Sample Questions and Answers
A forward contract is an agreement to:
Buy or sell an asset at a future date for a price agreed upon today.
B. Exchange one asset for another at the current market price.
C. Protect against price movements using insurance.
D. Enter a standardized contract traded on an exchange.
Answer: A
Which of the following is true about futures contracts?
They are over-the-counter contracts.
B. They are marked to market daily.
C. They involve payment at the end of the contract.
D. They have no margin requirements.
Answer: B
What is the main purpose of a swap agreement?
To hedge risk or speculate on interest rate or currency movements.
B. To acquire ownership of a physical asset.
C. To exchange one physical good for another.
D. To lock in a fixed rate for a loan repayment.
Answer: A
Which of the following is considered an alternative investment?
Stocks
B. Bonds
C. Private equity
D. Mutual funds
Answer: C
The intrinsic value of a call option is calculated as:
Strike price minus the stock price.
B. Stock price minus the strike price.
C. The premium paid for the option.
D. The difference between strike price and the risk-free rate.
Answer: B
What is the maximum loss for a buyer of a call option?
The strike price.
B. The premium paid.
C. The difference between the strike price and the asset price.
D. Unlimited loss.
Answer: B
In which of the following markets are derivatives most commonly traded?
Commodities markets
B. Stock markets
C. Bond markets
D. Over-the-counter markets
Answer: D
Which of the following is NOT a characteristic of hedge funds?
High liquidity
B. Limited investor access
C. High minimum investment requirements
D. Active management
Answer: A
The payoff from a short put option occurs when:
The underlying asset price increases.
B. The underlying asset price decreases.
C. The option is exercised and expires in the money.
D. The option expires out of the money.
Answer: D
A portfolio is hedged with derivatives to:
Maximize profits.
B. Eliminate all risks.
C. Protect against adverse price movements.
D. Speculate on market movements.
Answer: C
Which of the following is a key risk of investing in alternative investments?
High liquidity
B. High transparency
C. Limited regulation
D. Low management fees
Answer: C
The notional value of a derivative contract refers to:
The market price of the underlying asset.
B. The total value of the derivative.
C. The nominal or face value used to calculate payments.
D. The premium paid to enter the contract.
Answer: C
What is the primary difference between forward and futures contracts?
Futures are standardized, while forwards are customized.
B. Forwards are traded on exchanges, while futures are over-the-counter.
C. Futures involve no margin, while forwards do.
D. Forwards are marked to market daily, while futures are not.
Answer: A
Which of the following best describes a hedge fund’s lock-up period?
The time required for the fund to be audited.
B. A period during which investors cannot withdraw funds.
C. The time needed to start trading derivatives.
D. The duration of a futures contract.
Answer: B
What does a long position in a futures contract mean?
The investor expects prices to fall.
B. The investor expects prices to rise.
C. The investor is selling the futures contract.
D. The investor is closing the position.
Answer: B
Which of the following best describes private equity investments?
Investments in publicly traded companies.
B. Investments in early-stage or private companies.
C. Short-term investments in derivatives.
D. Fixed-income investments in government securities.
Answer: B
What is a credit default swap (CDS)?
A type of bond issued by companies.
B. A contract that insures against credit risk.
C. A forward contract for credit repayments.
D. A swap that exchanges variable interest rates.
Answer: B
Which of the following is a common use of derivatives?
To increase liquidity in financial markets.
B. To hedge risk or speculate on price movements.
C. To issue corporate bonds.
D. To directly purchase physical commodities.
Answer: B
Which of the following represents a real estate investment?
Hedge funds
B. REITs (Real Estate Investment Trusts)
C. Commodities
D. Derivatives
Answer: B
A put option provides the buyer with:
The obligation to sell an asset.
B. The right to buy an asset.
C. The right to sell an asset.
D. The obligation to buy an asset.
Answer: C
What is the purpose of collateral in derivatives trading?
To prevent losses entirely.
B. To act as a performance guarantee.
C. To earn interest during the contract term.
D. To eliminate counterparty risk.
Answer: B
Alternative investments are generally characterized by:
High liquidity and regulation.
B. Low volatility and returns.
C. High fees and limited access.
D. Low risk and guaranteed returns.
Answer: C
The primary purpose of a hedge fund strategy is to:
Passively track the stock market.
B. Minimize taxes for investors.
C. Generate high returns with active management.
D. Ensure capital preservation at all costs.
Answer: C
What happens if a call option expires out of the money?
The buyer makes a profit.
B. The option has no value.
C. The seller incurs a loss.
D. The premium is refunded.
Answer: B
Which of the following is an example of a derivative?
Exchange-Traded Fund (ETF)
B. Real Estate Investment Trust (REIT)
C. Call option
D. Corporate bond
Answer: C
Leverage in alternative investments:
Reduces risk exposure.
B. Increases the potential for higher returns and losses.
C. Eliminates the need for collateral.
D. Guarantees positive returns.
Answer: B
Which of the following is NOT a type of swap?
Interest rate swap
B. Commodity swap
C. Inflation swap
D. Stock price swap
Answer: D
A derivative contract derives its value from:
The interest rate of the central bank.
B. The underlying asset.
C. The margin requirements.
D. The credit risk of the seller.
Answer: B
A primary goal of alternative investments is:
To ensure market stability.
B. To provide diversification and risk-adjusted returns.
C. To invest only in equities.
D. To offer low fees and maximum liquidity.
Answer: B
Which of the following statements about derivatives is true?
They always reduce risk.
B. They are only traded on exchanges.
C. They are financial instruments used for hedging or speculation.
D. They require no initial investment.
Answer: C
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