Derivatives MCQ - Derivatives Section 1

26 Keene Smith, an investor, aims to invest in derivatives that can be classified as forward commitments. Which of the following is she least likely to consider?

A credit default swap (CDS) is a derivative in which the seller provides credit protection to the buyer against the credit risk of a separate party. It is hence classified as a contingent claim. B and C are incorrect because futures contracts and interest rate swaps are classified as forward commitments.

27 Which of the following is most likely to be correct regarding interest rate swaps?

Interest rate swaps are forward commitments that require one party to pay a fixed rate and the other party to pay floating rate during the life of the swap. A and B are incorrect because they are characteristics of credit default swaps.

28 Tim has a portfolio comprising of derivatives, which provide payoffs that are linearly related to the payoffs of the underlying. Which of the following is least likely to be a part of Tim’s portfolio?

Options are contingent claims that provide a one-sided payoff.

29 Which of the following statements is least likely correct about interest rate swaps?

Interest rate swaps are derivatives where two parties agree to exchange a series of cash flows. Typically, one set of cash flows is variable and the other set is variable. Option C is a true statement with respect to call options, not swaps.

30 Which of the following is least likely to be subject to default?

Futures are exchange traded contracts with a credit guarantee and a protection against default. Interest rate swaps and forwards are over-thecounter contracts that are privately negotiated and are subject to default