Financial Risk Management Exam Practice Tests
Course Introduction
Financial Risk Management explores the identification, analysis, and mitigation of risks faced by financial institutions and corporations. The course covers key concepts such as market risk, credit risk, operational risk, and liquidity risk, providing students with tools and frameworks for measuring and managing these uncertainties. Emphasis is placed on risk assessment techniques, regulatory environments, derivatives as risk management tools, and strategic decision-making processes to minimize potential financial losses. Through case studies and practical exercises, students gain hands-on experience in evaluating and responding to real-world financial risks.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
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16 Chapters
781 Verified Questions
781 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Investors who do not consider risk in their decisions are said to be
A)speculating
B)short selling
C)risk neutral
D)traders
E)none of the above
Answer: C
Q2) Derivatives permit investors to manage their risk more efficiently.
A)True
B)False Answer: True
Q3) Arbitrage is a transaction designed to capture profits resulting from market efficiency.
A)True
B)False
Answer: False
Q4) Speculation is equivalent to gambling.
A)True
B)False Answer: False
Page 3
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Chapter 2: Structure of Options Markets
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Sample Questions
Q1) 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
Q2) The order book official executes limit order option trades for the general public.
A)True
B)False
Answer: True
Q3) The Put and Call Brokers and Dealers Association created the first organized options exchange.
A)True
B)False
Answer: False
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) An American put might be exercised early even when there are no dividends on the underlying stock.
A)True
B)False
Answer: True
Q2) On March 2,a Treasury bill expiring on April 20 had a bid discount of 5.80,and an ask discount of 5.86.What is the best estimate of the risk-free rate as given in the text?
A)5.86 %
B)5.83 %
C)6.11 %
D)6.14 %
E)none of the above
Answer: C
Q3) The spread between the prices of two European puts,alike in all respects except exercise price,cannot exceed the difference in their exercise prices.
A)True
B)False
Answer: True
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5
Chapter 4: Option Pricing Models: the Binomial Model
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Sample Questions
Q1) 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
Q2) The binomial model will give a higher price for an American call on a stock that pays no dividends than if that call is European.
A)True
B)False
Q3) What is the current value of the call?
A)8.00
B)7.30
C)11.13
D)0.619
E)none of the above
Q4) The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.
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) Which of the following "Greeks" is not a measure of the option's sensitivity to a change in one of its input values?
A)delta
B)gamma
C)rho
D)theta
E)sigma
Q2) The time to expiration of an option is based on a 360-day year.
A)True
B)False
Q3) The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution.
A)True
B)False
Q4) The option's sensitivity to an interest rate change is called rho.
A)True
B)False
Q5) In the Black-Scholes-Merton model,stock prices are assumed to behave randomly. 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 protective put provides the same type of profit diagram as a long call.
A)True
B)False
Q3) 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
Q4) In the context of insurance,protective put buyers who choose lower exercise prices are using higher deductibles.
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) What will be the cost of the butterfly spread?
A)$1,195
B)$637
C)$79
D)$1,045
E)none of the above
Q2) If a straddle is closed prior to expiration,the investor can recover some of the time value of either the call or the put but not both.
A)True
B)False
Q3) There are three breakeven stock prices in a butterfly spread.
A)True
B)False
Q4) The payoffs form a straddle are more like the payoffs from a money spread than a calendar spread.
A)True
B)False
Q5) A box spread is a combination of a call bull spread and a put bear spread.
A)True
B)False
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Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) A limit move is when a futures price reaches its all time high or low price.
A)True
B)False
Q2) The number of futures contracts outstanding is called the
A)reportable position
B)minimum volume
C)open interest
D)spread position
E)none of the above
Q3) There are no futures contracts on the Dow Jones Industrial Average.
A)True
B)False
Q4) Locals are futures traders who are in business for themselves.
A)True
B)False
Q5) Futures trades are executed in the pit.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Sample Questions
Q1) 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
Q2) Which of the following best describes normal contango?
A)the spot price is less than the futures price
B)the futures price is less than the spot price
C)the expected spot price is less than the futures price
D)the cost of carry is negative
E)none of the above
Q3) Value is created in a futures contract with the passage of time.
A)True
B)False
Q4) The cost of carry includes the interest lost on the funds tied up in the asset stored.
A)True
B)False
Q5) Interest-rate parity is a cost-of-carry model.
A)True
B)False
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
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) An increase in dividends will lower the theoretical value of the stock index futures contract.
A)True
B)False
Q3) If the invoice price of bond A is 122,the invoice price of bond B is 95,the adjusted spot price of bond A is 127 and the adjusted spot price of bond B is 97,the better bond to deliver is bond B.
A)True
B)False
Q4) The wild card option exists because of the difference in the closing times of the spot and futures markets for Treasury bills.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) You hold a stock portfolio worth $15 million with a beta of 1.05.You would like to lower the beta to 0.90 using S&P 500 futures,which have a price of 460.20 and a multiplier of 250.What transaction should you do? Round off to the nearest whole contract.
A)sell 130 contracts
B)sell 9,778 contracts
C)sell 20 contracts
D)buy 50,000 contracts
E)sell 50,000 contracts
Q2) If you plan to issue a liability in the future,you are currently short in the spot market.
A)True
B)False
Q3) Which of the following is not a reason for firms to hedge?
A)Firms can hedge less expensively than can their shareholders
B)Shareholders cannot tolerate mark-to-market losses
C)Hedging by corporations can have tax advantages
D)Shareholders are not always aware of their firms' risks
E)none of the above
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Page 13
Chapter 12: Swaps
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Sample Questions
Q1) Swap payments are always either fixed or floating but never both.
A)True
B)False
Q2) Like interest rate and currency swaps,equity swap payments are always positive.
A)True
B)False
Q3) Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year)for one year.The prices of Eurodollar zero coupon bonds are 0.9756 (180 days)and 0.9434 (360 days).
A)5.9 percent
B)5 percent
C)6 percent
D)5.5 percent
E)2.95 percent
Q4) Interest rate swap payments are made
A)on the last day of the quarter
B)on the first day of each month
C)at whatever dates are agreed upon by the counterparties
D)on the 15th of the agreed-upon months
E)on the last day of the month
14
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) If a lender uses a collar,the transactions would be
A)buy a floor at one exercise price,sell a floor at another exercise price
B)buy a floor,sell a cap
C)sell a floor,buy a cap
D)buy a cap at one exercise price,sell a floor at another exercise price
E)buy a cap and sell a floor at the same exercise price
Q2) Swaptions are like forward swaps in which of the following ways
A)Both are free of credit risk
B)Both require the execution of a swap at expiration
C)They have the same price
D)Both are traded on swaption exchanges
E)none of the above
Q3) Which of the following is not required to determine a swaption payoff at expiration?
A)the exercise rate
B)the term structure of zero coupon rates at the swaption expiration
C)the maturity of the underlying swap
D)the yield on a bond of equivalent maturity as the swap
E)none of the above
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) If the S&P 500 ends up at 401,determine the upside capture.
A)96.7 percent
B)96 percent
C)99.3 percent
D)94 percent
E)100 percent
Q2) A security that pays off the return from a combination of mortgages is called a
A)homeowners' equity claim
B)mortgage portfolio
C)mortgage option
D)mortgage-backed security
E)none of the above
Q3) Which of the following statements about mortgage-backed security strips is true?
A)both interest-only and principal-only strips are subject to pre-payment risk
B)only principal-only strips are subject to prepayment risk
C)only interest-only strips are subject to prepayment risk
D)the prepayment risk of interest-only and principal-only strips is precisely offsetting
E)none of the above
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16
Chapter 15: Financial Risk Management Techniques and Applications
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Sample Questions
Q1) Eurodollar futures are widely used to hedge gamma and vega risk.
A)True
B)False
Q2) Stress testing allows a firm to see how its portfolio will behave under extremely rare but favorable conditions.
A)True
B)False
Q3) A total return swap is best described as
A)A swap in which the payments include only capital gains
B)a swap in which the total return on a stock index is swapped for the total return on a bond
C)a swap in which the return on one bond is swapped for some other payment
D)a swap designed to substitute for a basis swap
E)none of the above
Q4) If a firm holds a position in an option,it can delta and gamma hedge the position by adding a position in another option.
A)True
B)False
Page 17
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Risk managers should report to
A)the chief trader
B)legal counsel
C)the executive in charge of the front office
D)the executive in charge of the back office
E)none of the above
Q2) Hedge accounting is which of the following?
A)describing all hedges in footnotes to accounting statements
B)deferring all recording of hedge profits and losses until the hedge is over
C)associating the derivative profit or loss with the instrument being hedged
D)all of the above
E)none of the above
Q3) Which of the following would not be included among typical derivatives end users in the U.S.?
A)pension funds
B)corporations
C)state and local governments
D)the federal government
E)hedge funds
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Page 18