Financial Risk Management and Derivatives MCQs

Welcome to our comprehensive collection of Multiple Choice Questions (MCQs) on Financial Risk Management and Derivatives, a fundamental topic in the field of IC 89 Management Accounting. Whether you're preparing for competitive exams, honing your problem-solving skills, or simply looking to enhance your abilities in this field, our Financial Risk Management and Derivatives MCQs are designed to help you grasp the core concepts and excel in solving problems.

In this section, you'll find a wide range of Financial Risk Management and Derivatives mcq questions that explore various aspects of Financial Risk Management and Derivatives problems. Each MCQ is crafted to challenge your understanding of Financial Risk Management and Derivatives principles, enabling you to refine your problem-solving techniques. Whether you're a student aiming to ace IC 89 Management Accounting tests, a job seeker preparing for interviews, or someone simply interested in sharpening their skills, our Financial Risk Management and Derivatives MCQs are your pathway to success in mastering this essential IC 89 Management Accounting topic.

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Financial Risk Management and Derivatives MCQs | Page 2 of 7

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Q11.
What is a basic feature of derivatives?

a.

It remains unaffected by changes in the underlying price or index.

b.

Its value changes in response to changes in the underlying price or index.

c.

It requires a significant initial investment.

d.

Settlement is always done immediately.

Discuss
Answer: (b).Its value changes in response to changes in the underlying price or index. Explanation:A key feature of derivatives is that their value changes in response to changes in the underlying price or index.
Q12.
What is the usual characteristic of the notional face value in derivatives?

a.

It is the actual market value of the contract.

b.

It represents the maximum potential loss.

c.

It is the value or volume of the contract.

d.

It is irrelevant to the derivative's value.

Discuss
Answer: (c).It is the value or volume of the contract. Explanation:The notional face value in derivatives is usually the value or volume of the contract, serving as a reference amount.
Q13.
What is an Embedded Derivative?

a.

A derivative instrument with high initial investment requirements.

b.

An instrument embedded in another contract known as a host contract.

c.

A derivative traded on organized futures exchanges.

d.

A standardized derivative with fixed features.

Discuss
Answer: (b).An instrument embedded in another contract known as a host contract. Explanation:An Embedded Derivative is an instrument embedded in another contract known as a host contract, which could be a debt, an equity instrument, a lease, an insurance contract, or a sale or purchase contract.
Q14.
What is the purpose of a Commodity Derivative?

a.

To speculate on the price of commodities.

b.

To protect farmers from the risk of crop prices going above the cost price.

c.

To facilitate standardized derivative contracts.

d.

To trade on organized futures exchanges.

Discuss
Answer: (b).To protect farmers from the risk of crop prices going above the cost price. Explanation:A Commodity Derivative is an instrument used to protect farmers from the risk of the price of their crop going below the cost price of their produce.
Q15.
What characterizes Over the Counter (OTC) Derivatives?

a.

They are traded through organized futures exchanges.

b.

They are standardized and have uniform features.

c.

They are privately negotiated derivative contracts not traded through exchanges.

d.

They have fixed settlement dates.

Discuss
Answer: (c).They are privately negotiated derivative contracts not traded through exchanges. Explanation:Over the Counter (OTC) Derivatives are privately negotiated derivative contracts transacted off organized futures exchanges, known for their non-standardized and varied features.
Q16.
What are Exchange-Traded Derivatives?

a.

Non-standardized derivative contracts traded off organized exchanges.

b.

Derivative contracts that derive value from physical commodities.

c.

Standardized derivative contracts in the form of Futures and Options traded on an organized Future Exchange.

d.

Privately negotiated derivative contracts not traded through exchanges.

Discuss
Answer: (c).Standardized derivative contracts in the form of Futures and Options traded on an organized Future Exchange. Explanation:Exchange-Traded Derivatives are standardised derivative contracts, such as Futures and Options, traded on organised Future Exchanges.
Q17.
How are prices typically handled in Exchange-Traded Derivatives?

a.

Prices are manually determined by traders.

b.

Prices are broadcast automatically in real time by the exchange.

c.

Prices are published based on speculative market analysis.

d.

Prices are transparent only for floor-traded contracts.

Discuss
Answer: (b).Prices are broadcast automatically in real time by the exchange. Explanation:In Exchange-Traded Derivatives, prices are usually transparent and often published in real time by the exchange based on all current bids and offers.
Q18.
How do speculators use derivatives?

a.

To hedge against risk.

b.

To acquire risk.

c.

To reduce transparency in the market.

d.

To avoid arbitrage opportunities.

Discuss
Answer: (b).To acquire risk. Explanation:Speculators use derivatives to acquire risk rather than to hedge against risk, entering into derivative contracts to speculate on the value of the underlying asset.
Q19.
What happened in 1995 that brought notoriety to speculative trading in derivatives?

a.

A significant increase in transparency.

b.

Successful arbitrage opportunities.

c.

Nick Leeson's unauthorized investments in futures contracts.

d.

Improved oversight by bank management.

Discuss
Answer: (c).Nick Leeson's unauthorized investments in futures contracts. Explanation:In 1995, Nick Leeson's poor and unauthorized investments in futures contracts at Barings Bank brought notoriety to speculative trading in derivatives, leading to a significant loss and the bankruptcy of the bank.
Q20.
How do investors use derivatives for risk management?

a.

By avoiding the use of derivatives entirely.

b.

By entering into derivative contracts that move in the same direction as their underlying position.

c.

By creating an option ability linked to a specific condition or event, cancelling out the underlying position.

d.

By speculating and making a profit regardless of the movement in the underlying asset.

Discuss
Answer: (c).By creating an option ability linked to a specific condition or event, cancelling out the underlying position. Explanation:Investors use derivatives for risk management by entering into derivative contracts linked to specific conditions or events, cancelling out part or all of their underlying position.
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