A. A security that always guarantees fixed returns
B. An independent financial asset with intrinsic value
C. A financial contract whose value is derived from an underlying asset
D. A loan provided by banks for hedging risk
A derivative derives its value from an underlying asset like stocks, bonds, commodities, interest rates, or currencies.
2. Which of the following is considered the earliest form of derivatives trading in history?
A. Forward contracts on agricultural commodities
B. Credit Default Swaps in the 1990s
C. Options trading on stock exchanges in the 1970s
D. Futures contracts on currencies after Bretton Woods
The earliest form of derivatives were simple forward contracts, especially on agricultural products, used centuries ago to hedge against price uncertainty.
3. The global derivatives market is:
A. Smaller than the equity market
B. Roughly equal to the size of the bond market
C. Limited to commodity trading only
D. Many times larger than global GDP
The notional value of the global derivatives market runs into hundreds of trillions of dollars, making it several times larger than world GDP.
4. Which of the following is NOT an example of an underlying asset in derivatives?
A. Stock indices
B. Fixed bank deposits
C. Interest rates
D. Commodities
Derivatives can be based on stocks, indices, interest rates, commodities, or currencies. Fixed deposits are not used as underlying assets.
5. Organized exchange-based trading of derivatives in India started with:
A. Index futures on NSE in 2000
B. Commodity futures in the 1950s
C. Options trading in 1995
D. Credit default swaps in 2010
NSE introduced index futures in 2000, marking the beginning of formal exchange-traded derivatives in India.
6. Which of the following can be an underlying asset for a derivative contract?
A. Mutual Fund NAV
B. Bank Fixed Deposits
C. Gold only
D. Stocks, indices, commodities, currencies, or interest rates
Derivatives derive value from various underlying assets such as equities, indices, commodities, currencies, and interest rates.
7. Which of the following best describes Exchange-Traded Derivatives (ETDs)?
A. Privately negotiated contracts without standardization
B. Standardized contracts traded on regulated exchanges
C. Customized forward agreements between two banks
D. Informal agreements for currency swaps
ETDs are standardized and traded on exchanges like NSE or BSE, ensuring transparency and lower counterparty risk.
8. Which of the following is a key characteristic of Over-the-Counter (OTC) derivatives?
A. Always settled through a clearing house
B. Traded only on commodity exchanges
C. Customized contracts directly negotiated between parties
D. Standardized and exchange-regulated contracts
OTC derivatives are customized agreements between two parties, flexible but with higher counterparty risk compared to exchange-traded products.
9. Which of the following is an advantage of exchange-traded derivatives over OTC derivatives?
A. Reduced counterparty risk due to clearing house guarantee
B. Greater customization as per party’s requirement
C. Confidentiality of contract terms
D. Ability to avoid margin requirements
Exchange-traded derivatives are cleared by exchanges or clearing corporations, minimizing the default risk between parties.
10. A large corporate wants a highly customized interest rate swap with specific terms. This is most likely executed in:
A. NSE derivatives segment
B. BSE Futures & Options market
C. MCX commodity exchange
D. Over-the-Counter (OTC) market
Customized contracts like interest rate swaps are usually traded OTC as they require flexibility not possible in standardized exchange contracts.
11. Which of the following is NOT a typical participant in the derivatives market?
A. Hedgers
B. Tax Auditors
C. Speculators
D. Arbitrageurs
The main participants in derivatives markets are hedgers, speculators, and arbitrageurs. Tax auditors are not market participants.
12. A farmer enters into a futures contract to sell wheat at a fixed price to protect against a fall in prices. He is acting as a:
A. Speculator
B. Arbitrageur
C. Hedger
D. Regulator
A hedger uses derivatives to protect against adverse price movements in the underlying asset.
13. Which of the following best describes the role of a speculator in the derivatives market?
A. Takes risk in anticipation of profit from price movements
B. Eliminates price risk through hedging
C. Provides regulation for market transparency
D. Ensures settlement of all contracts
Speculators intentionally take risk to earn profits from expected changes in prices of underlying assets.
14. Arbitrage in the derivatives market means:
A. Trading only in commodities for profit
B. Taking speculative positions without risk
C. Investing in mutual funds using derivatives
D. Simultaneous buying and selling to exploit price differences
Arbitrage involves exploiting price discrepancies in different markets or contracts to earn risk-free profits.
15. One of the key economic functions of derivatives is:
A. Creating artificial demand for assets
B. Price discovery and risk management
C. Replacing the need for equity and debt markets
D. Providing tax exemptions to investors
Derivatives help in efficient price discovery, provide hedging opportunities, and allow participants to manage financial risks effectively.
16. Which of the following is NOT a type of derivative contract?
A. Forwards
B. Futures
C. Debentures
D. Swaps
Forwards, futures, options, and swaps are types of derivatives. Debentures are debt instruments, not derivatives.
17. A forward contract is best described as:
A. A customized agreement between two parties to buy/sell at a future date
B. A standardized exchange-traded contract
C. An options contract with premium payment
D. A swap agreement involving interest rates
Forward contracts are OTC agreements where terms are customized and settlement is at a future date.
18. The biggest disadvantage of forward contracts is:
A. Lack of customization
B. High liquidity
C. Regulated exchange trading
D. Counterparty default risk
Since forwards are private OTC contracts, they carry high counterparty risk compared to exchange-traded futures.
19. A futures contract differs from a forward contract in that:
A. Both are always customized
B. Futures are standardized and traded on exchanges
C. Futures carry higher counterparty risk
D. Forwards require margin payments, futures do not
Futures are standardized contracts traded on regulated exchanges with clearing house guarantees, unlike forwards.
20. A trader buys a futures contract on crude oil at ₹5,000 per barrel. If the price rises to ₹5,200 before expiry, the trader will:
A. Make a profit of ₹200 per barrel
B. Suffer a loss of ₹200 per barrel
C. Have no impact until delivery
D. Pay a premium of ₹200 to the seller
In futures, gains and losses are marked-to-market daily. The trader benefits when the market price rises above the contract price.
21. A call option gives the buyer the right to:
A. Sell the underlying asset at a fixed price
B. Cancel the contract anytime without cost
C. Buy the underlying asset at a fixed price within a specified time
D. Borrow funds against the underlying asset
A call option gives the holder the right, but not the obligation, to buy the underlying asset at the strike price before or on expiry.
22. Which of the following is true about a put option?
A. It obligates the buyer to sell the asset
B. It gives the right to sell the underlying asset at a pre-agreed price
C. It is always settled through physical delivery
D. It does not involve premium payment
A put option gives the holder the right to sell the underlying asset at the strike price, in return for paying a premium to the option seller.
23. In an interest rate swap, two parties typically agree to exchange:
A. Equity shares for bonds
B. Futures contracts for options
C. Commodity prices at a fixed rate
D. Fixed interest payments for floating interest payments
Interest rate swaps involve exchanging fixed-rate interest payments for floating-rate payments (or vice versa) to manage interest rate risk.
24. A Credit Default Swap (CDS) is primarily used for:
A. Transferring credit risk of a borrower from one party to another
B. Hedging against changes in commodity prices
C. Exchanging fixed interest for floating interest
D. Speculating on foreign exchange rates
A CDS allows one party to transfer the risk of default by a borrower to another party in exchange for periodic payments, acting like credit insurance.
25. In a CDS contract, the party that makes regular premium payments is called:
A. Protection seller
B. Protection buyer
C. Reference entity
D. Clearing house
The protection buyer pays premiums to the protection seller in a CDS, in return for compensation if the reference entity defaults.
26. As per RBI guidelines, Credit Default Swaps (CDS) in India are permitted only for which type of instruments?
A. Equity shares
B. Commodity derivatives
C. Corporate bonds and debentures
D. Government treasury bills
RBI permits CDS only on corporate bonds/debentures. It is not allowed on government securities or equity.
27. According to RBI, who are classified as ‘users’ in the CDS market?
A. Investors who buy CDS only for hedging their credit risk
B. Banks writing CDS contracts
C. Brokers arranging CDS deals
D. Clearing corporations guaranteeing settlement
RBI classifies entities using CDS only for hedging as 'users', while market makers provide two-way quotes and liquidity.
28. Which of the following is not permitted as per RBI guidelines on CDS?
A. CDS on corporate bonds
B. Market makers providing liquidity
C. Users hedging underlying exposure
D. Naked CDS positions for speculation
RBI prohibits naked CDS (speculative buying of CDS without owning the underlying exposure).
29. The standard documentation widely used for derivatives transactions worldwide is known as:
A. Basel III Agreement
B. ISDA Master Agreement
C. RBI Derivatives Code
D. IMF Swap Accord
The ISDA Master Agreement, published by the International Swaps and Derivatives Association, provides a standardized legal framework for OTC derivatives contracts.
30. Which of the following is not a typical component of the ISDA Master Agreement?
A. Events of default
B. Termination events
C. Monetary policy conditions set by RBI
D. Netting provisions
The ISDA agreement covers events of default, termination, close-out netting, and payment netting. RBI’s monetary policy is not part of ISDA.
