Insurance
and Risk Management Practice Questions
Course Introduction
Insurance and Risk Management explores the fundamental concepts, principles, and practices involved in identifying, evaluating, and mitigating various types of risks faced by individuals and organizations. The course covers the role of insurance as a key risk management tool, examining different types of insurance products, policies, and the underlying legal and regulatory frameworks. Students will learn risk assessment techniques, methods for transferring or retaining risk, and the decision-making processes involved in developing a comprehensive risk management strategy. Emphasis is placed on both theoretical concepts and practical applications in personal, commercial, and institutional contexts.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
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16 Chapters
781 Verified Questions
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Chapter 1: Introduction
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Sample Questions
Q1) Short selling is a high risk activity.
A)True
B)False
Answer: True
Q2) Which of the following instruments are contracts but are not securities
A)stocks
B)options
C)swaps
D)a and b
E)b and c
Answer: E
Q3) A market in which the price equals the true economic value
A)is risk-free
B)has high expected returns
C)is organized
D)is efficient
E)all of the above
Answer: D
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Page 3
Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Indices measuring options market activity are simple to construct and widely quoted.
A)True
B)False
Answer: False
Q2) The number of option contracts outstanding at any given time is called the open interest.
A)True
B)False
Answer: True
Q3) All of the following are forms of options except
A)convertible bonds
B)callable bonds
C)warrants
D)mutual funds
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) Even if there are no dividends on the stock,American put-call parity will not be the same as European put-call parity.
A)True
B)False
Answer: True
Q2) What is the lowest possible value of a European put?
A)Max(0,X - S<sub>0</sub>)
B)X(1 + r)<sup>-T</sup>
C)Max[0,S<sub>0</sub> - X(1 + r)<sup>-T</sup>]
D)Max[0,X(1 + r)<sup>-T</sup> - S<sub>0</sub>)]
E)none of the above
Answer: D
Q3) The time value of a call is greatest when the stock price is very high.
A)True
B)False
Answer: False
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) Which of the following are not path-dependent options when the stock pays a constant dividend yield?
A)European calls and European puts
B)European calls and American puts
C)American puts and European puts
D)American puts and European calls
E)none of the above
Q2) Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.
A)True
B)False
Q3) What is the theoretical value of the call?
A)8.00
B)4.39
C)5.15
D)5.36
E)none of the above
Q4) In a recombining binomial model with n periods,the number of outcomes is n + 1.
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) 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
Q2) The binomial model always gives the same option price as the Black-Scholes-Merton model.
A)True
B)False
Q3) What value does the Black-Scholes-Merton model predict for the call? (Due to differences in rounding your calculations may be slightly different."none of the above" should be selected only if your answer is different by more than 10 cents. )
A)5.35
B)1.10
C)4.73
D)6.50
E)none of the above
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) If the transaction described in problem 6 is closed out when the option has three months to go and the stock price is at $36,what is the investor's profit?
A)$600
B)$311
C)$889
D)$229
E)none of the above
Q2) 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
Q3) Which of the following transactions does not profit in a strong bull market.
A)a short put
B)a covered call
C)a protective put
D)a synthetic call
E)none of the above
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Page 8
Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) Early exercise is a disadvantage in which of the following transactions?
A)short box spread
B)put bear spread
C)long strip (2 puts and 1 call)
D)long strap (2 calls and 1 put)
E)none of the above
Q2) Buying a put money spread is a bearish strategy.
A)True
B)False
Q3) Which of the following strategies does not profit in a rising market?
A)put bull spread
B)long straddle
C)collar
D)call bull spread
E)none of the above
Q4) A box spread is a good strategy to use if high volatility is expected.
A)True
B)False
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Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) Position traders are futures traders who take very large positions.
A)True
B)False
Q2) Firms that solicit futures trading business from the public are called Futures Commission Merchants.
A)True
B)False
Q3) The daily settlement procedure is a major difference between futures contracts and forward contracts.
A)True
B)False
Q4) When futures accounts are marked-to-market,an account balance below the maintenance margin must be brought up to the initial margin.
A)True
B)False
Q5) Stock index futures contracts are terminated by delivery the portfolio of stocks represented by the index.
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) Find the forward rate of foreign currency Y if the spot rate is $4.50,the domestic interest rate is 6 percent,the foreign interest rate is 7 percent,and the forward contract is for nine months.
A)$4.458
B)$5.104
C)$4.468
D)$4.532
E)none of the above
Q2) The cost of carry includes the interest lost on the funds tied up in the asset stored. A)True
B)False
Q3) Suppose you buy a one-year forward contract at $65.At expiration,the spot price is $73.The risk-free rate is 10 percent.What is the value of the contract at expiration?
A)$8.00
B)-$8.00
C)$0.00
D)$7.27
E)none of the above
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) How is the cost of a delivery option paid?
A)the long pays the short with a cash settlement
B)the short pays the long with a cash settlement
C)a higher closing futures price
D)a lower closing futures price
E)none of the above
Q2) All of the following are limitations to Fed funds futures arbitrage,except
A)Fed funds rates are determined by Federal Reserve Bank policy
B)basis risk between Fed funds and LIBOR
C)repo rate is variable for the trading horizon
D)settlement is based on average in delivery month
E)transaction costs
Q3) Selling an index futures and holding an undiversified portfolio would eliminate unsystematic risk.
A)True
B)False
Q4) The cheapest bond to deliver is the one that has the lowest spot price.
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) If you plan to issue a liability in the future,you are currently short in the spot market.
A)True
B)False
Q2) In which of the following situations would you use a short hedge?
A)the planned purchase of a stock
B)the planned purchase of commercial paper
C)the planned issuance of bonds
D)the planned repurchase of stock to cover a short position
E)none of the above
Q3) A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.
A)True
B)False
Q4) A hedge that is expected to earn a net profit is called an anticipatory hedge.
A)True
B)False
Q5) The risk of the basis is usually less than the risk of the spot position.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
Q1) By adding a hypothetical notional principal to a swap,one can treat the cash flows like those of a bond.
A)True
B)False
Q2) A currency swap with no notional principal can be used to synthetically convert a bond issued in one currency into a bond issued in another currency.
A)True B)False
Q3) In an interest rate swap,the upcoming floating payment will not be determined until the end of the current settlement period.
A)True
B)False
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
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Page 14
Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) The convention for calculating interest on an interest rate derivative is to multiply the notional principal times the payoff function times 90 over 360 or 365.
A)True
B)False
Q2) Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent.(No days/360 adjustment is necessary and assume a $1 notional principal. )
A)0.12
B)zero
C)0.01
D)0.0090
E)none of the above
Q3) For firms that may need to enter into a swap in the future,a forward swap serves as well as a swaption.
A)True
B)False
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15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) An equity forward contract is
A)a forward contract on LIBOR secured by a stock as collateral
B)a futures contract on a stock index that is not marked-to-market
C)a call option on a stock with greater downside risk than an ordinary call
D)a forward contract whose payoff is determined by a stock or index
E)none of the above
Q2) 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
Q3) 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
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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) Which of the following instruments could be used to execute a delta,gamma and vega hedge?
A)a swap
B)an option
C)a futures
D)an FRA
E)none of the above
Q3) The Monte Carlo simulation method of estimating Value at Risk is one of the most flexible methods because it permits the user to assume any probability distribution.
A)True
B)False
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Page 17
Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Prior to FAS 133,where on the financial statements were derivatives reported?
A)as contingent liabilities
B)as goodwill
C)as intangible assets
D)nowhere because they were off-balance sheet items
E)in Other Comprehensive Income
Q2) Dealers typically have more sophisticated risk management operations than end users.
A)True
B)False
Q3) Legal support for derivatives dealers is done by a compliance officer.
A)True
B)False
Q4) 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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