Treasury Management Exam Practice Tests
Course Introduction
Treasury Management is a comprehensive course that explores the strategies, tools, and best practices used by organizations to manage their financial assets and liabilities efficiently. The course covers core topics such as cash management, liquidity planning, risk assessment, short-term investments, and the use of banking and financial instruments. Students analyze the roles and responsibilities of a corporate treasury department, the regulatory environment, and evolving technologies impacting treasurers today. Through practical case studies and real-world applications, learners develop the skills necessary to ensure optimal cash flow, minimize financial risks, and support strategic financial decision-making within an organization.
Recommended Textbook Fundamentals of Futures and Options Markets 8th Edition by John C. Hull
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Chapter 1: Introduction
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Q1) Which of the following is NOT true?
A) A call option gives the holder the right to buy an asset by a certain date for a certain price
B) A put option gives the holder the right to sell an asset by a certain date for a certain price
C) The holder of a call or put option must exercise the right to sell or buy an asset
D) The holder of a forward contract is obligated to buy or sell an asset
Answer: C
Q2) Which of the following best describes a central clearing party?
A) It is a trader that works for an exchange
B) It stands between two parties in the over-the-counter market
C) It is a trader that works for a bank
D) It helps facilitate futures trades
Answer: B
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3
Chapter 2: Mechanics of Futures Markets
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Q1) Which of the following are cash settled?
A) All futures contracts
B) All option contracts
C) Futures on commodities
D) Futures on stock indices
Answer: D
Q2) With bilateral clearing, the number of agreements between four dealers, who trade with each other, is
A) 12
B) 1
C) 6
D) 2
Answer: C
Q3) Margin accounts have the effect of
A) Reducing the risk of one party regretting the deal and backing out
B) Ensuring funds are available to pay traders when they make a profit
C) Reducing systemic risk due to collapse of futures markets
D) All of the above
Answer: D
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Page 4
Chapter 3: Hedging Strategies Using Futures
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Q1) A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?
A) Long 192 contracts
B) Short 192 contracts
C) Long 96 contracts
D) Short 96 contracts
Answer: C
Q2) The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?
A) The hedger's position improves
B) The hedger's position worsens
C) The hedger's position sometimes worsens and sometimes improves
D) The hedger's position stays the same
Answer: A
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Chapter 4: Interest Rates
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Q1) Given a choice between 5-year and 1-year instruments most people would choose 5-year instruments when borrowing and 1-year instruments when lending. Which of the following is a theory consistent with this observation?
A) Expectations theory
B) Market segmentation theory
C) Liquidity preference theory
D) Maturity preference theory
Q2) An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding?
A) 11.83%
B) 11.66%
C) 11.77%
D) 11.92%
Q3) Prior to the credit crisis that started in 2007 which of the following was the proxy used by derivatives traders for the risk-free rate?
A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The overnight indexed swap rate
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Page 6
Chapter 5: Determination of Forward and Futures Prices
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Q1) Which of the following is true for a consumption commodity?
A) There is no limit to how high or low the futures price can be, except that the futures price cannot be negative
B) There is a lower limit to the futures price but no upper limit
C) There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative
D) The futures price can be determined with reasonable accuracy from the spot price and interest rates
Q2) An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain?
A) $1,000
B) $400
C) $700
D) $300
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Chapter 6: Interest Rate Futures
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Q1) The time-to-maturity of a Eurodollars futures contract is 4 years, and the time-to-maturity of the rate underlying the futures contract is 4.25 years. The standard deviation of the change in the short term interest rate, = 0.011. What is the difference between the futures and the forward interest rate?
A) 0.105%
B) 0.103%
C) 0.098%
D) 0.093%
Q2) Which of the following day count conventions applies to a US Treasury bond?
A) Actual/360
B) Actual/Actual (in period)
C) 30/360
D) Actual/365
Q3) The conversion factor for a bond is approximately
A) The price it would have if all cash flows were discounted at 6% per annum
B) The price it would have if it paid coupons at 6% per annum
C) The price it would have if all cash flows were discounted at 8% per annum
D) The price it would have if it paid coupons at 8% per annum
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Chapter 7: Swaps
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Q1) A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true?
A) The value of the swap to the company increases
B) The value of the swap to the company decreases
C) The value of the swap can either increase or decrease
D) The value of the swap does not change providing the swap rate remains the same
Q2) When LIBOR is used as the discount rate
A) The value of a swap is worth zero immediately after a coupon payment
B) The value of a swap is worth zero immediately before a coupon payment
C) The value of the floating rate bond underlying a swap is worth par immediately after a coupon payment
D) The value of the floating rate bond underlying a swap is worth par immediately before a coupon payment
Q3) Which of the following is true?
A) OIS rates are less than the corresponding LIBOR rates
B) OIS rates are greater than corresponding LIBOR rates
C) OIS rates are sometimes greater and sometimes less than LIBOR rates
D) OIS rates are equivalent to one-day LIBOR rates
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Chapter 8: Securitization and the Credit Crisis of 2007
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Q1) Which of the following describes a waterfall?
A) A distribution of cash flows to tranches with priority given to tranche with the highest rating
B) A distribution of cash flows to tranches in proportion to their outstanding principals
C) A distribution of losses to tranches so that tranches bear losses in proportion to their outstanding principals
D) None of the above
Q2) Which of the following is true of a non-recourse mortgage?
A) The house buyer, if unable to make payments, can lose all possessions
B) The house buyer has an American style put option on the house
C) The house buyer has a European style put option on the house
D) The lender is less likely to lose money on the mortgage
Q3) Which of the following is true as the correlation between mortgage defaults increases?
A) Equity tranches are almost certain to incur losses
B) Senior tranches become more likely to incur losses
C) The expected number of defaults increases
D) Equity tranches are unaffected
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Chapter 9: Mechanics of Options Markets
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Q1) Which of the following describes a call option?
A) The right to buy an asset for a certain price
B) The obligation to buy an asset for a certain price
C) The right to sell an asset for a certain price
D) The obligation to sell an asset for a certain price
Q2) Which of the following is true?
A) A long call is the same as a short put
B) A short call is the same as a long put
C) A call on a stock plus a stock the same as a put
D) None of the above
Q3) Which of the following describes a long position in an option?
A) A position where there is more than one year to maturity
B) A position where there is more than five years to maturity
C) A position where an option has been purchased
D) A position that has been held for a long time
Q4) Which of the following must post margin?
A) The seller of an option
B) The buyer of an option
C) The seller and the buyer of an option
D) Neither the seller nor the buyer of an option
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Chapter 10: Properties of Stock Options
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Q1) When volatility increases with all else remaining the same, which of the following is true?
A) Both calls and puts increase in value
B) Both calls and puts decrease in value
C) Calls increase in value while puts decrease in value
D) Puts increase in value while calls decrease in value
Q2) Which of the following can be used to create a long position in a European put option on a stock?
A) Buy a call option on the stock and buy the stock
B) Buy a call on the stock and short the stock
C) Sell a call option on the stock and buy the stock
D) Sell a call option on the stock and sell the stock
Q3) When the stock price increases with all else remaining the same, which of the following is true?
A) Both calls and puts increase in value
B) Both calls and puts decrease in value
C) Calls increase in value while puts decrease in value
D) Puts increase in value while calls decrease in value
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Chapter 11: Trading Strategies Involving Options
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Q1) Which of the following is true of a box spread?
A) It is a package consisting of a bull spread and a bear spread
B) It involves two call options and two put options
C) It has a known value at maturity
D) All of the above
Q2) How can a strip trading strategy be created?
A) Buy one call and one put with the same strike price and same expiration date
B) Buy one call and one put with different strike prices and same expiration date
C) Buy one call and two puts with the same strike price and expiration date
D) Buy two calls and one put with the same strike price and expiration date
Q3) Which of the following describes a covered call?
A) A long call option on a stock plus a long position in the stock
B) A long call option on a stock plus a short put option on the stock
C) A short call option on a stock plus a short position in the stock
D) A short call option on a stock plus a long position in the stock
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13
Chapter 12: Introduction to Binomial Trees
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Q1) In a binomial tree created to value an option on a stock, the expected return on stock is
A) Zero
B) The return required by the market
C) The risk-free rate
D) It is impossible to know without more information
Q2) In a binomial tree created to value an option on a stock, what is the expected return on the option?
A) Zero
B) The return required by the market
C) The risk-free rate
D) It is impossible to know without more information
Q3) Which of the following describes how American options can be valued using a binomial tree?
A) Check whether early exercise is optimal at all nodes where the option is in-the-money
B) Check whether early exercise is optimal at the final nodes
C) Check whether early exercise is optimal at the penultimate nodes and the final nodes
D) None of the above
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Chapter 13: Valuing Stock Options: the Bsm Model
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Q1) Which of the following is assumed by the Black-Scholes-Merton model?
A) The return from the stock in a short period of time is lognormal
B) The stock price at a future time is lognormal
C) The stock price at a future time is normal
D) None of the above
Q2) What is the number of trading days in a year usually assumed for equities?
A) 365
B) 252
C) 262
D) 272
Q3) What does N(x) denote?
A) The area under a normal distribution from zero to x
B) The area under a normal distribution up to x
C) The area under a normal distribution beyond x
D) The area under the normal distribution between -x and x
Q4) The volatility of a stock is 18% per year. What is the volatility per month?
A) 1.5%
B) 3.0%
C) 5.2%
D) None of the above
Page 15
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Chapter 14: Employee Stock Options
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Q1) When an employee leaves the company which of the following is usually true?
A) All outstanding employee stock options are forfeited
B) Out-of the money employee stock options are forfeited
C) All options which have vested are forfeited
D) All options are retained
Q2) When an employee stock option is exercised, which of the following is usually true?
A) The employee pays the market price for the shares and the company refunds the difference between the market price and the strike price
B) The company or the company's agent buys stock in the market for the employee
C) The company issues more shares and sells them to the employee for the strike price
D) The employee cannot immediately sell the shares
Q3) Which of the following increases the expected life of employee stock options?
A) An increase in the vesting period
B) An increase in employee turnover
C) A fast growth rate for the stock price
D) A tendency for employees to exercise earlier than in the past
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16
Chapter 15: Options on Stock Indices and Currencies
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Q1) A European at-the-money call option on a currency has four years until maturity. The exchange rate volatility is 10%, the domestic risk-free rate is 2% and the foreign risk-free rate is 5%. The current exchange rate is 1.2000. What is the value of the option?
A) 0.98N(0.25)-1.11(0.05)
B) 0.98N(-0.3)-1.11N(-0.5)
C) 0.98N(-0.5)-1.11N(-0.7)
D) 0.98N(0.10)-1.11N(0.06)
Q2) Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be received?
A) Buy a put and sell a call on the currency with the strike price of the put higher than that of the call
B) Buy a put and sell a call on the currency with the strike price of the put lower than that of the call
C) Buy a call and sell a put on the currency with the strike price of the put higher than that of the call
D) Buy a call and sell a put on the currency with the strike price of the put lower than that of the call
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Chapter 16: Futures Options
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Q1) Which of the following are true?
A) Futures options are usually European
B) Futures options are usually American
C) Both American and European futures options trade actively are exchanges
D) Both American and European futures options trade actively in the OTC market
Q2) A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in the next six months. The risk-free interest rate is 6%. What is the value of a six month call option with a strike price of 39 cents?
A) 5.00 cents
B) 2.91 cents
C) 3.00 cents
D) 4.21 cents
Q3) Which of the following is acquired (in addition to a cash payoff) when the holder of a call futures exercises?
A) A long position in a futures contract
B) A short position in a futures contract
C) A long position in the underlying asset
D) A short position in the underlying asset
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Chapter 17: The Greek Letters
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Q1) Which of the following could NOT be a delta-neutral portfolio?
A) A long position in call options plus a short position in the underlying stock
B) A short position in call options plus a short position in the underlying stock
C) A long position in put options and a long position in the underlying stock
D) A long position in a put option and a long position in a call option
Q2) The risk-free rate is 5% and the dividend yield on an index is 2%. Which of the following is the delta with respect to the index of a one-year futures on the index?
A) 0.98
B) 1.05
C) 1.03
D) 1.02
Q3) Which of the following is true for a call option on a non-dividend-paying stock?
A) If the option is at the money (stock price equals strike price) it must have a delta of 0.5
B) If the strike price equals the forward price of the stock, it must have a delta of 0.5
C) If the option has a delta of 0.5, it must be out of the money
D) If the option has a delta of 0.5, it must be in of the money
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Chapter 18: Binomial Trees in Practice
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Q1) For an option on futures, the volatility is 35%, the time step is three months, and the risk-free rate is 5%. What is the Cox, Ross, Rubinstein parameter, p?
A) 0.52
B) 0.46
C) 0.48
D) 0.50
Q2) How many different paths are there through a Cox-Ross-Rubinstein tree with four-steps?
A) 5
B) 9
C) 12
D) 16
Q3) Which of the following is true for u in a Cox-Ross-Rubinstein binomial tree?
A) It depends on the interest rate and the volatility
B) It depends on the volatility but not the interest rate
C) It depends on the interest rate but not the volatility
D) It depends on neither the interest rate nor the volatility
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Chapter 19: Volatility Smiles
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Q1) Which of the following is true?
A) The volatility skew for equities is much more pronounced now than it was in 1985
B) The volatility skew for equities has a positive gradient
C) The volatility skew for equities is consistent with the Black-Scholes-Merton model
D) The volatility skew for equities is similar to that for foreign currencies
Q2) If the volatility implied from an at-the-money put currency option were used to price other put options on the currency, which of the following would be true?
A) Out-of-the money and in-the-money prices would be too high
B) Out-of-the money and in-the-money prices would be too low
C) Out-of-the-money option prices would be too high and in-the-money option prices would be too low
D) Out-of-the-money option prices would be too low and in-the-money option prices would be too high
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21
Chapter 20: Value at Risk
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Q1) Which of the following is true?
A) Cash flow mapping is a way of calculating the present value of cash flows
B) Cash flow mapping is used to handle interest rate exposures in the model building approach
C) Cash flow mapping is used to handle interest rate exposures in the historical simulation approach
D) None of the above
Q2) The gain from a project is equally likely to have any value between -$0.15 million and +$0.85 million. What is the 99% expected shortfall?
A) $0.145 million
B) $0.14 million
C) $0.13 million
D) $0.10 million
Q3) The 10-day VaR is often assumed to be which of the following?
A) The 1-day VaR multiplied by 10
B) The 1-day VaR multiplied by the square root of 10
C) The 1-day VaR divided by 10
D) The 1-day VaR divided by the square root of 10
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Chapter 21: Interest Rate Options
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Q1) In a cap with quarterly reset dates, the cap rate is 3.5% per annum and the notional principal is $1 million. Suppose that the LIBOR rate is 4.0% per annum for a particular 3-month period. What is the approximate payoff at the end of the 3 months?
A) $10,000
B) $5,000
C) $2,500
D) $1,250
Q2) A floating-rate lender wants to use a collar as a hedge. Which of the following is appropriate?
A) Buy a cap and sell a floor
B) Buy a cap and buy a floor
C) Sell a cap and sell a floor
D) Sell a cap and buy a floor
Q3) Which of the following is true?
A) A cap is a portfolio of put options on interest rates
B) A cap is a put option on a coupon-bearing bond
C) A cap is a call option on a coupon-bearing bond
D) None of the above
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Chapter 22: Exotic Options and Other Nonstandard Products
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Q1) When can Bermudan options be exercised?
A) Any time during the life of the options
B) Any time after a certain date up to the end of the life
C) Any time before a certain date or at the end of the option's life
D) On dates specified at the start of the option
Q2) An Asian option is a term used to describe which of the following?
A) An option where the payoff depends on whether a barrier is hit
B) An option where the payoff depends on the average value of a variable over a period of time
C) An option that trades on an exchange in the Far East
D) Any option with a nonstandard payoff
Q3) A binary option pays of $100 if a stock price is greater than its current value in three months. The risk-free rate is 3% and the volatility is 40%. Which of the following is its value?
A) 99.25N(-0.1375)
B) 99.25N(0.1375)
C) 99.25N(-0.0625)
D) 99.25N(0.0625)
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Chapter 23: Credit Derivatives
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Q1) What is the number of companies underlying the CDX NA IG index?
A) 50
B) 75
C) 100
D) 125
Q2) If the CDS-bond basis is X minus Y, what are X and Y?
A) X is the CDS spread and Y is the excess of the bond yield over the swap rate
B) X is the excess of the bond yield over the swap rate and Y is the CDS spread
C) X is the CDS spread and Y is the excess of the bond yield over the Treasury rate
D) X is the excess of the bond yield over the Treasury rate and Y is the CDS spread
Q3) A hazard rate is 1% per annum. What is the probability of a default during the first two years?
A) 2.00%
B) 2.02%
C) 1.98%
D) 1.96%
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Chapter 24: Weather, Energy, and Insurance Derivatives
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Q1) Which of the following is NOT true about electricity?
A) Supply and demand for electricity are matched within 140 control areas in the US, then excess power sold to other control areas
B) The ability to sell excess power is constrained by transmission capacity
C) Electricity is a commodity that can be easily stored
D) Air conditioning is a big use of electricity
Q2) Which of the following is the basis for calculating HDD and CDD?
A) The average temperature during the day
B) The average of the highest and lowest temperature during the day
C) The temperature at 12 noon during the day
D) None of the above
Q3) Which of the following are products refined from crude oil?
A) Heating oil
B) Gasoline
C) Kerosene
D) All of the above
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