hedging with derivatives?
A. The risk that the price of the hedging instrument and the underlying asset move in opposite directions
B. The risk that the underlying asset will not reach the strike price
C. The risk of not having enough margin to maintain a position
D. The risk that the value of the derivative position changes due to interest rate fluctuations

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138. Which of the following is a characteristic of an exotic option?
A. It is highly standardized and traded on exchanges
B. It has complex payoff structures and may depend on multiple factors
C. It has no expiration date
D. It is a type of forward contract

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139. In a credit default swap (CDS), who is the buyer of protection?
A. The seller of the bond
B. The counterparty to the swap
C. The investor looking to hedge against credit risk
D. The issuer of the bond

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140. What is “implied correlation” in options trading?
A. The relationship between the implied volatility of an option and the market risk-free rate
B. The correlation between the price of two underlying assets as implied by options prices
C. The historical correlation between the price movements of two stocks
D. The sensitivity of an option’s price to changes in interest rates

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141. What is the primary risk of writing a naked call option?
A. Limited potential for loss
B. Unlimited potential for loss
C. No counterparty risk
D. A fixed maximum loss

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142. Which of the following describes a “reverse convertible bond”?
A. A bond that can be converted into stock at the issuer’s discretion
B. A bond that allows the holder to convert it into stock at a fixed price
C. A bond that can be exchanged for cash or another bond
D. A bond that can be converted into stock if the underlying asset price falls below a threshold

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143. What is the term “convexity” in the context of options?
A. The rate of change of an option’s delta with respect to changes in the price of the underlying asset
B. The time decay of the option’s value
C. The relationship between the strike price and the underlying asset price
D. The sensitivity of the option price to changes in interest rates

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144. What is a key feature of “cash-settled” futures contracts?
A. The underlying asset is delivered physically at contract expiration
B. The contract is closed out by the exchange of cash instead of the underlying asset
C. The futures contract is settled in the currency of the underlying asset
D. The margin requirement is higher than for physically settled contracts

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145. What does a “zero-coupon swap” involve?
A. A swap that has no upfront cost or payment
B. A swap where no periodic payments are made, but a lump sum is paid at maturity
C. A swap with no interest rate component
D. A swap that involves no exchange of cash flows

146. What is the purpose of a “futures contract”?
A. To speculate on the future price of an asset
B. To buy or sell an asset at the current market price
C. To hedge against potential future price changes
D. To generate passive income

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147. Which of the following is an example of a derivative that is typically used for hedging purposes?
A. Stock option
B. Treasury bond
C. Futures contract
D. Real estate investment trust

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148. What does “implied volatility” represent in options pricing?
A. The actual volatility of the underlying asset
B. The expected future volatility of the underlying asset, as implied by the option’s price
C. The historical volatility of the underlying asset
D. The level of risk-free interest rates

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149. What is the “strike price” of an option?
A. The price at which the option holder can exercise the option
B. The price at which the option was purchased
C. The current market price of the underlying asset
D. The price at which the option seller is obligated to buy or sell the asset

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150. Which of the following is a characteristic of a “forward contract”?
A. It is standardized and traded on exchanges
B. It has no flexibility in terms of settlement date or underlying asset
C. It is customized and traded over-the-counter (OTC)
D. It is settled in cash only

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151. In a “collar” strategy, which of the following happens?
A. A put option is purchased, and a call option is sold
B. A call option is purchased, and a put option is sold
C. A call and put option are both purchased with the same strike price
D. A call and put option are sold simultaneously

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152. What is a “protective put” strategy in options trading?
A. Buying a call option and selling a put option on the same asset
B. Buying a put option to hedge against a potential drop in the price of an asset
C. Selling a put option to generate income
D. Buying a futures contract to hedge against price increases

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153. What does “time decay” refer to in options trading?
A. The decline in the price of an option as time passes
B. The decrease in the value of an option due to volatility changes
C. The increase in the option’s value as it approaches expiration
D. The impact of interest rate changes on option pricing

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154. Which of the following is a key characteristic of “exotic options”?
A. They have a simple and standardized payoff structure
B. They are only available on stocks and bonds
C. They are customized options with more complex payoff structures
D. They can be traded only on regulated exchanges

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155. What is the “premium” in options trading?
A. The initial margin required to enter a futures contract
B. The cost of purchasing an option
C. The value of the option at expiration
D. The difference between the underlying asset’s current price and the strike price

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156. Which of the following is a feature of an “interest rate swap”?
A. It involves the exchange of one currency for another
B. It involves exchanging fixed interest payments for floating payments
C. It is a futures contract based on interest rate fluctuations
D. It involves purchasing an asset with leverage

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157. What does “convexity” refer to in the context of bond options?
A. The relationship between the bond’s yield and its price
B. The change in the bond price for small changes in yield
C. The non-linear relationship between bond prices and interest rate changes
D. The volatility of a bond option

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158. What is the main objective of a “swaption”?
A. To exchange fixed interest payments for floating interest payments
B. To protect against interest rate fluctuations by entering into an option on a swap agreement
C. To speculate on the future price of a bond
D. To create a synthetic long position in an asset

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159. What does a “credit default swap” (CDS) provide protection against?
A. Interest rate risk
B. Currency risk
C. Credit risk (the risk of default on debt)
D. Commodity price risk

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160. What is a “reverse repo”?
A. A short-term loan where the borrower agrees to sell securities and repurchase them at a later date
B. A futures contract that involves the repurchase of a bond
C. A long-term bond repurchase agreement
D. A transaction that involves the exchange of foreign currencies

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161. Which of the following describes a “knock-in option”?
A. An option that becomes active only if the underlying asset price reaches a certain level
B. An option that can only be exercised at expiration
C. An option with a fixed expiration date
D. An option that is activated upon the occurrence of an event unrelated to the price of the asset

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162. What is “basis risk” in the context of hedging with futures contracts?
A. The risk that the futures price and the spot price of the underlying asset will move in opposite directions
B. The risk of price changes in the underlying asset being incorrectly forecasted
C. The risk that the futures contract will expire before the asset is delivered
D. The risk that the futures contract will not be honored by the counterparty

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163. What is a “currency swap”?
A. An agreement to exchange a currency for a commodity at a fixed price
B. A contract where two parties exchange cash flows in different currencies
C. A short-term transaction involving the purchase and sale of a foreign currency
D. A bond issued in a foreign currency to raise capital

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164. Which of the following is a key advantage of using derivatives for hedging purposes?
A. They allow for guaranteed profits
B. They are low-cost instruments that can be used to reduce risk
C. They can generate income without any risk
D. They allow for risk diversification through speculation

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165. What is a “naked call option”?
A. A call option where the seller does not own the underlying asset
B. A call option that is purchased without any hedging strategy
C. A call option where the seller owns the underlying asset
D. A call option with no expiration date

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166. Which type of risk does a “futures contract” typically hedge against?
A. Credit risk
B. Interest rate risk
C. Price (market) risk
D. Liquidity risk

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167. In options trading, what does “moneyness” refer to?
A. The strike price relative to the current price of the underlying asset
B. The time value remaining in the option
C. The volatility of the underlying asset
D. The cost of purchasing an option

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168. What is the “underlying asset” in a derivatives contract?
A. The price of the derivative instrument
B. The asset on which the derivative’s price is based
C. The initial margin required for the derivative
D. The market value of the option

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169. In a “collar” strategy, what is typically the effect on the portfolio’s risk profile?
A. It increases the potential for large gains
B. It creates a situation with a fixed return
C. It limits the potential for both gains and losses
D. It eliminates all risk from the portfolio

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170. What does “long position” in a futures contract refer to?
A. A position where the investor sells the asset
B. A position where the investor profits from falling prices
C. A position where the investor buys the asset
D. A position where the investor receives dividends from the asset

171. What is a “call option”?
A. A contract that allows the buyer to sell an asset at a predetermined price
B. A contract that gives the buyer the right, but not the obligation, to buy an asset at a predetermined price
C. A contract that obligates the buyer to buy an asset at the market price
D. A contract that gives the seller the right to buy an asset

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172. In the context of hedging, what does “delta” measure?
A. The time sensitivity of an option
B. The rate of change in the price of the option relative to the underlying asset’s price movement
C. The volatility of the underlying asset
D. The interest rate risk of the position

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173. What is the key difference between “futures contracts” and “forward contracts”?
A. Futures contracts are traded on exchanges, while forward contracts are over-the-counter (OTC)
B. Futures contracts are customizable, while forward contracts are standardized
C. Futures contracts have no expiration dates, while forward contracts do
D. Futures contracts are used for speculation, while forward contracts are used only for hedging

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174. What is a “put option”?
A. A contract that gives the buyer the right, but not the obligation, to buy an asset
B. A contract that obligates the buyer to sell an asset
C. A contract that gives the buyer the right, but not the obligation, to sell an asset
D. A contract that allows the buyer to purchase an asset at any time

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175. Which of the following is a key feature of “swaps”?
A. They are primarily used to hedge against credit risk
B. They involve the exchange of cash flows based on underlying asset prices
C. They are traded on exchanges like futures contracts
D. They are derivatives based on the interest rate risk

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176. What is meant by the term “hedging” in financial markets?
A. The act of taking on more risk in the hope of higher returns
B. The practice of using financial instruments to offset potential losses in investments
C. The process of diversifying a portfolio to reduce exposure to specific sectors
D. The strategy of shorting assets to profit from a decline in prices

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177. Which of the following is a “synthetic” position in options trading?
A. A position created by using a combination of multiple options and/or futures contracts to replicate the payoff of another position
B. A position in which the investor owns both the stock and the corresponding options
C. A position where the investor buys a bond and an equity option simultaneously
D. A position where the investor holds a short futures contract

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178. What is the “strike price” of a futures contract?
A. The price at which the buyer and seller agree to settle the futures contract
B. The price at which the contract holder can buy or sell the underlying asset
C. The price of the futures contract when it expires
D. The price set by the futures exchange

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179. In the context of a “long hedge,” what does an investor aim to do?
A. Purchase a futures contract to protect against a price decline in the underlying asset
B. Sell a futures contract to protect against a price increase in the underlying asset
C. Buy the underlying asset directly to profit from price movements
D. Sell the underlying asset to lock in profits

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180. How do “collateralized debt obligations” (CDOs) function in financial markets?
A. CDOs pool together different types of debt securities and sell tranches of these pools to investors
B. CDOs are a form of debt that guarantees returns based on underlying assets
C. CDOs are options on debt instruments that help hedge against interest rate risk
D. CDOs are used to settle futures contracts based on debt instruments

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181. What does a “naked put option” imply?
A. The seller owns the underlying asset and is offering to sell it
B. The seller does not own the underlying asset and is obligated to buy it at the strike price if the option is exercised
C. The buyer has no intention to exercise the option
D. The seller is hedging against the risk of falling asset prices

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182. What is the purpose of a “cross-currency swap”?
A. To exchange different types of bonds issued in different currencies
B. To exchange cash flows in different currencies based on interest rates
C. To speculate on the future value of currencies in the forex market
D. To hedge against inflation risks

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183. What type of option strategy is a “straddle”?
A. A strategy that involves buying both a call and put option on the same asset with the same strike price and expiration date
B. A strategy that involves selling both a call and put option on the same asset with different strike prices
C. A strategy that involves buying two call options on the same asset
D. A strategy that involves buying a put option and selling a call option simultaneously

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184. What does “moneyness” refer to in options trading?
A. The amount of time remaining until expiration
B. The risk-free interest rate at the time of purchase
C. The degree to which an option is in-the-money, at-the-money, or out-of-the-money
D. The underlying asset’s volatility

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185. What is “duration” in the context of bond options?
A. The time to maturity of a bond
B. The interest rate sensitivity of a bond or a bond portfolio
C. The level of risk associated with the underlying asset
D. The total return of the bond

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186. Which of the following is an example of an “exotic option”?
A. A European call option
B. A barrier option
C. A forward contract
D. A commodity futures contract

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187. In the context of options trading, what is a “covered call”?
A. A strategy where an investor sells a call option while holding the underlying asset
B. A strategy where an investor buys a call option without any underlying asset
C. A strategy where an investor sells a call option to cover a margin call
D. A strategy that involves buying both a call and put option simultaneously

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188. Which type of risk does a “cross-currency swap” primarily hedge against?
A. Interest rate risk
B. Inflation risk
C. Currency risk
D. Credit risk

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189. What is the “notional value” in a swap contract?
A. The market value of the underlying asset
B. The amount of money exchanged between the two parties
C. The principal amount on which the payments in the swap are calculated
D. The fixed interest rate applied to the swap contract

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190. What is “backwardation” in commodity futures markets?
A. When future prices are higher than current spot prices
B. When future prices are lower than current spot prices
C. A term used to describe the settlement process for futures contracts
D. The process of adjusting for dividends in commodity futures contracts

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191. What is the “Vega” of an option?
A. The sensitivity of an option’s price to changes in the price of the underlying asset
B. The sensitivity of an option’s price to changes in volatility
C. The time value of an option
D. The strike price of the option

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192. What is the main purpose of a “credit default swap” (CDS)?
A. To hedge against interest rate risk
B. To protect against credit risk, especially in the case of bond defaults
C. To hedge against commodity price changes
D. To protect against currency fluctuations

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193. What is the difference between “American options” and “European options”?
A. American options can be exercised at any time before expiration, while European options can only be exercised at expiration
B. European options can be exercised at any time before expiration, while American options can only be exercised at expiration
C. American options are always more expensive than European options
D. There is no difference between the two

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194. What is a “covered put option” strategy?
A. A strategy where the seller owns the underlying asset and writes a put option
B. A strategy where the seller does not own the underlying asset and writes a put option
C. A strategy where the buyer holds the underlying asset and buys a put option
D. A strategy where the seller owns the underlying asset and buys a call option

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195. In the context of a “long futures position,” what is the trader’s objective?
A. To sell the futures contract at a higher price than it was purchased
B. To buy the underlying asset at a fixed price
C. To hedge against interest rate risk
D. To generate income from dividends

196. What is the “gamma” of an option?
A. The rate of change in an option’s price relative to changes in volatility
B. The rate of change in an option’s delta relative to changes in the price of the underlying asset
C. The time decay of an option
D. The interest rate sensitivity of an option

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197. Which of the following is true about “forward contracts”?
A. They are traded on organized exchanges
B. They are customizable but have more counterparty risk than futures contracts
C. They have standardized terms
D. They are typically used only for speculation

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198. What does “implied volatility” refer to in options trading?
A. The actual price movements of the underlying asset
B. The expected future volatility of the underlying asset, as implied by option prices
C. The historical volatility of the underlying asset
D. The amount of time remaining until the option expires

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199. A “swaption” is:
A. A type of option that grants the holder the right to enter into a swap contract
B. A futures contract that can be exchanged for stocks
C. A swap agreement between two parties
D. An option on a foreign currency contract

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200. Which of the following best describes the “basis” in futures contracts?
A. The difference between the spot price of an asset and its futures price
B. The price of a futures contract
C. The amount of leverage available in futures trading
D. The margin requirement for futures contracts

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201. What is the purpose of using “interest rate swaps”?
A. To hedge against volatility in stock prices
B. To hedge against currency fluctuations
C. To exchange fixed interest rate payments for floating rate payments (or vice versa)
D. To speculate on the future price of bonds

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202. What is the “Rho” of an option?
A. The sensitivity of an option’s price to changes in interest rates
B. The time decay of an option
C. The sensitivity of an option’s price to changes in the volatility of the underlying asset
D. The rate of change in the option’s delta

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203. What does “in-the-money” mean for a call option?
A. The option’s strike price is above the current market price of the underlying asset
B. The option’s strike price is below the current market price of the underlying asset
C. The option’s strike price is equal to the current market price of the underlying asset
D. The option has no intrinsic value

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204. Which of the following best describes a “knock-in option”?
A. An option that becomes active only when the underlying asset reaches a certain price level
B. An option that can be exercised at any time before expiration
C. A call option that gives the holder the right to sell the underlying asset
D. An option that expires worthless regardless of the underlying asset’s price

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205. What is a “strangle” strategy in options trading?
A. Buying both a call and put option with the same strike price
B. Selling both a call and put option with the same strike price
C. Buying both a call and put option with different strike prices
D. Selling both a call and put option with different strike prices

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206. Which of the following best describes a “protective put”?
A. Buying a put option to protect an existing short position in the underlying asset
B. Selling a put option to generate income while holding the underlying asset
C. Buying a put option to protect an existing long position in the underlying asset
D. Selling a put option to hedge against a potential price decline

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207. A “zero-coupon swap” involves the exchange of:
A. Fixed interest payments for floating interest payments
B. Fixed interest payments for no payments at all
C. Fixed interest payments for principal exchange
D. No interest payments, just the exchange of notional principal

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208. What is a “collar” in options trading?
A. A strategy that involves buying a call option and selling a put option with different strike prices
B. A strategy that involves buying a put option and selling a call option with different strike prices
C. A strategy that involves buying a call and a put option to protect against large price movements
D. A strategy that involves hedging against interest rate risk using bonds

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209. What is the main advantage of “futures contracts” over “forward contracts”?
A. Futures contracts are customizable
B. Futures contracts are less liquid than forward contracts
C. Futures contracts are traded on exchanges, providing greater liquidity and transparency
D. Futures contracts are better suited for long-term hedging

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210. What is “interest rate risk” in the context of hedging?
A. The risk that the price of an underlying asset will decline due to interest rate changes
B. The risk that interest rates will fluctuate, affecting the value of investments and derivatives
C. The risk that future interest rate changes will not be reflected in derivative prices
D. The risk that changes in credit spreads will affect bond prices

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211. In options trading, what does “theta” represent?
A. The rate of change in an option’s price relative to changes in volatility
B. The sensitivity of an option’s price to time decay
C. The rate of change in the underlying asset’s price relative to the option’s price
D. The sensitivity of an option’s price to interest rate changes

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212. What does the term “leveraged buyout” (LBO) refer to?
A. The purchase of a company using a significant amount of borrowed money
B. The purchase of a company using all-equity financing
C. A strategy used by firms to increase stock buybacks
D. A strategy involving options trading to acquire companies

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213. A “calendar spread” in options involves:
A. Buying and selling options with the same strike price but different expiration dates
B. Buying and selling options with the same expiration date but different strike prices
C. Buying and selling options in different markets
D. Selling options on one type of asset and buying options on another type of asset

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214. Which of the following best describes the “put-call parity” theory?
A. A relationship between the price of call and put options on the same asset with the same strike price and expiration date
B. A strategy that combines both puts and calls with the same strike prices
C. The idea that options prices are determined solely by the price of the underlying asset
D. A theory that states that options prices are inversely related to interest rates

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215. What is “basis risk” in the context of hedging with futures?
A. The risk that the price of the asset in the spot market will move in the opposite direction of the futures price
B. The risk that the futures contract will not accurately track the underlying asset’s price
C. The risk that the price of a futures contract will increase unexpectedly
D. The risk of a currency fluctuation

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216. What is the primary use of a “currency swap”?
A. To exchange cash flows in different currencies based on interest rates
B. To swap one currency for another at a fixed exchange rate
C. To hedge against changes in commodity prices
D. To protect against changes in equity prices

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217. A “bear spread” is a strategy used to profit from:
A. Rising prices of the underlying asset
B. Falling prices of the underlying asset
C. Uncertainty in the price movement of the underlying asset
D. The volatility of the underlying asset

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218. What is the key feature of “interest rate derivatives”?
A. They help hedge against fluctuations in interest rates
B. They allow investors to gain exposure to stock markets
C. They are used to hedge against changes in exchange rates
D. They allow for speculation on commodity prices

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219. What does “open interest” refer to in futures contracts?
A. The total number of contracts that have been bought and sold in a market
B. The total number of outstanding futures contracts that have not been settled
C. The total amount of margin required for all open contracts
D. The price of the most recently traded futures contract

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220. What is a “naked call option”?
A. A call option where the seller does not own the underlying asset and is exposed to potentially unlimited losses
B. A call option where the buyer does not own the underlying asset
C. A call option where the seller owns the underlying asset
D. A call option that expires worthless

221. What is a “bull spread” in options trading?
A. A strategy used to profit from falling asset prices
B. A strategy where a call option is bought and a put option is sold with the same strike price
C. A strategy where a call option is bought and a call option is sold with different strike prices
D. A strategy where both put and call options are sold simultaneously

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222. A “futures contract” is best described as:
A. A legally binding agreement to exchange a specific asset for cash in the future
B. A forward contract traded on an exchange with standardized terms
C. An option to buy or sell an asset at a specific price within a fixed period
D. A loan agreement between two parties

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223. What is the “delta” of an option?
A. The rate of change in an option’s price with respect to changes in interest rates
B. The rate of change in an option’s price with respect to changes in the price of the underlying asset
C. The rate of change in the underlying asset’s price relative to the option’s price
D. The time decay of an option

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224. What does “time value” of an option refer to?
A. The difference between the option’s strike price and the underlying asset’s price
B. The premium paid for an option in excess of its intrinsic value
C. The value of the option as the time to expiration decreases
D. The option’s value that depends solely on the volatility of the underlying asset

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225. What is a “synthetic” position in options trading?
A. A position that mimics the payoffs of another asset using combinations of options
B. A position that involves buying a single option with high volatility
C. A strategy that involves buying a call and a put option simultaneously
D. A position involving the purchase of the underlying asset

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226. What is a “swap” in financial derivatives?
A. An agreement to exchange one asset for another
B. An agreement between two parties to exchange cash flows or other financial instruments based on predetermined terms
C. A standardized contract to buy or sell an asset at a future date
D. A strategy to hedge against interest rate risk using options

________________________________________
227. What is the “credit default swap” (CDS)?
A. A financial contract in which the seller agrees to compensate the buyer for the default of a borrower
B. A contract used to exchange fixed interest rate payments for floating rates
C. A forward contract to hedge against commodity price movements
D. An options contract on interest rate movements

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228. What is a “reverse swap”?
A. A swap agreement where the parties exchange fixed interest rate payments for floating rates
B. A swap agreement where one party agrees to pay a fixed rate and receive a floating rate
C. A type of swap where one side is paying the floating rate while receiving the fixed rate
D. A swap where both parties exchange principal amounts

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229. In a “currency swap”, what are the parties exchanging?
A. Different amounts of the same currency
B. Cash flows in different currencies based on interest rate agreements
C. Ownership of underlying assets
D. Equity shares in different companies

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230. What is “implied volatility” commonly used to determine?
A. The current price of the option
B. The expected future volatility of the underlying asset, inferred from market prices of options
C. The strike price of the option
D. The level of interest rates in the market

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231. What is the primary use of “interest rate options”?
A. To hedge against fluctuations in interest rates
B. To hedge against changes in commodity prices
C. To protect against currency fluctuations
D. To speculate on the direction of stock prices

________________________________________
232. A “long straddle” strategy involves:
A. Buying a call option and selling a put option with the same strike price and expiration date
B. Buying both a call and a put option with the same strike price and expiration date
C. Selling both a call and a put option with different strike prices
D. Selling a call option while holding the underlying asset

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233. What does the term “hedge ratio” refer to in the context of derivatives trading?
A. The proportion of an asset that is covered by derivatives
B. The number of derivative contracts required to offset the risk of an underlying asset
C. The ratio of profits to risks in a hedging strategy
D. The total value of options contracts

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234. In options trading, “open interest” refers to:
A. The number of outstanding futures contracts
B. The number of option contracts that have been bought and sold but not yet closed
C. The total amount of capital invested in a particular options position
D. The rate of return of a particular options strategy

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235. A “double no-touch” option is:
A. An option that has two predetermined price levels that, if not touched, result in a payout
B. An option that involves two assets being traded simultaneously
C. A high-risk option strategy used in futures markets
D. An option that becomes worthless after the second price level is touched

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236. What does “basis” refer to in commodity futures trading?
A. The difference between the spot price of an asset and its futures price
B. The price at which a futures contract trades
C. The underlying asset’s price volatility
D. The difference between the contract’s purchase price and its sale price

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237. What is a “futures spread”?
A. A strategy that involves buying and selling futures contracts on the same asset with different expiration dates or strike prices
B. A strategy where multiple futures contracts are bought on different assets
C. A contract that allows the buyer to choose the strike price of a futures contract
D. A contract used exclusively for speculating on short-term price movements

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238. Which of the following describes a “barrier option”?
A. An option where the payoff depends on whether the price of the underlying asset reaches a specified barrier level
B. A simple call or put option without any conditions
C. A type of option with a fixed expiration date and strike price
D. A derivative based on the volatility of an underlying asset

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239. What does a “protective collar” strategy typically involve?
A. Buying a call option and a put option with the same strike price
B. Buying a put option to protect against losses while selling a call option to offset the cost
C. Buying a call option and selling a put option with different strike prices
D. A combination of two put options to limit risk exposure

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240. What is “liquidity risk” in derivatives trading?
A. The risk that the underlying asset will not be available for delivery at the contract’s maturity
B. The risk that there will not be enough market participants to execute a trade
C. The risk that market conditions will prevent the derivative from providing any value
D. The risk that interest rates will fluctuate unexpectedly

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241. What is a “covered call” strategy?
A. Selling a call option while holding the underlying asset to generate income
B. Buying a call option to protect against a decline in the price of the underlying asset
C. Selling a call option without holding the underlying asset
D. A strategy where a put option is purchased and a call option is sold

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242. What does “portfolio insurance” in derivatives trading typically refer to?
A. A strategy using futures and options to limit losses in an investment portfolio
B. A financial product that offers protection against inflation
C. A way to ensure portfolio returns are maximized
D. A method of guaranteeing returns from options contracts

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243. What is the role of a “clearinghouse” in futures trading?
A. To facilitate the trading of options contracts
B. To guarantee the performance of contracts and ensure counterparty risk is minimized
C. To provide liquidity for futures markets
D. To set the initial margin requirements for futures contracts

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244. In the context of futures trading, “margin” refers to:
A. The initial payment required to enter into a futures contract
B. The difference between the spot price and the futures price
C. The total value of the futures contract
D. The maximum leverage allowed for a trade

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245. What is the purpose of “derivatives pricing models”?
A. To calculate the fair value of derivatives based on market conditions and inputs like volatility and interest rates
B. To predict the direction of asset prices
C. To provide speculative opportunities based on historical data
D. To set the strike price for options contracts

246. What does the term “implied volatility” refer to?
A. The expected volatility of the underlying asset, inferred from the price of the options
B. The historical volatility of the underlying asset
C. The volatility of an asset’s price over a fixed time period
D. The risk-free rate used in options pricing

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247. A “put option” gives the buyer the right to:
A. Buy an underlying asset at a specified price
B. Sell an underlying asset at a specified price
C. Buy or sell an underlying asset at market price
D. Only buy an underlying asset at the current market price

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248. What is the main difference between a “forward contract” and a “futures contract”?
A. Futures contracts are standardized and traded on exchanges, while forward contracts are customizable and traded over-the-counter (OTC)
B. Forward contracts are legally binding, while futures contracts are not
C. Futures contracts have no expiration date, while forward contracts do
D. Forward contracts are only used for commodities, while futures contracts can be used for stocks and bonds

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249. Which of the following is true regarding a “long position” in futures trading?
A. The trader agrees to sell the underlying asset at a set price at the expiration of the contract
B. The trader agrees to buy the underlying asset at a set price at the expiration of the contract
C. The trader benefits from a decrease in the price of the underlying asset
D. The trader holds a call option for the underlying asset

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250. A “strangle” strategy involves:
A. Buying a put and a call option with the same strike price
B. Selling a put and a call option with different strike prices
C. Buying a put and a call option with different strike prices
D. Selling a put and a call option with the same strike price

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251. What is the primary purpose of a “hedging” strategy?
A. To speculate on price movements for potential profits
B. To protect against adverse price movements in the underlying asset
C. To reduce the number of trades in the portfolio
D. To increase exposure to asset price fluctuations

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252. What does “mark-to-market” mean in the context of derivatives trading?
A. Adjusting the value of derivatives positions to reflect the current market price
B. Selling derivative contracts at market prices
C. The process of resetting option strike prices to current market values
D. The process of marking the expiration date of a derivative contract

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253. Which of the following best describes a “swaption”?
A. A derivative contract that gives the holder the right to buy or sell a bond at a future date
B. A type of option that gives the buyer the right to enter into an interest rate swap contract
C. A bond that can be converted into an option contract
D. A strategy used to manage equity risk

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254. What is the “strike price” of an option?
A. The price at which the option holder can buy or sell the underlying asset
B. The price at which the option is traded
C. The market price of the underlying asset when the option expires
D. The amount of time until the option expires

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255. The “Vega” of an option is a measure of:
A. The rate of change in an option’s price with respect to changes in the price of the underlying asset
B. The rate of change in an option’s price with respect to changes in interest rates
C. The sensitivity of an option’s price to changes in volatility
D. The time decay of an option

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256. What is the primary risk in a “naked call” option strategy?
A. The risk that the price of the underlying asset will decline
B. The risk that the price of the underlying asset will rise above the strike price
C. The risk that the option holder will exercise the option at a loss
D. The risk of unlimited loss if the price of the underlying asset rises significantly

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257. What does a “reverse conversion” strategy involve?
A. Buying a call option and selling a put option with the same strike price
B. Selling a call option and buying a put option with the same strike price
C. Creating a synthetic short position by combining options and futures
D. Creating a synthetic long position by combining options and futures

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258. A “zero-coupon bond” is a bond that:
A. Pays interest periodically
B. Pays no interest and is sold at a discount to its face value
C. Pays interest in the form of dividends
D. Can be converted into equity shares

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259. The “rollover” process in futures trading involves:
A. Selling an expiring contract and buying a new contract with a longer expiration
B. Selling an option before its expiration date
C. The automatic renewal of options contracts
D. Moving from one asset class to another

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260. In the context of options, “intrinsic value” refers to:
A. The time value of an option
B. The difference between the option’s strike price and the underlying asset’s price when it is profitable to exercise
C. The price of the underlying asset when the option expires
D. The premium paid for an option

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261. What is a “long strangle” strategy?
A. Buying a call and a put option with different strike prices and the same expiration date
B. Selling a call and a put option with the same strike price
C. Buying a call and a put option with the same strike price
D. Selling a call and a put option with different strike prices

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262. What is “duration” in the context of interest rate derivatives?
A. The time until the underlying asset matures
B. A measure of the sensitivity of a bond’s price to changes in interest rates
C. The time remaining until a futures contract expires
D. A measure of the volatility of interest rates

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263. What does “gamma” measure in options pricing?
A. The rate of change of an option’s price in relation to changes in volatility
B. The rate of change of delta in relation to changes in the price of the underlying asset
C. The time decay of an option’s price
D. The probability of an option expiring in the money

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264. In a “collar” strategy, the investor is:
A. Selling a call and buying a put option to hedge a position
B. Selling both a call and a put option to generate income
C. Buying a call and a put option with the same expiration date
D. Holding an underlying asset while simultaneously buying a call option and selling a put option to protect against losses

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265. What is the “fair value” of a derivative contract?
A. The current market price of the underlying asset
B. The value derived from the contract’s current price and future expected cash flows
C. The price at which the derivative contract can be immediately sold on the market
D. The price at which the derivative contract was initially purchased

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266. What is a “capped call option”?
A. An option with a fixed limit on the potential profit
B. An option that expires after a predetermined time period
C. A call option that has a minimum price at which it can be exercised
D. An option that has a fixed interest rate for the underlying asset

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267. A “short put” option strategy benefits if:
A. The price of the underlying asset increases
B. The price of the underlying asset decreases
C. The price of the underlying asset remains the same
D. The price of the underlying asset fluctuates dramatically

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268. A “futures contract” typically includes which of the following?
A. An agreement to settle in cash rather than physical delivery of the asset
B. A specific expiration date for the contract
C. An option to buy or sell at a specified price
D. A loan agreement between the buyer and the seller

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269. Which of the following is the primary use of “interest rate futures”?
A. To hedge against commodity price fluctuations
B. To hedge against changes in interest rates
C. To speculate on the future direction of stock prices
D. To protect against currency exchange rate changes

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270. The term “underlying asset” refers to:
A. The asset that the derivative contract is based on
B. The price at which a derivative contract can be exercised
C. The exchange where the derivative contract is traded
D. The market value of the asset

271. What is the primary risk associated with a “naked” option?
A. The risk of unlimited loss
B. The risk of limited profit
C. The risk of high premiums
D. The risk of the option expiring worthless

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272. A “bull call spread” strategy involves:
A. Buying a call option and selling a call option with the same expiration date but different strike prices
B. Buying a call option and buying a put option with the same strike price
C. Selling a call option and selling a put option with the same strike price
D. Buying a call option and buying a call option with the same strike price

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273. What does “delta” measure in options trading?
A. The change in an option’s price relative to the change in the volatility of the underlying asset
B. The rate of change in an option’s price in relation to the price movement of the underlying asset
C. The time decay of an option’s value
D. The interest rate sensitivity of an option

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274. What is the purpose of “interest rate swaps”?
A. To exchange one type of interest rate for another, usually fixed for floating or vice versa
B. To swap one underlying asset for another
C. To trade interest rate derivatives on the open market
D. To hedge against equity price volatility

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275. In which situation would a “protective put” strategy be most useful?
A. When an investor expects the price of the underlying asset to decrease significantly
B. When an investor expects the price of the underlying asset to increase moderately
C. When an investor wants to lock in profits from an asset
D. When an investor wants to hedge against volatility but not price movement

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276. Which of the following best describes a “synthetic” position in options?
A. A position that is artificially created using other derivative contracts, such as combining options with futures contracts
B. A position that mimics a long position in the underlying asset
C. A position that allows for immediate settlement of options
D. A position that involves creating an option contract with no underlying asset

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277. What is the difference between “call options” and “put options”?
A. A call option gives the holder the right to sell, while a put option gives the holder the right to buy
B. A call option gives the holder the right to buy, while a put option gives the holder the right to sell
C. A call option is for long-term investments, while a put option is for short-term investments
D. Call options are only used in commodities markets, while put options are used in financial markets

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278. What is “implied volatility” used for in options pricing?
A. To estimate the future volatility of the underlying asset
B. To adjust the strike price of an option
C. To calculate the option’s time value
D. To determine the optimal expiration date for an option

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279. What is a “futures contract” designed to do?
A. Allow the buyer to pay for an asset at a discounted price in the future
B. Allow the seller to cancel the contract at any time
C. Commit the buyer and seller to buy or sell an asset at a predetermined price on a future date
D. Provide a mechanism for price discovery in the open market

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280. A “horizontal” or “time” spread in options involves:
A. Buying and selling options with different strike prices but the same expiration date
B. Buying and selling options with the same strike price but different expiration dates
C. Buying a long-term call and a short-term put
D. Selling options with the same strike price and expiration but different underlying assets

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281. The “greeks” in options trading are used to measure:
A. The price of the underlying asset
B. The time decay of an option
C. The sensitivity of an option’s price to various factors like volatility, interest rates, and time decay
D. The volatility of the underlying asset

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282. Which of the following strategies involves buying both a put option and a call option with the same strike price and expiration date?
A. Iron condor
B. Long straddle
C. Covered call
D. Protective put

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283. In a “covered call” strategy, the investor:
A. Sells a call option while simultaneously holding the underlying asset
B. Buys a put option while simultaneously holding the underlying asset
C. Sells a call option without holding the underlying asset
D. Buys a call option while simultaneously selling the underlying asset

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284. What is the key feature of “currency options”?
A. They give the holder the right to exchange one currency for another at a fixed exchange rate
B. They guarantee future exchange rates between currencies
C. They eliminate currency risk completely
D. They are used only by central banks to manage monetary policy

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285. What is a “collar” in options trading?
A. A strategy that involves buying a call option and selling a put option with the same strike price
B. A strategy used to limit both downside risk and upside potential by using options
C. A strategy used to speculate on large movements in the underlying asset
D. A type of option used to protect against interest rate changes

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286. “Theta” in options trading refers to:
A. The time decay of an option’s price
B. The price of the underlying asset
C. The change in an option’s price due to volatility
D. The interest rate sensitivity of an option

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287. What is the primary advantage of using “futures contracts” for hedging?
A. They allow for customized agreements
B. They provide a mechanism for speculating on market movements
C. They are standardized and traded on exchanges, reducing counterparty risk
D. They offer immediate settlement and delivery of assets

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288. In a “reverse iron condor” strategy, the investor:
A. Buys both a call and a put option with the same strike price and sells another call and put option with different strike prices
B. Sells both a call and a put option with the same strike price and buys another call and put option with different strike prices
C. Sells both a call and a put option with different strike prices
D. Buys a call option and sells a call option with different expiration dates

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289. In a “straddle” strategy, the investor:
A. Buys a call and a put option with the same strike price and expiration date
B. Sells a call and a put option with different strike prices
C. Buys both a call and a put option with different expiration dates
D. Sells both a call and a put option with the same strike price and expiration date

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290. What does “backwardation” in futures markets indicate?
A. The futures price is lower than the spot price of the underlying asset
B. The futures price is higher than the spot price of the underlying asset
C. There is no difference between the spot and futures prices
D. The futures market is in long-term equilibrium

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291. A “binary option” pays:
A. A set amount if the option expires in-the-money
B. The value of the underlying asset at expiration
C. A variable payout depending on the strike price
D. A fixed payout only if the price of the underlying asset reaches a specific threshold

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292. What is a “knock-in” option?
A. An option that becomes active only if the underlying asset reaches a specific price
B. An option that has an automatic exercise feature when the price of the underlying asset is reached
C. An option with no strike price
D. An option that pays out automatically at expiration

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293. A “floor” strategy in options involves:
A. Selling a call option to reduce downside risk
B. Buying a put option to protect against falling prices
C. Selling a put option to reduce upside potential
D. Buying a call option to protect against falling prices

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294. What is the advantage of using “options” instead of “futures” for hedging?
A. Options offer unlimited risk potential
B. Futures require no upfront premium payments
C. Options provide flexibility and limit downside risk to the premium paid
D. Futures contracts are more liquid than options

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295. Which of the following best describes “exchange-traded derivatives”?
A. Derivatives that are negotiated and traded directly between two parties
B. Derivatives that are standardized and traded on an organized exchange
C. Derivatives with a fixed interest rate
D. Derivatives that are not subject to regulation