Derivatives MCQ - Derivatives Section 1

16 Analyst 1: During daily settlement of futures contract the initial margin deposits are refunded to the two parties.
Analyst 2: During daily settlement of futures contract losses are charged to one party and gains credited to the other.
Which analyst’s statement is most likely correct?

During daily settlement losses and gains are collected and distributed to the respective parties.

17 Which of the following statements about options is most accurate?

An option is strictly the right to buy (a call) or the right to sell (a put). It does not provide both choices. Similarly, the right to convert is an obligation, not a right.

18 Which of the following is a characteristic of a put option on the stock?

A put option on a stock provides no guarantee of any change in the stock price. It has an expiration date, and it provides for a fixed price at which the holder can exercise the option, thereby selling the stock.

19 Analyst 1: A credit derivative is a derivative contract in which the seller provides protection to the buyer against the credit risk of a third party.
Analyst 2: A credit derivative is a derivative contract in which the exchange provides a credit guarantee to both the buyer and the seller.
Which analyst’s statement is most likely correct?

A credit derivative is a class of derivative contracts between two parties, a credit protection buyer and a credit protection seller, in which the latter provides protection to the former against a specific credit loss.

20 A corporation has issued 10-year, floating-rate bonds. The treasurer realizes that the interest rates are going to rise and enters into an agreement to receive semi-annual payments based on the 6-month LIBOR and to make semi-annual payments at a fixed rate. This agreement is best described as a(n):

It is a swap because two parties agree to exchange cash flows in the future. Section