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 3 of 7

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Q21.
What is one purpose of providing leverage in derivatives trading?

a.

To minimize potential losses.

b.

To create an option ability.

c.

To contain exposure to the underlying.

d.

To amplify the impact of small movements in the underlying value.

Discuss
Answer: (d).To amplify the impact of small movements in the underlying value. Explanation:Providing leverage in derivatives trading allows a small movement in the underlying value to cause a large difference in the value of the derivative.
Q22.
In what situation do investors use derivatives for speculation?

a.

When they want to hedge currency risks.

b.

When they need to contain exposure to the underlying.

c.

When they expect the value of the underlying asset to move as they anticipate.

d.

When they aim to avoid large losses.

Discuss
Answer: (c).When they expect the value of the underlying asset to move as they anticipate. Explanation:Investors use derivatives for speculation when they anticipate the value of the underlying asset to move in a way they expect.
Q23.
Why might a business firm use derivatives?

a.

To speculate on market trends.

b.

To hedge currency risks and inventory risks.

c.

To amplify potential losses.

d.

To avoid any form of leverage.

Discuss
Answer: (b).To hedge currency risks and inventory risks. Explanation:Business firms use derivatives to hedge currency risks and inventory risks, managing their exposure to market fluctuations.
Q24.
What is the adverse effect regarding the use of derivatives?

a.

Large returns in adverse situations.

b.

Losses due to borrowing or leverage.

c.

Minimal impact on underlying asset prices.

d.

Reduction of potential profits.

Discuss
Answer: (b).Losses due to borrowing or leverage. Explanation:The adverse effect with the use of derivatives, especially with leverage or borrowing, can result in large losses in adverse situations.
Q25.
What are the two classes of derivative contracts?

a.

Lock and Option derivatives

b.

Exchange Traded and Privately traded derivatives

c.

Forward and Swap derivatives

d.

Equity and Commodity derivatives

Discuss
Answer: (b).Exchange Traded and Privately traded derivatives Explanation:The two classes of derivative contracts are Exchange Traded derivatives (ETD) and Privately traded or OTC derivatives.
Q26.
What is one of the oldest derivatives with a history tracing back to the eighteenth century?

a.

Foreign exchange derivatives

b.

Rice futures

c.

Equity derivatives

d.

Interest rate derivatives

Discuss
Answer: (b).Rice futures Explanation:One of the oldest derivatives is rice futures, which has been traded on the Dojima Rice Exchange since the eighteenth century.
Q27.
How are derivatives categorised based on their pay-off profile?

a.

Lock and Option products

b.

Exchange Traded and Privately traded

c.

Forward and Swap products

d.

Hedge and Speculation products

Discuss
Answer: (a).Lock and Option products Explanation:Derivatives can be broadly categorised as "Lock" or "Option" products based on their pay-off profile.
Q28.
What is the primary distinction between "Lock" and "Option" products?

a.

Lock products provide the right, but not the obligation to exercise the contract.

b.

Option products compel the contractual parties to the terms over the life of the contract.

c.

Lock products are traded on exchanges, while Option products are traded OTC.

d.

Option products provide the right, but not the obligation to exercise the contract.

Discuss
Answer: (d).Option products provide the right, but not the obligation to exercise the contract. Explanation:Option products provide the buyer the right, but not the obligation to exercise the contract under the terms specified.
Q29.
How are derivatives commonly used for risk management?

a.

To speculate and make a financial bet.

b.

As a form of insurance against undesired events.

c.

To amplify potential losses.

d.

To increase profit through speculation.

Discuss
Answer: (b).As a form of insurance against undesired events. Explanation:Derivatives are commonly used for risk management by acting as a form of "insurance" against undesired events, providing offsetting compensation.
Q30.
In finance, where are Forward contracts, Swap, and different types of options regularly traded?

a.

On organised exchanges

b.

In over-the-counter markets

c.

On commodity exchanges

d.

In foreign exchange markets

Discuss
Answer: (b).In over-the-counter markets Explanation:Forward contracts, Swap, and different types of options are regularly traded outside exchanges by financial institutions, banks, and their corporate clients in over-the-counter markets.
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