Financial Risk Management Exam Bank
Course Introduction
Financial Risk Management is a course designed to equip students with the fundamental principles and practices involved in identifying, analyzing, and mitigating financial risks faced by organizations. The course covers key topics such as market risk, credit risk, operational risk, and liquidity risk, introducing students to financial instruments and strategies used to manage these exposures. Emphasis is placed on both quantitative and qualitative risk assessment techniques, the regulatory environment, and the use of risk management tools such as derivatives and insurance. Through case studies and real-world examples, students develop practical skills in risk modeling, scenario analysis, and the development of robust risk management frameworks essential for effective decision-making in financial institutions and corporations.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) A risk premium is the additional return investors expect for assuming risk.
A)True
B)False Answer: True
Q2) Cash markets are also known as A)speculative markets
B)spot markets
C)derivative markets
D)dollar markets
E)none of the above Answer: B
Q3) Most derivative contracts terminate with delivery of the underlying asset.
A)True
B)False Answer: False
Q4) Swaps,like options,trade on organized exchanges.
A)True
B)False Answer: False
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Chapter 2: Structure of Options Markets
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Q1) All of the options on Microsoft comprise an option class.
A)True
B)False
Answer: True
Q2) Exercise limits are restrictions on the number of options that can be exercised by an investor in a given day or series of days.
A)True
B)False
Answer: True
Q3) A put option in which the stock price is $60 and the exercise price is $65 is said to be
A)in-the-money
B)out-of-the-money
C)at-the-money
D)exercisable
E)none of the above
Answer: A
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) What is the intrinsic value of the January 110 call?
A)0.00
B)8.30
C)3.75
D)5.00
E)none of the above
Answer: E
Q2) What is the European lower bound of the December 105 call?
A)9.86
B)0.00
C)8.25
D)9.26
E)none of the above Answer: D
Q3) An American call on a non-dividend paying stock will be worth more than a European call on that same stock.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Option Pricing Models: the Binomial Model
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Sample Questions
Q1) The binomial probabilities are probabilities if investors were risk neutral. A)True
B)False
Q2) If the binomial model describes the real world,the combined actions of all investors will cause the market price to converge to the binomial price.
A)True
B)False
Q3) The binomial option pricing formula is based on the weighted average of the next two possible values,discounted back to the present.
A)True
B)False
Q4) One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors. A)True
B)False
Q5) The binomial model assumes that investors are risk neutral.
A)True B)False
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Chapter 5: Option Pricing Models: the
Black-Scholes-Merton Model
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Sample Questions
Q1) Vega captures the combined effects of time decay and volatility.
A)True
B)False
Q2) When the risk-free rate is zero,the Black-Scholes formula converges to the intrinsic value.
A)True
B)False
Q3) The binomial price will theoretically equal the Black-Scholes-Merton price under which of the following conditions?
A)when the number of time periods is large
B)when the option is at-the-money
C)when the option is in-the-money
D)when the option is out-of-the-money
E)none of the above
Q4) The binomial model always gives the same option price as the Black-Scholes-Merton model.
A)True
B)False
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Early exercise imposes a risk to all but one of the following transactions.
A)a short call
B)a short put
C)a protective put
D)an uncovered call
E)none of the above
Q2) A covered call with a higher exercise price has a higher breakeven.
A)True
B)False
Q3) A covered call provides protection for a stock price at expiration down to the current stock price minus the premium.
A)True
B)False
Q4) What is your profit if you buy a call,hold it to expiration and the stock price at expiration is $37?
A)$700
B)-$289
C)$2,711
D)$411
E)none of the above
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) The delta of a straddle would be the call delta plus the put delta.
A)True
B)False
Q2) Early exercise is an important risk when call bear spreads and put bull spreads are used.
A)True
B)False
Q3) What will be the cost of the butterfly spread?
A)$1,195
B)$637
C)$79
D)$1,045
E)none of the above
Q4) The risk of early exercise is of no concern to the holder of a long straddle.
A)True
B)False
Q5) A strap is a less expensive bullish strategy than a straddle.
A)True
B)False
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Chapter 8: The Structure of Forward and Futures Markets
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Q1) Which of the following is not a futures exchange?
A)Minneapolis Grain Exchange
B)CBOE Futures Exchange
C)Chicago Climate Exchange
D)Kansas City Board of Trade
E)MidAmerica Commodity Exchange
Q2) Which of the following is not a type of futures trader?
A)scalpers
B)arbitrageurs
C)profit-takers
D)hedgers
E)day traders
Q3) Because futures markets do not have designated market makers,there is no such thing as a bid-ask spread.
A)True
B)False
Q4) The earliest financial futures contracts were futures on foreign currencies.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Q1) The futures price of a non-storable asset is determined by the cost of carry.
A)True
B)False
Q2) In financial futures markets,contango means that long-term interest rates are less than short-term interest rates.
A)True
B)False
Q3) A market in which the futures price is said to be unbiased is also a market in which there is a risk premium.
A)True
B)False
Q4) What is the lower bound of a European foreign currency call if the spot rate is $2.25,the domestic interest rate is 5.5 percent,the foreign interest rate is 6.2 percent,the option expires in three months,and the exercise price is $2.20?
A)$0.0457
B)$0.05
C)$0.0793
D)$0.0529
E)none of the above
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Chapter 10: Futures Arbitrage Strategies
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Q1) It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.
A)True
B)False
Q2) Determine the conversion factor for delivery of the 7 1/4's off May 15,2026 on the March 2010 T-bond futures contract.
A)1.225
B)0.932
C)1.083
D)1.127
E)1.509
Q3) The cheapest bond to deliver is the one that has the lowest spot price.
A)True
B)False
Q4) The end-of-the-month option is
A)the right to exercise an option on the last day of the month
B)an option expiring on the last day of the month
C)the right to deliver during the last seven business days of the month
D)an option that trades only at the end of the month
E)none of the above
Page 12
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Q1) Which of the following correctly expresses the profit on a hedge?
A)the basis when the hedge is closed
B)the change in the basis
C)the spot profit minus the futures profit
D)the futures profit minus the spot profit
E)none of the above
Q2) Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5,buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.
A)-3
B)-2
C)2
D)1
E)none of the above
Q3) The risk of the basis is usually less than the risk of the spot position.
A)True
B)False
Q4) The basis is the ratio of the futures price to the spot price.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
Q1) A currency swap without the exchange of notional principal is most likely to be used in what situation?
A)a company issuing a bond
B)a company generating cash flows in a foreign currency
C)a company arranging a loan
D)a dealer trying to hedge a currency option
E)none of the above
Q2) A swap involving two floating rates is called a basis swap.
A)True
B)False
Q3) The most basic and common type of swap is called
A)basis swap
B)plain vanilla swap
C)plain paper swap
D)commercial swap
E)bond swap
Q4) The value of a floating-rate bond is par on each interest payment date.
A)True
B)False
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Chapter 13: Interest Rate Forwards and Options
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Q1) Find the fixed rate on a forward swap expiring in 90 days in which the underlying swap has a maturity of 180 days and makes payments every 90 days.The prices of zero coupon bonds are 0.9877 (90 days),0.9732 (180 days),and 0.9597 (270 days).
A)5.97 percent
B)5.6 percent
C)5.5 percent
D)5.78 percent
E)5 percent
Q2) A payer swaption is expiring.The underlying swap has a two year maturity.Th e present value factors are 0.9259 (one year)and 0.8651 (two years).The strike rate is 7 percent.What is the value of the swaption per $1 notional principal.
A)0.0000,since it is out-of-the-money
B)1.0000
C)0.0753
D)0.0095
E)none of the above
Q3) Payer swaptions can be used to convert callable to non-callable debt.
A)True
B)False
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Page 15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) A chooser option permits you to choose the exercise price at a later date before expiration.
A)True
B)False
Q2) Which of the following is a path-independent option
A)a fixed strike Asian call option
B)a standard European call option
C)an up-and-out call option
D)an American put option
Q3) If the insured portfolio were dynamically hedged with T-bills,how many T-bills would be used?
A)16,332
B)63,002
C)126,723
D)61,672
E)32,468
Q4) Large stock price moves reduce the effectiveness of portfolio insurance.
A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Applications
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Sample Questions
Q1) A bond subject to default is equivalent to A)a payer swaption
B)a call and a default-free bond
C)a put and a call
D)a default-free bond and a short put
E)none of the above
Q2) Eurodollar futures are widely used to hedge gamma and vega risk.
A)True
B)False
Q3) The equity of a company with leverage is a put option on the assets.
A)True
B)False
Q4) Operational risk is more difficult to manage than market risk and credit risk. A)True B)False
Q5) Companies can benefit from risk management if their incomes fluctuate across different tax brackets.
A)True B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Procter and Gamble lost $157 million doing what?
A)speculating on a worldwide recession
B)failure to hedge their borrowing cost on a bond issue
C)speculating on foreign interest and exchange rates
D)speculating on a decrease in the federal budget deficit
E)mismanagement of a hedge fund in their pension fund
Q2) What is the primary activity of a firm's front office?
A)risk management
B)trading
C)pricing derivative products
D)auditing
E)none of the above
Q3) "Independent risk management" means which of the following?
A)that risk management of a firm is independent of its overall corporate policy decisions
B)that the risk management function is provided by an outside consulting firm
C)that the risk manager cannot be influenced by the traders
D)that the risk manager is independent of the firm's senior managers
E)none of the above
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