CSC - Canadian Securities Course Derivatives and Risk Management Questions and Answers

Question 1

An investor purchases a call option on XYZ stock with a strike price of $50 for a premium of $3 per share.
At the time of expiry, XYZ stock is trading at $58.
What is the intrinsic value of the option per share?

Accepted Answer

$8

Answer

$5

Answer

$3

Answer

$0

Question 2

Which of the following BEST describes a key difference between a forward contract and a futures contract?

Accepted Answer

Futures contracts have standardized terms and are traded on an exchange, minimizing counterparty risk.

Answer

Futures contracts are customized agreements, while forward contracts are standardized.

Answer

Forward contracts are traded on an exchange, whereas futures contracts are traded over-the-counter (OTC).

Answer

Forward contracts are marked-to-market daily, while futures contracts are settled only at maturity.

Question 3

A portfolio manager is concerned about rising interest rates negatively impacting the value of a fixed-rate bond portfolio. To hedge this risk, the manager could enter into an interest rate swap. Which position should the manager take in the swap?

Accepted Answer

Pay a fixed rate and receive a floating rate.

Answer

Pay a floating rate and receive a fixed rate.

Answer

Pay a floating rate and receive a floating rate.

Answer

Pay a fixed rate and receive a fixed rate.

Question 4

An investor who is bullish on a stock believes its price will rise significantly. Which of the following option strategies offers limited risk and unlimited potential profit?

Accepted Answer

Buying a call option

Answer

Writing (selling) a call option

Answer

Buying a put option

Answer

Writing (selling) a put option

Question 5

Which of the following scenarios describes the primary motivation for a speculator using derivatives?

Accepted Answer

An investor buying S&P/TSX 60 Index futures because they believe the overall market is undervalued and will rise.

Answer

A corn farmer selling corn futures to lock in a price for their upcoming harvest.

Answer

A Canadian exporter buying a currency forward to hedge against a rise in the Canadian dollar.

Answer

A corporation entering an interest rate swap to convert its variable-rate debt to a fixed rate.

Question 6

The premium of an option is composed of its intrinsic value and its time value. If a put option is 'at-the-money,' what constitutes its entire premium?

Accepted Answer

Time value only

Answer

Intrinsic value only

Answer

Neither intrinsic value nor time value

Answer

An equal combination of intrinsic and time value