Financial Risk Management Exam Review
Course Introduction
Financial Risk Management explores the principles and practices used to identify, assess, and mitigate financial risks in organizations. The course covers a broad spectrum of risk types, including market, credit, operational, and liquidity risks, while introducing tools such as Value at Risk (VaR), derivatives, and hedging strategies. Students gain insight into regulatory frameworks, risk measurement techniques, and governance structures, developing both the analytical and practical skills necessary to manage uncertainty and enhance value within financial institutions and corporate environments.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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16 Chapters
945 Verified Questions
945 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) The top ten derivatives exchanges have less than 50 percent of trading volume.
A)True
B)False Answer: False
Q3) Speculation is equivalent to gambling.
A)True
B)False
Answer: False
Q4) A call option on a futures contract gives the buyer the right to buy a futures contract.
A)True
B)False Answer: True
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Chapter 2: Structure of Options Markets
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65 Flashcards
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Sample Questions
Q1) The order book official executes limit order option trades for the general public.
A)True
B)False
Answer: True
Q2) A put option increases in value when the stock price decreases.
A)True
B)False
Answer: True
Q3) An investor who owns a call option can close out the position by any of the following types of transactions except
A) exercise
B) offset
C) expiring out-of-the-money
D) buying a put
E) none of the above
Answer: D
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Page 4
Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) Holding everything else constant, put options are more expensive in periods of high interest rates.
A)True
B)False
Answer: False
Q2) What is the intrinsic value of the December 115 put?
A) 1.75
B) 0.00
C) 3.90
D) 3.00
E) none of the above
Answer: A
Q3) A stock is equivalent to a long call, short put and long risk-free bond.
A)True
B)False
Answer: True
Q4) At expiration the call price must converge to the stock price.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) If the binomial model is extended to multiple periods for a fixed option life, which of the following adjustments must be made?
A) the up and down factors must be increased
B) the risk-free rate must be increased
C) the up and down factors and the risk-free rate must be decreased
D) the initial stock price must be proportionately reduced
E) none of the above
Q2) 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
Q3) When puts are priced with the binomial model, which of the following is true?
A) the puts must be American
B) the puts cannot be properly hedged
C) the puts will violate put-call parity
D) the hedge ratio is one throughout the tree
E) none of the above
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6
Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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Sample Questions
Q1) Which of the following is not correct about a call's gamma?
A) it is the same as a put's gamma
B) it is large when the call is at-the-money
C) it can be viewed as a measure of the risk of the delta
D) it is a source of risk that can be hedged only by using another option
E) none of the above
Q2) If the simple return on a Treasury bill is 8.5 percent, the risk-free rate in the Black-Scholes-Merton model is
A) 8.77 percent
B) 8.93 percent
C) 8.55 percent
D) 8.20 percent
E) none of the above
Q3) Which of the following assumptions of the Black-Scholes-Merton model is not correct?
A) the stock volatility is constant
B) the stock return follows a normal distribution
C) there are no transaction costs
D) there are no taxes
E) none of the above
Page 7
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) To maximize profits on a call purchase, one should hold the position for as short a time as possible.
A)True B)False
Q2) What is the breakeven stock price at expiration on the transaction described in problem 1?
A) $32.89
B) $30.00
C) $27.11
D) $32.15
E) there is no breakeven
Q3) A synthetic put is always less expensive than a synthetic call.
A)True
B)False
Q4) An investor can construct a synthetic put by buying a call and selling short a stock. A)True B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) Suppose you wish to construct a ratio spread using the March and June 50 calls. You want to buy 100 June 50 call contracts. How many March 50 calls would you sell?
A) 105
B) 95
C) 100
D) 57
E) none of the above
Answer questions 10 and 11 about a calendar spread based on the assumption that stock prices are expected to remain fairly constant. Use the June/March 50 call spread. Assume one contract of each.
Q2) A collar gives downside protection, leaving the upside open.
A)True
B)False
Q3) One of the risks of a calendar spread is that the intrinsic values may be different. A)True
B)False
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Chapter 8: Structure of Forward and Futures Markets
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61 Flashcards
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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) Which of the following is not a forward contract?
A) a long-term employment contract at a fixed salary
B) an automobile lease non-cancelable for three years
C) a rain check
D) a signed contract to buy a house in six months
E) none of the above
Q3) Options on futures have been trading since
A) 1973
B) 1982
C) 1966
D) 1936
E) none of the above
Q4) Very few futures contracts are terminated in delivery of the underlying commodity or security.
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) Suppose you buy a futures contract at $150. If the futures price changes to $147, what is its value an instant before it is marked-to-market?
A) 0
B) $3
C) -$3
D) it is impossible to tell
E) none of the above
Q2) The value of a long position in a forward contract at expiration is
A) the spot price plus the original forward price
B) the spot price minus the original forward price
C) the original forward price discounted to expiration
D) the spot price minus the original forward price discounted to expiration
E) none of the above
Q3) A futures contract can have negative value.
A)True
B)False
Q4) As soon as a futures contract is marked to market, its value is zero.
A)True
B)False
11
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) The implied interest rate based on Treasury bond carry arbitrage will decrease when the cheapest-to-deliver bond price increases, everything else held constant.
A)True
B)False
Q2) A deliverable Treasury bond has accrued interest of 3.42 per $100, a coupon of 9.5 percent, a price of 135 and a conversion factor of 1.195. The futures price is 112.25. What is the invoice amount?
A) 137.56
B) 143.64
C) 161.33
D) 134.14
E) none of the above
Q3) Transaction costs in program trading are so small that they are not much of a factor.
A)True
B)False
Q4) The implied repo rate is the return on an overnight repurchase agreement.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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60 Flashcards
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Sample Questions
Q1) A strengthening of the basis means
A) the spot price rises more than the futures price
B) the futures price falls more than the spot price
C) a short hedger benefits
D) all of the above
E) none of the above
Q2) The liquidity of the futures contract used in a hedge is very important to the hedger.
A)True
B)False
Q3) Since it states that systematic risk cannot be eliminated, modern portfolio theory does not allow for stock index futures contracts.
A)True
B)False
Q4) A short hedge is one in which
A) the margin requirement is waived
B) the hedger is short futures
C) the hedger is short in the spot market
D) the futures price is lower than the spot price
E) none of the above
Chapter 12: Swaps
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Sample Questions
Q1) An interest rate swap with both sides paying a floating rate is called a
A) plain vanilla swap
B) two-way swap
C) floating swap
D) spread swap
E) basis swap
Q2) Currency swap volume is greater than equity swap volume.
A)True
B)False
Q3) The fixed rates on a currency swap are the same as the fixed rates on plain vanilla interest rate swaps in the respective currencies.
A)True
B)False
Q4) Interest rate swaps can be used for all of the following purposes except:
A) to borrow at the prime rate
B) to convert a fixed-rate loan into a floating-rate loan
C) to convert a floating-rate loan into a fixed-rate loan
D) to speculate on interest rates
E) to hedge interest rate risk
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) When pricing interest rates in the Black model, the underlying is the forward rate.
A)True
B)False
Q2) The advantage of a collar over a cap is
A) it lowers the out-of-pocket cost
B) it offers the possibility of greater returns
C) it eliminates the risk
D) it has lower transaction costs
E) none of the above
Q3) Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap. The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to
A) computing the Black-Scholes-Merton option call price
B) computing the net present value
C) computing the internal rate of return*
D) computing the Black commodity option call price
E) computing the WACC
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) If the stock price is currently 36, the exercise price is 35 and the stock ends up at 44, the value of an asset-or-nothing option at expiration is
A) 35
B) 8
C) 9
D) 44
E) none of the above
Q2) Modified lookback options fix the exercise price and replace the expiration price of the asset with the maximum or minimum price.
A)True
B)False
Q3) Barrier options either begin or end when the stock hits a certain price.
A)True
B)False
Q4) The cost of portfolio insurance is the return foregone if the market moves up. A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Appplications
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Sample Questions
Q1) Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.
A)True
B)False
Q2) Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.
A) the probability is 5 percent that the firm will lose at least $5 million in one year
B) the probability is at least 5 percent that the firm will lose $5 million in one year
C) the probability is 5 percent that the firm will lose $5 million in one year
D) the probability is less than 5 percent that the firm will lose $5 million in one year
E) none of the above
Q3) Credit risk is the uncertainty of a firm's value or cash flow that is associated with movements in an underlying source of risk.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) The basic premise behind FAS 133 is that derivatives transactions must be marked to market and recorded somewhere in the financial statements.
A)True
B)False
Q2) The front office refers to
A) the compliance office
B) the traders who engage in derivatives transactions
C) legal counsel
D) the risk management function
E) senior management
Q3) 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
Q4) Dealers typically have more sophisticated risk management operations than end users.
A)True
B)False
Page 18
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