Question

                                                                                                                                                True                False

1. In order to properly value a derivative investment it is necessary to know the        

     notional amount.                                                                                                                _____             _____

2. A derivative instrument involving a futures contract to buy corn requires that the

    commodity actually be delivered.                                                                                        _____             _____

3. A forward contract to sell a foreign currency has increased in value if the forward

     rate is less that the current spot rate.                                                                                    _____             _____

4. The present value of a forward contract can only be determined if the forward rate is

     discounted to the present.                                                                                                   _____             _____

5. A futures contract differs from a forward contract in that the former typically requires a

    margin account and is typically a standardized rather than customized contract                _____             _____

6. The value of an option can be allocated to two component parts, the time and the

     intrinsic value                                                                                                                     _____             _____

7. A put option and a call option refer to the right to buy and sell a quantity respectively        _____             _____

8. If a put option at an exercise price of $12 per unit when the market value per unit is $13

    has a value of $0.50 per option, then there is no time value associated with the option        _____             _____

9. An option related to a commodity with a lot of price volatility would tend to increase the

    time value of the option                                                                                                       _____             _____

10. If a borrower had debt financing requiring the payment if a fixed rate of interest, an

      interest rate swap would be prudent if it was assumed that variable interest rates were to

      increase over fixed interest rates.                                                                                       _____             _____

11. If a creditor with a loan bearing a variable rate of interest were to swap variable rates for

     fixed rates, their interest net cash flow would be the differential between the respective rates   _____            _____

12. If an entity were to acquire a derivative instrument purely for investment purposes, the

      investment would be marked-to-market with changes in value being recognized currently

      in earnings                                                                                                                              _____            _____

Answer 1

1. True

( It is the term used to value the underlying assets in a derivative investment, it may be the total value of the positions or the value of the positions control agreed by the parties on the contract amount.

2. True

( In futures contract both the parties go through a future contact to protect the valuation of the commodity as in coming time the price of the commodity may increase or decrease, to avoid this problem parties go into future contract and decides the date of delivery and the payment will be made accordingly.

4. True

The present value of the forward contract cannot be determined if the forward rate is discounted to the present rate of interest.

5. True

Forward contract and Future Contract are mostly same in both the contact the parties decides to make the payment into the future.

in forward contract the trade is done on the counter and there is chances of fraud or theft no third party in between.

but in Futures contact the exchange is in between the parties so no theft can take place and it is traded on the margin basis, In future contract there is no risk of fraud or theft of money .

6. True

The value of the option can be allocated by time value of money and the instinct value of the money and actual value of the derivative.

7. True

Call option are like the agreements who give the buyer the option to buy but not the obligation to buy a stock, bond, commodity etc. call option is used when the market trend is bullish trend.

Put option is the option which gives the owner to right to buy but not the obligation to sell the underlying asset at a specified price or a specified date, Put option is taken by the investors when the market shows the bearish trend.

9. True

if an option is related to a commodity with a lot of price volatility and tends to increase the market the it can be said as the market is showing the bullish tend into the market and the market has the probability to go upward.