IMC Financial Analysis & Derivatives

Question 1

What does the Price-to-Earnings (P/E) ratio measure?

Accepted Answer

The market price of a share divided by earnings per share, indicating how much investors pay for each pound of earnings

Answer

The profitability of a company relative to its assets

Answer

The ratio of dividends paid to total earnings

Answer

The ratio of a company's market value to its book value

Question 2

What is 'discounted cash flow' (DCF) analysis?

Accepted Answer

A valuation method that estimates the present value of future expected cash flows using an appropriate discount rate

Answer

Analysis of a company's historical cash expenditure

Answer

A method for calculating a bond's current yield

Answer

An analysis of management fees charged by investment funds

Question 3

What is a 'forward contract' in derivatives?

Accepted Answer

An agreement to buy or sell an asset in the future at a price agreed today, traded over-the-counter (OTC)

Answer

A contract to buy shares on the current day's close

Answer

An agreement to lend money at a future date

Answer

A regulatory contract for forward-looking risk reporting

Question 4

What is the key difference between a 'futures contract' and a 'forward contract'?

Accepted Answer

Futures are standardised, exchange-traded, and cleared centrally; forwards are customised OTC contracts with counterparty risk

Answer

Futures have no expiry date; forwards expire daily

Answer

Futures are only for commodities; forwards are only for currencies

Answer

Futures require full upfront payment; forwards require no upfront payment

Question 5

What is a 'call option' and what is the maximum loss for the buyer?

Accepted Answer

The right to buy an asset at a strike price before expiry; maximum loss is the premium paid

Answer

The right to sell an asset at a strike price; maximum loss is unlimited

Answer

The obligation to buy an asset; maximum loss is the full asset value

Answer

The right to call in a loan; maximum loss is the interest foregone

Question 6

What is a 'put option' and when would an investor buy one?

Accepted Answer

The right to sell an asset at a strike price before expiry; bought to profit from or hedge against a price fall

Answer

An option to put money into a savings account

Answer

An obligation to sell an asset

Answer

An option that pays out when volatility falls