FM FM Derivatives and Options 2

Question 1

An interest rate swap in which Party A pays a fixed rate and receives a floating rate results in Party A having:

Accepted Answer

Fixed-to-floating exposure, benefiting if floating rates rise

Answer

Paying fixed and receiving floating means Party A benefits when floating rates rise above the fixed rate.

Question 2

The swap rate in a plain vanilla interest rate swap is the fixed rate that makes the swap's initial value:

Accepted Answer

Equal to zero (fair swap)

Answer

The fixed swap rate is set so that the present value of fixed payments equals the present value of expected floating payments, making initial value zero.

Question 3

A futures contract differs from a forward contract primarily because futures are:

Accepted Answer

Exchange-traded and marked to market daily

Answer

Futures are standardized, exchange-traded, and subject to daily mark-to-market settlement, which virtually eliminates counterparty risk.

Question 4

The intrinsic value of a put option with strike K and current asset price S is:

Accepted Answer

max(K − S, 0)

Answer

Put intrinsic value is max(K − S, 0): positive when the asset is below the strike, zero otherwise.

Question 5

On the FM exam, a 'cap' is a series of interest rate call options (caplets) used by borrowers to:

Accepted Answer

Limit the maximum interest rate paid on a floating-rate loan

Answer

An interest rate cap protects a floating-rate borrower from rising rates by providing payoffs whenever the reference rate exceeds the cap rate.

FM - Certifications in Financial Mathematics Practice Test

FM - Certifications in Financial Mathematics Practice Test

FM FM Derivatives and Options 2