Risk Management in Finance
Review Questions
Course Introduction
Risk Management in Finance explores the principles, tools, and techniques used to identify, assess, and mitigate financial risks within organizations and markets. The course covers key topics such as market risk, credit risk, operational risk, and liquidity risk, with a focus on quantitative methods, risk modeling, and regulatory frameworks. Students learn how financial instruments like derivatives and insurance are employed for hedging purposes, how to analyze risk using statistical and computational tools, and how to implement best practices in risk governance. Case studies and real-world scenarios are integrated to develop practical skills in evaluating and managing financial risks in an ever-changing global environment.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
Available Study Resources on Quizplus
16 Chapters
781 Verified Questions
781 Flashcards
Source URL: https://quizplus.com/study-set/3885 Page 2
Chapter 1: Introduction
Available Study Resources on Quizplus for this Chatper
29 Verified Questions
29 Flashcards
Source URL: https://quizplus.com/quiz/77389
Sample Questions
Q1) Arbitrage is a transaction designed to capture profits resulting from market efficiency.
A)True
B)False
Answer: False
Q2) The market value of the derivatives contracts worldwide totals
A)less than a trillion dollars
B)in the hundreds of trillion dollars
C)over a trillion dollars but less than a hundred trillion
D)over quadrillion dollars
E)none of the above
Answer: C
Q3) Options,forwards,swaps,and futures are financial assets.
A)True
B)False
Answer: False
Q4) Speculation is equivalent to gambling.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above. Page 3
Chapter 2: Structure of Options Markets
Available Study Resources on Quizplus for this Chatper
55 Verified Questions
55 Flashcards
Source URL: https://quizplus.com/quiz/77381
Sample Questions
Q1) Indices measuring options market activity are simple to construct and widely quoted.
A)True
B)False
Answer: False
Q2) The exercise price can be set at any desired level on each of the following types of options except
A)FLEX options
B)equity options
C)over-the-counter options
D)all of the above
E)none of the above
Answer: B
Q3) In which city did organized option markets originate?
A)New York
B)Chicago
C)Philadelphia
D)San Francisco
E)none of the above
Answer: B
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Principles of Option Pricing
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77380
Sample Questions
Q1) What is the time value of the November 110 call?
A)0.00
B)4.40
C)1.15
D)3.25
E)none of the above
Answer: C
Q2) Which of the following is the lowest possible value of an American call on a stock with no dividends?
A)Max(0,S<sub>0</sub> - X(1 + r)<sup>-T</sup>)
B)S<sub>0</sub>
C)Max(0,S<sub>0</sub> - X)
D)Max(0,S<sub>0</sub> (1 + r)<sup>-T</sup> - X)
E)none of the above
Answer: A
Q3) The lower bound of a European put on a non-dividend paying stock is lower than the intrinsic value of an American put.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 5
Chapter 4: Option Pricing Models: the Binomial Model
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77379
Sample Questions
Q1) A portfolio that combines the underlying stock and a short position in an option is called
A)a risk arbitrage portfolio
B)a hedge portfolio
C)a ratio portfolio
D)a two-state portfolio
E)none of the above
Q2) If the stock price adjusted for dividends at a continuous rate follows the up and down parameters,the binomial tree will recombine.
A)True
B)False
Q3) 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
Q4) When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 6
Chapter 5: Option Pricing Models: the
Black-Scholes-Merton Model
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77378
Sample Questions
Q1) Which of the following statements about the delta is not true?
A)it ranges from zero to one
B)it converges to zero or one at expiration
C)it is given by N(d1)in the Black-Scholes-Merton model
D)it changes slowly near expiration if the option is at-the-money
E)none of the above
Q2) If the stock price is 44,the exercise price is 40,the put price is 1.54,and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11,the implied volatility will be
A)higher than 0.28
B)lower than 0.28
C)0.28
D)lower than the risk-free rate
E)none of the above
Q3) In the term structure of volatility,the forward volatility is the expected future volatility.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Basic Option Strategies
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77377
Sample Questions
Q1) What is the disadvantage of a strategy of rolling over a covered call to avoid exercise?
A)the call premium is essentially thrown away
B)transaction costs tend to be high
C)the stock will incur losses
D)the call is more expensive when rolled over
E)none of the above
Q2) Both call and put writers have the potential for unlimited losses.
A)True
B)False
Q3) 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
Q4) The maximum loss on a call purchase is the premium on the call.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 8
Chapter 7: Advanced Option Strategies
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77376
Sample Questions
Q1) 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
Q2) An investor who holds a strap (2 calls and 1 put)believes the market is more likely to go up than down.
A)True
B)False
Q3) A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.
A)True
B)False
Q4) What is the profit if the position is held for 90 days and the stock price is $55?
A)-$971
B)-$58
C)-$109
D)-$471
E)none of the above
To view all questions and flashcards with answers, click on the resource link above. Page 9
Chapter 8: The Structure of Forward and Futures Markets
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77375
Sample Questions
Q1) One party to a futures transaction does not bear the risk that the other party will default.
A)True
B)False
Q2) If the initial margin is $5,000,the maintenance margin is $3,500 and your balance is $3,100,how much must you deposit?
A)$1,500
B)$400
C)$1,900
D)0
E)none of the above
Q3) There are no futures contracts on the Dow Jones Industrial Average.
A)True
B)False
Q4) 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
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77374
Sample Questions
Q1) A synthetic put option on futures could be constructed by buying a call option on futures and selling the futures.
A)True
B)False
Q2) The spot price plus the cost of carry equals
A)the convenience yield
B)the expected future spot price
C)the risk premium
D)the futures price
E)none of the above
Q3) Determine the value of a European foreign currency put if the call is at $0.05,the spot rate is $0.5702,the exercise price is $0.59,the domestic interest rate is 5.75 percent,the foreign interest rate is 4.95 percent and the options expire in 45 days.
A)$0.069
B)$0.031
C)$0.050
D)$0.517
E)none of the above
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Futures Arbitrage Strategies
Available Study Resources on Quizplus for this Chatper
48 Verified Questions
48 Flashcards
Source URL: https://quizplus.com/quiz/77388
Sample Questions
Q1) 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
Q2) Determine the amount by which a stock index futures is mispriced if the stock index is at 200,the futures is at 202.5,the risk-free rate is 6.45 percent,the dividend yield is 2.75 percent,and the contract expires in three months.
A)underpriced by 0.64
B)overpriced by 2.5
C)overpriced by 9.76
D)overpriced by 0.64
E)underpriced by 2.5
Q3) The timing option will lead to early delivery if the coupon rate is higher than the repo rate.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 12
Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77387
Sample Questions
Q1) What is the profit on a hedge if bonds are purchased at $150,000,two futures contracts are sold at $72,500 each,then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?
A)-$2,500
B)-$5,500
C)-$500
D)-$3,000
E)none of the above
Q2) 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
Q3) The measure of hedging effectiveness in a minimum variance hedge is the size of profit on the 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
13
To view all questions and flashcards with answers, click on the resource link above.
Chapter 12: Swaps
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77386
Sample Questions
Q1) Use the information in problem 16 to find the fixed rate on an equity swap in which the stock index is at 2,000.
A)5.9 percent
B)5 percent
C)6 percent
D)2.95 percent
E)3.5 percent
Q2) Find the upcoming payment interest payments in a currency swap in which party A pays U.S.dollars at a fixed rate of 5 percent on notional principal of $50 million and party B pays Swiss francs at a fixed rate of 4 percent on notional principal of SF35 million.Payments are annual under the assumption of 360 days in a year,and there is no netting.
A)party A pays $2,500,000,and party B pays SF1,400,000
B)party A pays SF1,400,000,and party B pays $2,500,000
C)party A pays SF1,750,000,and party B pays SF1,400,000
D)party A pays $2,500,000,and party B pays $2,000,000
E)party A pays $50 million,and party B pays SF35 million
Q3) The notional principal is never exchanged in an interest rate swap.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 14
Chapter 13: Interest Rate Forwards and Options
Available Study Resources on Quizplus for this Chatper
49 Verified Questions
49 Flashcards
Source URL: https://quizplus.com/quiz/77385
Sample Questions
Q1) A long interest rate cap is an appropriate strategy for a party that lends money.
A)True
B)False
Q2) In a 12 x 18 FRA,the derivative expires in one year and the underlying matures in 18 months.
A)True
B)False
Q3) An interest rate payer swaption is more like an interest rate put than an interest rate call.
A)True
B)False
Q4) The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.
A)True
B)False
Q5) FRAs,and caps and floors are guaranteed against default.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 15
Chapter 14: Advanced Derivatives and Strategies
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77384
Sample Questions
Q1) 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
Q2) Which of the following is not a type of structured note?
A)range floater
B)inverse floater
C)diff floater
D)reverse floater
E)none of the above
Q3) A diff swap pays off in one currency based on the difference between two interest rates from different countries.
A)True
B)False
Q4) A standard (Black-Scholes)European option is equivalent to a combination of a down-and-out call plus a down-and-out put.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 16
Chapter 15: Financial Risk Management Techniques and Applications
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77383
Sample Questions
Q1) Which of the following is the primary impetus for the growth in the practice of risk management?
A)faster computers
B)better pricing models
C)improved knowledge of risk management
D)tighter government regulation
E)concern over volatility
Q2) 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
Q3) A dealer who engages in derivatives transactions with customers of low credit quality will offer a less attractive rate.
A)True
B)False
Q4) Legal risk is the risk that the government will declare derivatives illegal.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Managing Risk in an Organization
Available Study Resources on Quizplus for this Chatper
50 Verified Questions
50 Flashcards
Source URL: https://quizplus.com/quiz/77382
Sample Questions
Q1) Under SEC rules,derivatives activities must be disclosed in one of three ways.
A)True
B)False
Q2) In which of the following activities is hedge accounting prohibited?
A)hedging an overall portfolio as opposed to an individual transaction
B)using short calls to protect a long asset
C)using long puts to protect an asset
D)hedging a long position with a short futures
E)hedging a swapt with a swaption
Q3) SEC disclosure requirements force companies to reveal how they manage all risks.
A)True
B)False
Q4) 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
To view all questions and flashcards with answers, click on the resource link above. Page 18