Financial Markets, Instruments & Derivatives — Practice

Question 1

What are the three standard T-bill maturities?

Accepted Answer

91-day, 182-day, and 364-day.

Question 2

Name the three principal types of derivative contracts.

Accepted Answer

Futures, options, and swaps.

Question 3

In a liquidation, who is paid first — an equity shareholder or a debenture-holder?

Accepted Answer

The debenture-holder.

Question 4

A company enters a swap to exchange its floating-rate loan interest for a fixed rate. What kind of derivative is this?

Accepted Answer

A swap — an agreement to exchange cash flows (here, floating-rate interest for fixed-rate interest) over time.

Question 5

What does the call money market's interest rate indicate, and who are its main participants?

Accepted Answer

Short-term liquidity conditions in the banking system; banks lend to and borrow from each other overnight to manage day-to-day liquidity mismatches.

Question 6

A farmer sells wheat futures to lock in a price for a crop they are actually growing. Is this hedging or speculation?

Accepted Answer

Hedging — the farmer has a real, existing exposure (the crop) and is using the futures contract to reduce price-movement risk on that specific exposure.

Question 7

Distinguish futures from options in terms of obligation, using a worked example of each.

Accepted Answer

Futures: both parties are obligated to transact at the agreed price on the future date — e.g., a trader who buys a futures contract must buy the underlying at expiry regardless of the prevailing market price. Options: only the seller (writer) is obligated to perform, and only if the buyer chooses to exercise their right — e.g., a call-option buyer will exercise only if the market price exceeds the strike price, otherwise they simply let the option lapse.

Question 8

Why do both Commercial Paper and Certificates of Deposit function as discount instruments, and what limits who can issue each?

Accepted Answer

Both raise short-term funds without a periodic coupon, with the investor's return coming from the discount-to-face-value gap. CP is issued by highly-rated corporates (since it is unsecured, investors require strong creditworthiness); CDs are issued by banks to raise bulk short-term deposits. Both share the discount-instrument structure but differ in the issuing institution type.

Practice — Financial Markets, Instruments & Derivatives

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