Derivative

Products
BFM
Introduction to Derivatives
➢‘Derivative’ stands for a contract whose
price is derived from or is dependent
upon an underlying asset.
➢underlying asset could be a financial
asset such as currency, stock and
market index, an interest bearing
security or a physical commodity.
➢Derivatives are market products widely
used by bank treasuries.
➢Price of derivative always means a
future price, which is derived from spot
price
3,215.10
 OTC and Exchange Traded
Derivative
❑OTC derivative - Between 2 parties (forward contract/private contract).
❑Directly negotiated and obtained from banks and investment
institutions are known as Over-the-Counter (OTC) products.
❑Exchange traded derivative - Standardized contracts for a specified
period, for a specified amount, purchased/ sold through an exchange
❑Exchange traded derivatives include currency futures, interest rate
futures, commodity futures, stock and index futures, as well as options.
❑Some of the futures exchanges are organized independently (e.g.,
Chicago Mercantile Exchange, Eurex, Euronext, MCX of India),
❑or at times associated/or merged with stock exchange (e.g., Hong Kong
Exchanges & Clearing, SGX of Singapore, NSE in India).
 Forward Contracts
➢These are promises to deliver an asset at a pre-
determined date in future at a predetermined
price.
➢Forward contract is a contract to deliver foreign
currency on a future date at a fixed exchange rate.
➢This is an OTC product where the counterparty is
always a bank.
➢An exporter enters into a forward sale (purchase
from Bank’s perspective)contract of his export
proceeds denominated in USD.
Forward Contracts
 Options Contracts
➢Options refer to contracts where the buyer of an option
has a right but no obligation to exercise the contract.
➢Options are either put options or call options.
➢Call option gives a right to the holder to buy an
underlying product (currency/bonds/commodities) at a
prefixed rate on a specified future date.
➢Put option gives a similar right to the holder to sell the
underlying at a prefixed rate on a specified future date
or during a specified period.
➢The prefixed rate is known as the strike price, which is
decided by the customer (Option Holder).
➢The specified time is known as expiry date.
 Options Contracts
➢Options are divided into two types according to
their mode of settlement.
➢An American type option can be exercised any
time before the expiry date.
➢After the sub-prime crisis which took place in the
year 2008/2009 in most of the markets, American
option is prohibited.
➢European type option can be exercised only on the
expiry date.
➢In India we use only European type of options.
 Option Terminology
▪ Intrinsic value of an ITM option, For a CALL Option, Intrinsic
being the difference between the Value
= Spot Price – Strike Price
strike price and current forward rate For a PUT Option, Intrinsic
of the currency, or zero whichever is Value
less. = Strike Price – Spot Price

▪ ATM and OTM options do not have Strike vs. Spot/Market Call Put
any intrinsic value. Intrinsic Value Strike > Spot/Market OTM ITM
of an option is the amount by which Strike = Spot/Market ATM ATM

an option is In-The-Money. Strike < Spot/Market ITM OTM

▪ Second component is the time

value, which is maximum for an ATM
option. Time Value is also called
Extrinsic Value.
Q. Question on Call Option
Strik Price- 2725
Spot price – 2750
Lot size- 100
Premium- 800
Calculate Profit and Loss
Ans- 1700
The equity share of ABC Ltd. is quoted at Rs. 430. A 3-
month call option is available at a premium of Rs. 15,
and a 3-month put option is available at a premium of
Rs. 8 per share. The strike price in both cases is Rs.
450. Share spot price on the strike date is given as Rs.
410, 430, 450, 470, 490.
Strike vs. Spot/Market Call Put
Q.1 What is the net Strike > Spot/Market OTM ITM
profit/loss for the holder of Strike = Spot/Market ATM ATM
the call option if the share Strike < Spot/Market ITM OTM
price on the strike date is
Rs. 410? ❑ The call option will not be exercised as
the share price (Rs. 410) is below the
A. Rs. -15 strike price (Rs. 450).
B. Rs. 0 ❑ The loss is equal to the premium paid
C. Rs. -30 for the call option: Rs. -15.
D. Rs. 15
The equity share of ABC Ltd. is quoted at Rs. 430. A 3-
month call option is available at a premium of Rs. 15,
and a 3-month put option is available at a premium of
Rs. 8 per share. The strike price in both cases is Rs.
450. Share spot price on the strike date is given as Rs.
410, 430, 450, 470, 490.
Strike vs. Spot/Market Call Put
Q.2 What is the net profit/loss Strike > Spot/Market OTM ITM
for the holder of the call option Strike = Spot/Market ATM ATM
if the share price on the strike
Strike < Spot/Market ITM OTM
date is Rs. 470?
A. Rs. 5 ❑The call option will be exercised
B. Rs. 20 as the share price (Rs. 470) is
above the strike price (Rs. 450).
C. Rs. 15
❑Net Profit = (470 - 450) - 15
D. Rs. 10 ❑= 20 - 15 = Rs. 5.
The equity share of ABC Ltd. is quoted at Rs. 430. A 3-
month call option is available at a premium of Rs. 15,
and a 3-month put option is available at a premium of
Rs. 8 per share. The strike price in both cases is Rs.
450. Share spot price on the strike date is given as Rs.
410, 430, 450, 470, 490.
Strike vs. Spot/Market Call Put
Q.3 What is the net profit/loss Strike > Spot/Market OTM ITM
for the holder of the put option Strike = Spot/Market ATM ATM
if the share price on the strike
Strike < Spot/Market ITM OTM
date is Rs. 430?
A. Rs. -8 ❑The put option will not be exercised as
B. Rs. -10 the share price (Rs. 430) is above the
strike price (Rs. 450).
C. Rs. 12
❑450-430= 20
D. Rs. 8 ❑Net value= 20-8= 12
The equity share of ABC Ltd. is quoted at Rs. 430. A 3-
month call option is available at a premium of Rs. 15,
and a 3-month put option is available at a premium of
Rs. 8 per share. The strike price in both cases is Rs.
450. Share spot price on the strike date is given as Rs.
410, 430, 450, 470, 490.
Strike vs. Spot/Market Call Put
Q.4 What is the net profit/loss Strike > Spot/Market OTM ITM
for the holder of the put option Strike = Spot/Market ATM ATM
if the share price on the strike
Strike < Spot/Market ITM OTM
date is Rs. 410?
A. Rs. 32 ❑The put option will be exercised as the
B. Rs. 30 share price (Rs. 410) is below the strike
price (Rs. 450).
C. Rs. 20
D. Rs. 22 ❑Profit = (450 - 410) - 8 = 40 - 8 = Rs. 32.
Q. What is the settlement method for USDINR
futures?
a. Cash
b. Physical / Based on Delivery
c. Can be cash or physical
d. None of the above
Q. Which of the following is the last trading
day for EURINR monthly futures contract?
a. One business days after the first business
day of the Expiry Month
b. Two working days prior to the last business
day of the expiry month
c. Seven business days before the last
business day of the Expiry Month
d. Last Thursday of Contract Month
Q. Person goes short in a GBPINR futures
contract at Rs.99.75 and on expiry GBPINR
reference rate is Rs. 100.75, he will ________?
a. Make profit of Rs. 1
b. Make loss of Rs. 1
c. No profit no loss
d. None of the above
Q. The price which option buyer pays to option
seller to acquire the right is called as ________.
a. Agreed Price
b. Strike Price
c. Sell Price
d. Premium
Q. Option buyer faces ________ risk and option
seller faces __________ risk.
a. Limited, Unlimited
b. Limited, Limited
c. Unlimited, Limited
d. Unlimited, Unlimited
Q. An option is _________, if on exercising it, the
option buyer gets positive cash flow.
a. In the money
b. At the money
c. Out of the money
d. None of the above
Q. The difference between option premium and
intrinsic value is __________.
a. Strike Price
b. Time Value
c. Expiry Value
d. Option Value
❑ATM and OTM options do not have any intrinsic value.
❑Intrinsic Value of an option is the amount by which an
option is In-The-Money.
❑For a CALL Option, Intrinsic Value = Spot Price – Strike
Price
❑For a PUT Option, Intrinsic Value = Strike Price – Spot
Price
❑The option price, less the intrinsic value, is the time
value of the option.
❑Hence, the second component is the time value, which
is maximum for an ATM option.
❑Time Value is also called Extrinsic Value.
❑Time value decreases with the option becoming more
and more ITM or OTM, as the expiry date approaches.
Q. A client buys a USD call option at strike of
75.5 and pays a premium of INR 0.3. What
would be the breakeven point for the
transaction?
a. 75.2
b. 75.6
c. 76.1
d. 75.8
On 2nd September 2021 following are the Spot rates. Q1. In a Currency Option
Spot EUR/USD : 1.2000 Contract:
USD/INR : 66.8000 a) An Option buyer has the
Following are the quotes for European type Options. right to buy the underlying
but not sell.
b) An Option buyer has the
Currency Call / Put Strike Price Premium Expiry Date obligation to buy the
Pair underlying but no
EUR/USD Call 1.2000 $0.036 24th Dec obligation to sell.
EUR/USD Put 1.2000 $0.04 24th Dec c) An Option seller has the
USD/INR Call 66.8000 Rs.0.15 24th March right but not the obligation
USD/INR Put 66.8000 Rs.0.08 24th March
to sell the underlying.
d) The buyer has the right but
In context of the given details, answer the following not the obligation to buy or
questions. sell the underlying
depending on whether it is
a call or put option.
On 2nd September 2021 following are the Spot rates. Q2. Buying a Call Option on
Spot EUR/USD : 1.2000 currency Y against currency
USD/INR : 66.8000 X is same as:
Following are the quotes for European type Options. a) Buying a put on currency X
against Y.
Currency Call / Put Strike Price Premium Expiry Date b) Selling a put on X against
Pair Y.
EUR/USD Call 1.2000 $0.036 24th Dec c) Selling a call on X against
EUR/USD Put 1.2000 $0.04 24th Dec Y.
USD/INR Call 66.8000 Rs.0.15 24th March
d) None of the above
USD/INR Put 66.8000 Rs.0.08 24th March

In context of the given details, answer the following

questions.
On 2nd September 2021 following are the Spot rates. Q3. ‘Straddle’ in money
Spot EUR/USD : 1.2000 market is referred to:
USD/INR : 66.8000 a) Call option where strike
Following are the quotes for European type Options. price = market price
b) Put option where strike
Currency Call / Put Strike Price Premium Expiry Date Price = market price
Pair
EUR/USD Call 1.2000 $0.036 24th Dec
c) Call & put option with
identical strike price
EUR/USD Put 1.2000 $0.04 24th Dec
USD/INR Call 66.8000 Rs.0.15 24th March d) None of the above
USD/INR Put 66.8000 Rs.0.08 24th March

In context of the given details, answer the following

questions.
On 2nd September 2021 following are the Spot rates. Q4. A dealer believes that the
Spot EUR/USD : 1.2000 spot rate for the dollar will
USD/INR : 66.8000 rise to 67.00 by 24th March
Following are the quotes for European type Options. 2017. So, he decides to buy at
the money call options. If his
expectations is correct, his
Currency Call / Put Strike Price Premium Expiry Date
profit from buying call option
Pair
for USD 1.5 million will be
EUR/USD Call 1.2000 $0.036 24th Dec
INR_________:
EUR/USD Put 1.2000 $0.04 24th Dec
USD/INR Call 66.8000 Rs.0.15 24th March
a) 80,000
USD/INR Put 66.8000 Rs.0.08 24th March b) 75,000
c) 1,00,000
In context of the given details, answer the following
questions. d) 90000
Futures Contracts
➢Futures are forward contracts traded in
a futures exchange.
➢Under a futures contract, the seller
agrees to deliver to the buyer a
specified security/currency or
commodity on a specified date, at a fixed
price.
➢Futures relating to exchange rates
(currency futures), Interest rates (bond
futures) and equity prices (stock/index
futures) are known as financial futures,
as distinct from commodity futures
(oil/metal/ agro-products etc.).
➢Futures contracts are of standard sizes
with prefixed settlement dates.
A company enters into a futures contract on the London International
Financial Futures and Options Exchange (LIFFE) to sell GBP 25,000 at an
exchange rate of USD 1.3700 per GBP, with the delivery date set for 28th
March. At the time of contract initiation, the spot exchange rate is USD 1.34
per GBP. The contract stipulates that on 28th March, the seller will deliver
GBP 25,000 in exchange for the equivalent amount in USD at the rate of
1.3700. On the settlement date, the actual market rate is USD 1.40 per GBP.

Q. On 28th March, the actual The seller's loss is calculated

market rate for GBP is USD as follows:
1.40. Calculate the financial Difference between the
outcome for the seller of the contracted price and the
futures contract. market price on settlement
A. The seller gains USD 750. date: USD 1.40 - USD 1.3700
B. The seller loses USD 750. = USD 0.03 per GBP.
C. The seller gains USD 500. Total loss: USD 0.03 * GBP
D. The seller loses USD 500. 25,000
= USD 750.
A company enters into a futures contract on the London International
Financial Futures and Options Exchange (LIFFE) to sell GBP 25,000 at an
exchange rate of USD 1.3700 per GBP, with the delivery date set for 28th
March. At the time of contract initiation, the spot exchange rate is USD 1.34
per GBP. The contract stipulates that on 28th March, the seller will deliver
GBP 25,000 in exchange for the equivalent amount in USD at the rate of
1.3700. On the settlement date, the actual market rate is USD 1.40 per GBP.
Q. Which of the following statements accurately describes the impact
of the futures contract's settlement on 28th March?
A. The buyer gains if the market price is higher than the contracted
price, and the seller gains if the market price is lower than the
contracted price.
B. Both buyer and seller gain if the market price is higher than the
contracted price.
C. Both buyer and seller lose if the market price is lower than the
contracted price.
D. The buyer gains if the market price is lower than the contracted
price, and the seller gains if the market price is higher than the
contracted price.
 Interest Rate Swaps
➢A swap is an exchange of cash flow. An interest rate swap is an
exchange of interest flows on an underlying asset or liability, the
value of which is the notional amount of the swap.
➢In a swap, basis for calculation of interest is charged according
to the requirement of the borrower (or, lender).
An commercial Bank Z entered into Q. Who gained after 1 year and how
an IRS with Bank X for a notional much?
principal of Rs.1 cr, for 1 year, to
take effect from 1-10-23, with 1st Quarter: Bank X will pay to Bank Z
quarterly settlements. Z expects 1,00,00,000 x 0.15% x 3 / 12 = 3750
that rates will move up and X feels 2nd Quarter: Bank Z will pay to Bank X
that rates will remain fixed. As per
1,00,00,000 x 0.10% x 3 / 12 = 2500
IRS arrangement, Bank Z is to
receive interest linked to American 3rd Quarter: Bank Z will pay to Bank X
Interbank Offer rate (AMERIBOR) 1,00,00,000 x 0.05% x 3 / 12 = 1250
and Bank X is to receive fixed rate
4th Quarter: Bank X will pay to Bank Z
of 3.5%. Quarterly changes in
AMERIBOR is: 1,00,00,000 x 0.25% x 3 / 12 = 6250

01-10-23 = 3.65% Net settlement for one year:

01-01-24 = 3.40% Bank X to pay to Bank Z = 3750 + 6250 = 10000

Bank Z to pay to Bank X = 2500 + 1250 = 3750

01-04-24 = 3.45%
Gain to Bank B = 6250
01-07-24 = 3.75%
 Swaps
➢LIBOR has since been phased out with Secured Overnight
Financing Rate (SOFR) as one among the Alternate
Reference Rates (ARR).
➢In Indian Rupee market, the most popular benchmark rate
is O/N MIBOR (overnight Mumbai Inter-Bank Offered Rate)
which is the one-day money market rate in the inter-bank
market.
➢MIBOR is announced daily at around 9.50 a.m. by NSE, after
receiving the rates through a poll system from several
banks and arrive at an average rate, after deleting extreme
top and bottom rates.
➢Though O/N MIBOR is an overnight rate, it is used as a base
rate for short-term and medium-term lending also.
➢Presently Financial Benchmark India Ltd (FBIL) is
publishing the MIBOR.
 Swaps
➢Constant Maturity Swaps (CMS) based on G-sec
yields are also popular.
➢INBMK swap rates are available on Reuter
screen.
➢Other benchmark rates used in Indian markets
are, 90 day T-bill and CP rate index.
➢Market practices on adopting different
benchmark rates are standardized by FIMMDA
(Fixed Income, Money Market and Derivatives
Association) which is a SRO for debt market.
 Swaps
➢Interest Rate Swap (IRS) is an OTC instrument normally issued
by a bank.
➢Quanto swaps refer to paying interest in home currency at
rates applicable to a foreign currency (now prohibited in
India).
➢Coupon swaps refer to floating rate in one currency
exchanged to fixed rate in another currency.
➢There are also swaps which collapse at a knock-out level of
market rates and swaps with built-in options, known as
swaptions.
➢In Indian Rupee market only plain vanilla type swaps are
permitted.
➢Counterparty risk on an IRS is limited to the net interest
payable by one counterparty to the other depending on
whether the floating rate is higher or the fixed rate is higher.
Credit Conversion Factors are used to reduce the Notional
Principal Amount of the swaps for reckoning Capital
Charge.
 FRA
➢A product closely linked with IRS is forward rate
agreement (FRA), where the interest payable for a
future period is committed under the agreement.
➢FRA is for a single payment in future.
➢3X5 FRA= Contract: 90 days + Loan: 60 days
➢1x4 FRA= Contract: 30 days + Loan: 90 days
➢3x6 FRA= Contract: 90 days + Loan: 90 days
Q. Which of the following statements accurately
describes the purpose and function of a Forward Rate
Agreement (FRA)?
a) An FRA allows companies to exchange one currency
for another at a future date, based on today's
exchange rate.
b) An FRA allows companies to fix an interest rate today
for a future period, mitigating the risk of interest rate
fluctuations.
c) An FRA is used to cover a series of periodic interest
payments over multiple periods.
d) An FRA is settled at the end of the interest payment
period based on the floating rate at that time.
Answer: B. An FRA allows companies to fix an interest
rate today for a future period, mitigating the risk of
interest rate fluctuations.
A company has a loan with an interest rate linked to an alternate reference rate, and the
interest for the next half-year period is due to be fixed on 29th June. To mitigate the risk
of a potential increase in the reference rate by 29th June, the company decides to enter
into a 6/12 Forward Rate Agreement (FRA). This agreement will fix the interest rate for a
period starting 6 months from now and ending 12 months from now. The floating rate
(alternate reference rate) for the interest payment period is determined in advance,
typically on the last day of the previous period, and the interest settlement is done at the
beginning of the period (1st July). 1. Difference in interest rates:

Assume the current 6/12 FRA rate is 5% per annum, = 6% - 5% = 1% per annum.
and the notional principal amount is USD 2. Interest amount difference for 6
1,000,000. If the actual reference rate on 29th months: 1% of USD 1,000,000 for 6
months = USD 1,000,000 * 0.01 *
June is 6% per annum, calculate the settlement
(6/12) = USD 5,000.
amount that the company will receive or pay on 1st
July. The interest period is from 1st July to 31st 3. Discount this amount at the
actual reference rate (6%) for 6
December, and the interest is settled at the
months:
beginning of the period (1st July), discounted at
the actual reference rate. Discount factor = 1 / (1 + 0.06 *
(6/12)) = 1 / 1.03 = 0.970874.
A. The company will pay USD 4,761.90.
Discounted settlement amount =
B. The company will receive USD 4,761.90. USD 5,000 * 0.970874 = USD
C. The company will pay USD 4,716.98. 4,761.90.
D. The company will receive USD 4,716.98.
ABC Limited need Rs.5 cr. for 6 ▪ Company buys 3 x 9 FRA available @ 5.94%
M, after 3 M. ▪ Interest payable to bank if actual ROI is 4.5% =
FRA bank quotes following ROI: 50,000,000 x 4.5% x 6/12 = 1125000
Interest settlement will take place after 3 months.
Spot: 5.50% - 5.75%
Interest payable to FRA bank (5.94% - 4.5% = 1.44%)
3 x 6 FRA: 5.59% – 5.82%
= 5 cr x 1.44% x 6/12 = 360000.
3 x 9 FRA: 5.64% – 5.94% Net cost to company = 1125000 + 360000 = 1485000
Effective cost to company = 1485000 / 5 cr x 100 /
Q. Calculate net cost to the 6/12 = 5.94%
company if actual ROI after ▪ Interest payable to bank if actual ROI is 6.5% =
3 M is: 50,000,000 x 6.5% x 6/12 = 1625000
a) If ROI 4.5%, Interest receivable from FRA bank (6.5% - 5.94% =
b) If ROI 6.5% 0.56%)
= 5 cr. x 0.56% x 6/12 = 140000.
Q. Verify that at the Net cost to company = 1625000 - 140000 = 1485000
calculated net cost, the FRA Effective cost to company = 1485000 / 5 cr x 100 /
6/12 = 5.94%
cost is justified.
 Currency Swaps
➢A Currency Swap is an exchange of cash flow in
one currency, with that of another currency.
➢Cash flow may relate to repayment of principal
and/or interest under a loan obligation where the
lender or the borrower intends to eliminate
currency risk.
➢If only currency is hedged, it will be Principal
Only Swap (POS)
➢If only interest rate is hedged, it would be
Coupon Only Swap (COS)
 Currency Swaps
▪ Principal Only Swap (POS): Borrower continues to pay interest in USD
terms, but has the benefit of using the principal amount in home
currency, without exchange risk. The repayment takes place in
domestic currency, at a fixed rate of exchange, hence there is no
exchange risk.
▪ Coupon Only Swap (COS): USD loan is utilized in the same currency,
but interest on USD loan is swapped into Rupee interest – the
borrower has to pay interest in Rupees at swap rate; principal
repayment is as per original loan terms. Such strategy is useful, if
principal amount is hedged by using other derivative instruments
(e.g., options), or if the borrower prefers to leave the position open,
in anticipation of appreciation of paying currency (If Rupee
appreciates, USD borrows will effectively pay fewer Rupees to settle
the debt).
▪ P+I swap: Without initial exchange – where the borrower has
eliminated the currency risk and interest rate risk completely (zero
risk) and will pay principal and interest in domestic currency
(Rupees) to settle the foreign currency borrowing. The swap cost is
included in the rupee interest rate.
 FBIL
➢As per FBIL’s extant methodology,
➢MIFOR (Mumbai Interbank Forward Outright
Rate) for Overnight, 1 month, 2 months, 3
months, 6 months and 12 months tenor is
calculated using the rolling forward premia in
percentage term and the USD LIBOR for the
relevant tenor.
➢MIFOR is published upto two decimal points.
➢CCIL is the calculating agent.
➢USD/INR rolling forward rates are published
by 4.15 PM,
➢MIFOR is published by 5 PM subject to
availability of LIBOR.
 FBIL
➢FBIL announces the benchmark rate for
Overnight Mumbai Interbank Outright Rate
(MIBOR) on a daily basis, except Saturdays,
Sundays and local holidays.
➢Benchmark rate is calculated based on the
actual call money transactions data obtained
from the NDS-call platform of Clearing
Corporation of India Ltd (CCIL).
➢CCIL acts as the Calculating Agent. The rate
is announced at 10.45 AM every day.
 FBIL
➢FBIL also announces the benchmark
rates/matrix of:
➢(a) Term MIBOR for three tenors of 14-day, 1-
month and 3-month
➢(b) FC-Rupee Options Volatilities for five
tenors of 1-week, 1-month, 3-month, 6-month
and 12-month
➢(c) Certificates of Deposit (FBIL-CD)
➢(d) Treasury Bills (FBIL-TBILL) on a daily basis
except Saturdays, Sundays and public
holidays.
‘AD Category - I bank’ are permitted to
become trading and clearing members of
the exchange traded currency options
market of the recognized stock
exchanges, on their own account and on
behalf of their clients:
Subject to fulfilling the following minimum
prudential requirements:
(a) Minimum net worth of Rs. 500 crores.
(b) Minimum CRAR of 10 per cent.
(c) Net NPA should not exceed 3 per cent.
(d) Made net profit for last 3 years.
Q. One of the essential differences between an OTC
and an exchange traded derivative is:
a) OTC derivatives are cheaper while exchange
traded derivative are costly
b) OTC derivatives are for customers while exchange
traded derivatives fro banks
c) In OTC derivatives, counter party risk is
prominent, whereas in exchange traded
derivatives, counter party risk is totally absent
d) OTC derivatives are for hedging risks whereas
exchange traded derivatives are used for
speculation
Q. In case of free currencies, forward premium or
discount is exactly equal to the difference between:
a) Risk free interest of the two currencies
b) Inflation rates in both the countries
c) Spot rate and TOM rate
d) LIBOR and RBO reference rate
Q. A put option is in the money (ITM) if:
a) The strike price is less than market price
b) The strike price is more than the market price
c) The market price is equal to the strike price
d) A put option can never be in the money
Q. In India, market for currency futures commenced
in:
a) August 2008
b) August 1993
c) The market yet to be commence operations
d) The currency futures markets were existing for a
long time but where lying dormant
Q. Which of the following refers to protection of risk
in a transaction, usually obtained from derivative
products and it covers future risk?
a) Speculation
b) Swaps
c) Hedge
d) Trading
Q. All of the following are true regarding futures
contracts except
(a)they are regulated by RBI
(b)they require payment of a performance bond
(c)they are a legally enforceable promise
(d)they are mark to market
Q. All open positions in the index futures contracts
are daily settled at the:
(a) mark-to-market settlement price
(b) net settlement price
(c) opening price
(d) closing price
 BFM Q. What are the primary reasons bank treasuries use
derivatives?
a) To fund their operational activities and to facilitate
Mod.-C mergers.
b) To manage risk, especially ALM risks, and to cater to
Unit-24 the needs of clients, especially corporate customers.
c) To determine the future price of a commodity and to
ensure proper audit trails.
d) To set spot market prices and to compete with foreign
exchange markets.
Answer: b) To manage risk, especially ALM risks, and to
cater to the needs of clients, especially corporate
customers.
 BFM Q. Which statement accurately describes a derivative?
a) A derivative always has its independent value that is
unaffected by any underlying market.
Mod.-C
b) Derivatives primarily relate only to the foreign
exchange market, excluding any other financial products.
Unit-24 c) A derivative is a financial contract based on a notional
amount, specifying an underlying which is a price or rate,
and its value depends on the spot market.
d) Derivative values are determined by the history of the
commodity market, without any reference to the future.
Answer: c) A derivative is a financial contract based on a
notional amount, specifying an underlying which is a
price or rate, and its value depends on the spot market.
 Q. What distinguishes Over-the-Counter (OTC) derivative products from
BFM exchange-traded derivatives?
a) OTC derivative products are standardized contracts purchased or
sold on futures exchanges while exchange-traded derivatives are
Mod.-C customized based on the client's needs.
b) OTC derivative products are customized products directly negotiated
with banks and investment institutions based on a client's specific
Unit-24 needs, whereas exchange-traded derivatives are standardized
contracts available on an exchange.
c) OTC derivative products only deal with currency futures and interest
rates, while exchange-traded derivatives deal with a wider range of
financial products.
d) OTC derivative products are primarily used for commodities like oil
and gold, while exchange-traded derivatives are used for financial
products.
Answer: b) OTC derivative products are customized products directly
negotiated with banks and investment institutions based on a client's
specific needs, whereas exchange-traded derivatives are standardized
contracts available on an exchange.
 BFM Q. Which of the following is true regarding futures
contracts?
a) They are primarily OTC products negotiated directly
Mod.-C between a client and a bank.
b) They are customized contracts based solely on a
Unit-24 client's risk appetite.
c) They are a type of forward contract traded on a futures
exchange and are part of the exchange-traded derivatives
category.
d) They exclusively deal with stock and index options and
have no relation to commodities or interest rates.
Answer: c) They are a type of forward contract traded on
a futures exchange and are part of the exchange-traded
derivatives category.
 Q. How does pricing differ between OTC and Exchange
BFM Traded products?
a) OTC products have transparent pricing based on screen-
based order matching systems, while Exchange Traded
Mod.-C products are priced by banks adding a margin.
b) Both OTC and Exchange Traded products have prices
quoted by banks and are based on the client's risk profile.
Unit-24 c) OTC product prices are quoted by the Bank with an
added margin to the market quote, whereas Exchange
Traded products have transparent pricing via screen-based
order matching systems.
d) Both OTC and Exchange Traded products have
standardized pricing based on pre-set settlement dates and
terms.
Answer: c) OTC product prices are quoted by the Bank with
an added margin to the market quote, whereas Exchange
Traded products have transparent pricing via screen-based
order matching systems.
 Q. Which statement accurately captures the primary usage of
BFM OTC products compared to Exchange Traded Products?
a) Both OTC products and Exchange Traded Products are
primarily used for speculation and trading purposes.
Mod.-C b) OTC products are mainly used for trading and speculation,
while Exchange Traded Products are mostly used for hedging
underlying risks.
Unit-24 c) OTC products are predominantly used for hedging underlying
risks, especially by Bank Treasuries and corporate customers,
while Exchange Traded Products are largely used for trading and
speculation.
d) OTC products are exclusively used by futures exchanges for
organizing trades, while Exchange Traded Products are preferred
by banks for hedging.
Answer: c) OTC products are predominantly used for hedging
underlying risks, especially by Bank Treasuries and corporate
customers, while Exchange Traded Products are largely used for
trading and speculation.
 BFM Q. What kinds of risks are derivatives primarily used
to hedge in India?
a) Currency, equity, and commodity risks.
Mod.-C
b) Commodity, property, and interest rate risks.
c) Equity, currency, and stock risks.
Unit-24
d) Currency, interest rate, and commodity risks.
Answer: d) Currency, interest rate, and commodity
risks.
 BFM Q. What is the primary function of a forward contract in
the context of foreign currency?
a) It is a contract that allows exporters to speculate on
Mod.-C future exchange rate movements.
b) It is an agreement to deliver a foreign currency on a
Unit-24 future date but without a fixed exchange rate.
c) It is an OTC product where the counterparty is always
an exchange.
d) It is a contract to deliver foreign currency on a future
date at a predetermined exchange rate, allowing parties
like exporters to protect against exchange risk.
Answer: d) It is a contract to deliver foreign currency on a
future date at a predetermined exchange rate, allowing
parties like exporters to protect against exchange risk.
 BFM Q. What happens if currency delivery isn't executed as per
the contract terms on the expiry date of a forward
contract?
Mod.-C a) The contract continues indefinitely until delivery is
made.
Unit-24 b) The contract gets automatically renewed for another
term.
c) The difference between the spot rate and forward rate
is credited to or recovered from the counterparty, and the
contract is cancelled.
d) The counterparty is penalized with a flat fee
determined at the onset of the contract.
Answer: c) The difference between the spot rate and
forward rate is credited to or recovered from the
counterparty, and the contract is cancelled.
 BFM Q. What does the forward rate primarily represent in the
context of two currencies?
a) The forward rate is solely dependent on the current
Mod.-C market demand and supply.
b) It represents the difference in GDP growth between two
Unit-24 countries.
c) The forward rate represents the interest rate
differential of the two currencies, with the currency
carrying a higher rate of interest always at a discount.
d) The forward rate always remains constant and is set by
the central banks of the two countries.
Answer: c) The forward rate represents the interest rate
differential of the two currencies, with the currency
carrying a higher rate of interest always at a discount.
 BFM Q. What factors affect the forward exchange rate of
USD/INR?
a) Only the risk-free interest rates of the two currencies.
Mod.-C
b) Only the GDP growth rates of the two countries.
c) The difference between risk-free interest rates of the
Unit-24 two currencies and perceptions about supply and demand
for forward dollars.
d) The forward exchange rate of USD/INR is always
constant and is not affected by any external factors.
Answer: c) The difference between risk-free interest rates
of the two currencies and perceptions about supply and
demand for forward dollars.
 BFM Q. Which of the following best describes a call
option?
a) It allows the holder to sell a product at a prefixed
Mod.-C rate on a specified future date.
b) It provides an obligation for the holder to buy a
Unit-24 product at a predetermined rate.
c) It gives the holder a right, but not an obligation,
to purchase an underlying product at a prefixed rate
on a specific future date.
d) It ensures the holder will sell a product at market
rate on a specified future date.
Answer: c) It gives the holder a right, but not an
obligation, to purchase an underlying product at a
prefixed rate on a specific future date.
 BFM Q. What type of options are primarily used in India?
a) American type options that can be exercised any
time before expiry.
Mod.-C
b) European type options that can only be exercised
on the expiry date.
Unit-24 c) Asian type options that consider the average
price of the underlying asset.
d) Bermudian type options that can be exercised on
specific dates during the option's life.
Answer: b) European type options that can only be
exercised on the expiry date.
 BFM Q. Regarding a Dollar put/JPY call option with a strike
price of 105 for USD 1 million, if the market rate on the
expiry date is 108, what will the option-holder most likely
Mod.-C do?
a) Exercise the put option to gain more yen per dollar.
Unit-24 b) Not exercise the put option as the open market offers a
better rate.
c) Exercise the call option to purchase USD at a
discounted rate.
d) Wait for the market rate to drop to 100 before deciding.
Answer: b) Not exercise the put option as the open market
offers a better rate.
 BFM Q. When is an option considered to be "in-the-
money" (ITM) for a call option?
a) When the strike price is the same as the forward
Mod.-C rate on the start date.
b) When the strike price is more than the forward
Unit-24 rate.
c) When the strike price is less than the forward
rate.
d) When the strike price is worse than the market
price.
Answer: c) When the strike price is less than the
forward rate.
 BFM Q. Which of the following best describes the
intrinsic value of a PUT option?
a) Intrinsic Value = Spot Price + Strike Price
Mod.-C
b) Intrinsic Value = Spot Price – Strike Price
c) Intrinsic Value = Strike Price – Spot Price
Unit-24
d) Intrinsic Value = Strike Price × Spot Price
Answer: c) Intrinsic Value = Strike Price – Spot
Price.
 BFM Q. Which factor does NOT influence the price of an
option premium?
a) The intrinsic value of the option.
Mod.-C
b) The time value associated with the option's
residual maturity.
Unit-24 c) The historical value of the underlying asset.
d) Whether the option is in-the-money or out-of-the-
money.
Answer: c) The historical value of the underlying
asset.
 BFM Q. How can the dual nature of a currency option be
best described?
a) A put option on USD at USD/JPY strike is
Mod.-C equivalent to a put option on JPY.
b) A put option on USD at USD/JPY strike is
Unit-24 equivalent to a call option on JPY.
c) A call option on USD at USD/JPY strike is
equivalent to a put option on JPY.
d) Both a put and a call option on USD are
equivalent to options on JPY at different strikes.
Answer: b) A put option on USD at USD/JPY strike is
equivalent to a call option on JPY.
 BFM Q. What is the potential action of an option-holder if
the stock price on the expiry date is above the
strike price?
Mod.-C a) The option-holder will definitely exercise the
option irrespective of the open market price.
Unit-24 b) The option-holder would prefer to sell his shares
in the open market.
c) The option-holder has no other choice but to hold
onto the shares.
d) The option-holder would always choose to sell at
the strike price.
Answer: b) The option-holder would prefer to sell his
shares in the open market.
 BFM Q. Which of the following best describes a zero cost
option?
a) An option that comes without any premium but holds
Mod.-C no associated risk.
b) An option where the premium is paid by a third-party
Unit-24 entity.
c) An option where there is no premium payable but has
a corresponding risk, like paying at a higher rate if
market rate rises beyond a specified level.
d) An option that provides maximum protection against
all market risks.
Answer: c) An option where there is no premium payable
but has a corresponding risk, like paying at a higher rate
if market rate rises beyond a specified level.
 Q. Which of the following statements accurately
BFM distinguishes between a Forward Contract and an Option
Contract in terms of the rate applied?
a) In a Forward Contract, the rate is always the market rate
Mod.-C at the time of contract expiration, while in an Option
Contract, the holder always uses the strike price.
b) In a Forward Contract, the rate is predetermined, while
Unit-24 in an Option Contract, the holder can choose between the
strike price or the market rate.
c) Both Forward and Option Contracts use a fixed rate
based on the initial market quote.
d) In a Forward Contract, the rate can vary depending on
market volatility, while an Option Contract always uses the
strike price.
Answer: b) In a Forward Contract, the rate is
predetermined, while in an Option Contract, the holder can
choose between the strike price or the market rate.
 BFM Q. How does the risk exposure of the writer of an option
(option seller) compare to the buyer of a plain vanilla
option?
Mod.-C a) Both the writer and buyer of an option share an equal
amount of risk.
Unit-24 b) The writer of an option has unlimited risk, while the
buyer has no risk.
c) The buyer of an option bears all the risk, while the writer
enjoys the benefits.
d) Both the writer and buyer of an option are protected
from all risks in the market.
Answer: b) The writer of an option has unlimited risk, while
the buyer has no risk.
 BFM Q. What does a 3-year put option on a 5-year bond
allow an investor to do?
a) Convert the bond into equity at the end of the 5th
Mod.-C year.
b) Redeem his investment at the end of the 5th year
Unit-24 without any conditions.
c) Sell back the bond to the issuer and redeem his
investment at the end of the 3rd year.
d) Ensure a fixed interest rate for the entire 5-year
duration.
Answer: c) Sell back the bond to the issuer and
redeem his investment at the end of the 3rd year.
 BFM Q. Which of the following best describes an embedded
option in the context of bonds?
a) An option that allows the bond issuer to change the
Mod.-C interest rate of the bond after a specific period.
b) A unique option that allows banks to raise capital
Unit-24 through the issue of Perpetual Debt Instruments.
c) An option within a financial product, like a bond, that
affects its pricing and has specific conditions for
conversion or redemption.
d) A mandatory requirement for all bonds issued by
financial institutions.
Answer: c) An option within a financial product, like a
bond, that affects its pricing and has specific conditions
for conversion or redemption.
 BFM Q. What is a distinct characteristic of a futures
contract compared to a forward contract in terms
of settlement?
Mod.-C a) Futures contracts are only settled on the
specified settlement date.
Unit-24 b) Futures contracts are marked-to-market daily,
adjusting for losses or gains.
c) Futures contracts are settled at the spot rate on
the settlement date.
d) Futures contracts are never actively traded on
exchanges.
Answer: b) Futures contracts are marked-to-market
daily, adjusting for losses or gains.
 BFM Q. In a currency futures contract at The London
International Financial Futures and Options
Exchange (LIFFE), what happens on the settlement
Mod.-C date if the market rate is higher than the contracted
price?
a) The buyer pays the difference to the seller.
Unit-24
b) The contract is nullified and no transaction takes
place.
c) The seller pays to the holder the difference in
contracted price and spot price on that date.
d) The contract continues with the same contracted
price for the next settlement period.
Answer: c) The seller pays to the holder the
difference in contracted price and spot price on that
date.
 BFM Q. When did the trading in cross-currency – Rupee
contracts (Euro/INR, GBP/INR and JPY/INR)
commence in India?
Mod.-C a) In August 2008.
b) In the last quarter of 2009.
Unit-24 c) In the first quarter of 2010.
d) In January 2008.
Answer: b) In the last quarter of 2009.
 BFM Q. How does a corporate hedge against the
possibility of rising interest rates when expecting to
borrow USD after 3 months?
Mod.-C a) The corporate will buy the 90-day treasury
futures contract of a similar size.
Unit-24 b) The corporate will short sell the 90-day treasury
futures contract of comparable size.
c) The corporate will adjust the interest rate on the
actual loan.
d) The corporate will purchase long-term bonds to
counteract the interest rate.
Answer: b) The corporate will short sell the 90-day
treasury futures contract of comparable size.
 BFM Q. When was the Rupee interest rate futures market
relaunched in India after its initial failure?
a) In 2003.
Mod.-C
b) In Aug 2009.
c) In 2016-17.
Unit-24
d) In the late 2000s.
Answer: b) In Aug 2009.
 BFM Q. What is the term for the small difference
between the face value of the contracts and the
actual exposure in futures?
Mod.-C a) Marginal risk.
b) Residual risk.
Unit-24 c) Exposition variance.
d) Basis risk.
Answer: d) Basis risk.
 BFM Q. What does an interest rate swap primarily
involve?
a) An exchange of the principal amount on a loan.
Mod.-C
b) A transfer of ownership of the underlying asset.
c) An exchange of interest flows based on a
Unit-24 notional amount.
d) A switch of the initial lender with a third party.
Answer: c) An exchange of interest flows based on
a notional amount.
 BFM Q. In the provided example, when the company
enters into an interest rate swap, what is the
reason for adding the 2% to the 3-month T-bill rate?
Mod.-C a) It represents the bank's service charge for
facilitating the swap.
Unit-24 b) It is the risk premium of the bank.
c) It makes the rate equivalent to the fixed rate of
7% originally committed by the company.
d) It represents inflation adjustment for the rate.
Answer: c) It makes the rate equivalent to the fixed
rate of 7% originally committed by the company.
 BFM Q. In the context of interest rate swaps, how is the
notional amount treated?
a) The notional amount is always exchanged
Mod.-C between the two parties at the beginning of the
contract.
Unit-24 b) The notional amount is exchanged periodically
based on the terms of the swap.
c) The notional amount is used as the base for
calculating interest payments but is never
exchanged.
d) The notional amount is adjusted each time with
the market rates.
Answer: c) The notional amount is used as the base
for calculating interest payments but is never
exchanged.
 BFM Q. In terms of interest rate swaps, what does a
benchmark rate signify?
a) The credit risk associated with the company
Mod.-C taking part in the swap.
b) A risk-free interest rate determined by the
Unit-24 market, known for its objectivity and transparency.
c) The maximum rate of interest that a company
can be charged in any swap agreement.
d) The fixed rate of interest that both parties have
agreed upon during the swap.
Answer: b) A risk-free interest rate determined by
the market, known for its objectivity and
transparency.
 BFM Q. Which benchmark rate has been phased out in
favor of the Secured Overnight Financing Rate
(SOFR) as one of the Alternate Reference Rates
Mod.-C (ARR)?
a) O/N MIBOR
Unit-24 b) Fed Rate
c) LIBOR
d) MIBOR
Answer: c) LIBOR
 BFM Q. Who is currently responsible for publishing the
MIBOR?
a) US Federal Reserve
Mod.-C
b) Several banks through a polling system
c) Financial Benchmark India Ltd (FBIL)
Unit-24
d) NSE after an average calculation
Answer: c) Financial Benchmark India Ltd (FBIL)
 BFM Q. What is the role of FIMMDA in the context of
benchmark rates in Indian markets?
a) It announces the daily rates of benchmarks.
Mod.-C
b) It combines alternate reference rate with forward
premiums.
Unit-24 c) It is a self-regulatory agency for the debt market
and standardizes practices for adopting benchmark
rates.
d) It determines the forward premium of USD/INR.
Answer: c) It is a self-regulatory agency for the debt
market and standardizes practices for adopting
benchmark rates.
 BFM Q. Which of the following statements regarding
MIFOR is accurate?
a) MIFOR is announced daily by the RBI for term
Mod.-C lending.
b) MIFOR is only applicable to G-sec yields in the
market.
Unit-24 c) RBI has allowed corporates to use MIFOR as a
benchmark rate for all their dealings.
d) MIFOR is a combination of alternate reference
rate and forward premium of USD/INR, and
corporates are not permitted to use it as a
benchmark rate.
Answer: d) MIFOR is a combination of alternate
reference rate and forward premium of USD/INR,
and corporates are not permitted to use it as a
benchmark rate.
 BFM Q. What does a floating to floating rate swap, also
known as a basis swap, involve?
a) The exchange of a fixed rate for a floating rate
Mod.-C based on MIBOR.
b) The shift from a T-bill linked rate to a base rate of
Unit-24 MIBOR.
c) The exchange of a fixed rate in one currency for
a floating rate in another currency.
d) Converting a MIBOR linked rate to a T-bill rate.
Answer: b) The shift from a T-bill linked rate to a
base rate of MIBOR.
 BFM Q. Which of the following accurately describes the
use of Interest Rate Swap (IRS) in the context of
the Indian Rupee market?
Mod.-C a) Quanto swaps, which pay interest in home
currency at rates applicable to a foreign currency,
are widely used.
Unit-24
b) Swaptions, swaps with built-in options, are the
most popular swaps in the Indian market.
c) Only plain vanilla type swaps are permitted in the
Indian Rupee market.
d) The Indian Rupee market primarily uses coupon
swaps, which refer to a floating rate in one currency
exchanged for a fixed rate in another.
Answer: c) Only plain vanilla type swaps are
permitted in the Indian Rupee market.
 BFM Q. What is the primary difference between an Interest Rate
Swap (IRS) and a Forward Rate Agreement (FRA)?
a) IRS is based on the risk free Treasury yield curve, while
Mod.-C FRA is based on the G-sec yield curve in India.
b) While an IRS covers a series of periodical interest
Unit-24 payments, an FRA deals with a single payment in the future.
c) The counterparty risk in IRS depends on the Credit
Conversion Factors, while in FRA, it depends on the tenor of
the contract.
d) IRS is used for settling interest at the beginning of the
period, whereas FRA is for settling interest at the end.
Answer: b) While an IRS covers a series of periodical
interest payments, an FRA deals with a single payment in
the future.
 BFM Q. How is the floating rate (alternate reference rate)
typically decided for an interest payment period?
a) It is decided at the end of the current interest payment
Mod.-C period based on the FRA rate.
b) It is decided in advance, on the last day of the previous
Unit-24 period or one day before the last day.
c) It is decided based on the risk free Treasury yield curve
through interpolation.
d) It is determined by the Credit Conversion Factors for the
corresponding tenor of the contract.
Answer: b) It is decided in advance, on the last day of the
previous period or one day before the last day.
 BFM Q. What is a Principal Only Swap (POS) in the context
of a Currency Swap?
a) It involves the exchange of both principal and
Mod.-C interest in different currencies.
b) It hedges only the currency risk associated with the
Unit-24 principal amount.
c) It pertains to hedging the risk associated with
varying interest rates across currencies.
d) It is a mechanism to exchange interest payments in
the same currency.
Answer: b) It hedges only the currency risk associated
with the principal amount.
 BFM Q. Why might two parties, one from Germany and one
from India, consider engaging in a currency swap?
a) Both parties intend to raise loans in the same currency
Mod.-C and are looking for a hedging mechanism.
b) The German investor wants to invest in France, while
Unit-24 the Indian company wants to invest in Germany.
c) Each party can raise funds in their domestic currency
at a lower rate, and by swapping, they can serve their
respective needs more efficiently.
d) The Indian company wants to hedge against potential
Euro depreciation while the German investor is confident
about Rupee appreciation.
Answer: c) Each party can raise funds in their domestic
currency at a lower rate, and by swapping, they can serve
their respective needs more efficiently.
 BFM Q. Why might banks be well-positioned to offer currency
swaps without necessarily waiting for two clients with
complementary requirements?
Mod.-C a) Banks usually have large amounts of foreign currencies
in reserve, enabling them to offer swaps at any time.
b) Banks have access to a broad network of international
Unit-24 clients, allowing for easier matching.
c) Banks, through their treasuries, might have their own
requirements for currency swaps, be it for investment or
trading.
d) Banks have the ability to create synthetic currency pairs
for unmatched swap requirements.
Answer: c) Banks, through their treasuries, might have their
own requirements for currency swaps, be it for investment
or trading.
 BFM Q. Why do several Indian companies raise External
Commercial Borrowings (ECB) in foreign currencies and
then swap these loans into Rupees?
Mod.-C a) They intend to speculate on the foreign exchange
market.
b) Raising funds in foreign currencies and then swapping
Unit-24 into Rupees often results in a less expensive effective loan
cost compared to a standard Rupee loan.
c) Indian companies prefer to deal with foreign banks rather
than domestic ones.
d) The practice of raising ECB is mandated by the Indian
government.
Answer: b) Raising funds in foreign currencies and then
swapping into Rupees often results in a less expensive
effective loan cost compared to a standard Rupee loan.
 BFM Q. In a Principal Only Swap (POS), which of the following
statements is accurate regarding the repayment of the
loan?
Mod.-C a) The repayment occurs in foreign currency with a variable
exchange rate, leading to possible exchange risk.
Unit-24 b) The borrower has to repay the loan in USD terms but uses
the principal amount in domestic currency.
c) The repayment takes place in the home currency, and the
exchange rate is fixed, mitigating any exchange risk.
d) The borrower has the choice to repay either in domestic
currency or USD, based on the prevailing exchange rates.
Answer: c) The repayment takes place in the home
currency, and the exchange rate is fixed, mitigating any
exchange risk.
 BFM Q. In the context of a Coupon Only Swap (COS), why might
a borrower opt for this type of swap?
a) The borrower anticipates depreciation of the home
Mod.-C currency and wishes to leverage this to reduce debt.
b) The borrower intends to pay both the principal and
interest in the home currency.
Unit-24 c) Such a strategy might be beneficial if the principal
amount is already hedged using other derivative
instruments, or the borrower anticipates appreciation of
the currency they will use for payment.
d) The borrower is mandated by the lender to only utilize
COS as an option.
Answer: c) Such a strategy might be beneficial if the
principal amount is already hedged using other derivative
instruments, or the borrower anticipates appreciation of
the currency they will use for payment.
 BFM Q. When were interest rate swaps (IRS) and forward
rate agreements (FRA) first introduced in the Indian
markets by the RBI?
Mod.-C a) In 1995, alongside other complex derivative
products.
Unit-24 b) In 1999, marking a new era in the Indian financial
market.
c) In 2000, as a measure to stabilize the fluctuating
interest rates.
d) In 1998, as a part of a comprehensive financial
reform.
Answer: b) In 1999, marking a new era in the Indian
financial market.
 BFM Q. What is the primary purpose of the ISDA Master Agreement in
the context of derivative contracts in Indian markets?
a) It is a transaction-wise agreement that must be executed for
Mod.-C each deal.
b) It is an agreement that determines the interest rates for
various derivative products.
Unit-24 c) It is a standardized agreement laying down terms of contracts
including jurisdiction, valuation norms, and netting out, and once
executed, covers all transactions between two counterparties
globally.
d) It is an optional agreement that banks can choose to
implement if they desire additional security for their derivative
contracts.
Answer: c) It is a standardized agreement laying down terms of
contracts including jurisdiction, valuation norms, and netting
out, and once executed, covers all transactions between two
counterparties globally.
 BFM Q. In the hierarchy of the ISDA documentation standards,
which document takes precedence in the event of a
dispute?
Mod.-C a) The Trade Confirmation always takes precedence over
the other documents.
b) The Schedule to Master Agreement holds the ultimate
Unit-24 authority.
c) The ISDA Master Agreement supersedes both the
Schedule and the Trade Confirmation.
d) The specific covenants of each trade in the Trade
Confirmation take precedence over the Schedule, which in
turn takes precedence over the Master Agreement.
Answer: d) The specific covenants of each trade in the
Trade Confirmation take precedence over the Schedule,
which in turn takes precedence over the Master
Agreement.
 BFM Q. Which of the following statements is true regarding
RBI's stance on IRS and benchmarks?
a) RBI has always allowed MIFOR as a benchmark for
Mod.-C interest rate swaps without any restrictions.
b) Banks have only been allowed to use IRS strictly for
Unit-24 hedging purposes and not for trading.
c) RBI originally restricted benchmarks to domestic
markets and later allowed MIFOR exclusively for inter-bank
dealings.
d) RBI has shown a constant stance in allowing all
benchmarks without any limitations.
Answer: c) RBI originally restricted benchmarks to
domestic markets and later allowed MIFOR exclusively for
inter-bank dealings.
 BFM Q. How is the MIFOR (Mumbai Interbank Forward Outright
Rate) calculated for various tenors?
a) MIFOR is purely based on the USD/INR rolling forward rates.
Mod.-C
b) MIFOR is calculated using the rolling forward premia in
percentage term combined with the Euro LIBOR for the
relevant tenor.
Unit-24
c) MIFOR is determined by taking the average of the USD
LIBOR and the rolling forward premia in percentage terms.
d) MIFOR is calculated using the rolling forward premia in
percentage term and the USD LIBOR for the relevant tenor.
Answer: d) MIFOR is calculated using the rolling forward
premia in percentage term and the USD LIBOR for the relevant
tenor.
 BFM Q. Which of the following is accurate regarding RBI's 2012
instructions related to OTC foreign exchange derivatives?
a) All inter-bank OTC foreign exchange derivatives are to be
Mod.-C reported on the CCIL platform without any confidentiality protocol.
b) Only selective trades between the Category-I Authorised Dealer
Banks and their clients need to be reported on the CCIL platform.
Unit-24 c) All inter-bank OTC foreign exchange derivatives and trades
between the Category-I Authorised Dealer Banks and their clients
are to be reported on the CCIL platform with a confidentiality
protocol.
d) The reporting on the CCIL platform is purely optional for all the
inter-bank OTC foreign exchange derivatives.
Answer: c) All inter-bank OTC foreign exchange derivatives and
trades between the Category-I Authorised Dealer Banks and their
clients are to be reported on the CCIL platform with a confidentiality
protocol.
 BFM Q. When were USD Rupee options introduced in the
Indian market?
a) January 2002
Mod.-C
b) June 2003
c) September 2004
Unit-24
d) December 2005
Answer: b) June 2003
 BFM Q. For an 'AD Category - I bank' to become a trading
and clearing member of the exchange-traded
currency options market of the recognized stock
Mod.-C exchanges, which of the following is NOT a
requirement as per the Reserve Bank?
a) A minimum net worth of Rs. 500 crores.
Unit-24
b) A minimum CRAR of 8 per cent.
c) Net NPA should not exceed 3 per cent.
d) Should have made a net profit for the last 3 years.
Answer: b) A minimum CRAR of 8 per cent.
 BFM Q. Which category of banks can participate in the
exchange-traded currency options market only as clients,
provided they get approval from the respective regulatory
Departments of the Reserve Bank?
Mod.-C
a) AD Category - I banks that have surpassed the prudential
requirements.
Unit-24 b) AD Category - II banks that are Urban Co-operative
banks.
c) AD Category - I banks that are Urban Co-operative banks
or State Co-operative banks and do not meet the prudential
requirements.
d) All AD Category - I banks irrespective of their prudential
standings.
Answer: c) AD Category - I banks that are Urban Co-
operative banks or State Co-operative banks and do not
meet the prudential requirements.
 BFM Q. How is the eligible limit determined for exporters and
importers to take appropriate hedging positions in
Exchange Traded Currency Derivatives (ETCDs)?
Mod.-C a) Based on the average of the last five years’ export or
import turnover.
Unit-24 b) Determined by the previous year's export or import
turnover only.
c) The higher of the average of the last three years’ export
or import turnover or the previous year’s export or import
turnover.
d) Solely based on the present year's expected export or
import turnover.
Answer: c) The higher of the average of the last three
years’ export or import turnover or the previous year’s
export or import turnover.
 BFM Q. What prudential requirement states the financial
performance a bank must demonstrate to become a
trading and clearing member of the exchange
Mod.-C traded currency options market?
a) Minimum net worth of Rs. 700 crores.
Unit-24 b) Net NPA should not exceed 5 per cent.
c) Made net profit for the last 2 years.
d) Made net profit for the last 3 years.
Answer: d) Made net profit for the last 3 years.
 BFM Q. How frequently must trading positions in forwards,
options, and interest rate swaps be marked to market, and
how does this relate to hedging trading positions?
Mod.-C a) Trading positions must be marked to market monthly,
while hedging trading positions must be marked to market
weekly.
Unit-24 b) All trading positions must be marked to market daily, and
hedging trading positions must be marked to market at the
same frequency as the underlying position.
c) Trading positions are marked to market annually, while
hedging trading positions are assessed quarterly.
d) Trading and hedging positions are only marked to market
at the end of the financial year.
Answer: b) All trading positions must be marked to market
daily, and hedging trading positions must be marked to
market at the same frequency as the underlying position.
 BFM Q. What is the condition for Authorised Dealer Category-I bank
trading members when undertaking trading in permitted
exchange traded currency derivatives?
Mod.-C a) They can only trade in FCY-INR contracts and must establish
an underlying exposure.
b) They have unlimited trading ability in cross-currency
contracts.
Unit-24
c) Any synthetic USD-INR position created using a combination
of exchange traded FCY-INR and cross-currency contracts
should be within the position limit prescribed for the USD-INR
contract.
d) They can only trade within their NOPL if they have a pre-
approved permission from SEBI.
Answer: c) Any synthetic USD-INR position created using a
combination of exchange traded FCY-INR and cross-currency
contracts should be within the position limit prescribed for the
USD-INR contract.
 BFM Q. What requirement must be fulfilled by exchanges
before introducing any Interest Rate Option in India?
a) They should have a minimum of 500 trading members.
Mod.-C
b) The introduction needs to be post 31st January 2017.
c) They must ensure all trading members have
Unit-24 appropriate infrastructure and risk management
systems.
d) The Exchanges must obtain prior approval from the
Reserve Bank before introducing any Interest Rate
Option.
Answer: d) The Exchanges must obtain prior approval
from the Reserve Bank before introducing any Interest
Rate Option.
 BFM Q. What is a distinct characteristic of a European
option in the context of its exercise?
a) It can be exercised at any point before its
Mod.-C expiration date.
b) It has multiple predefined dates on which it can
Unit-24 be exercised.
c) It can only be exercised on a single predefined
expiration date.
d) Its exercise date can be changed based on
market conditions.
Answer: c) It can only be exercised on a single
predefined expiration date.
 BFM Q. What was the primary purpose of establishing
the Financial Benchmarks India Pvt Ltd (FBIL)?
a) To directly oversee the trading of European
Mod.-C options in the Indian market.
b) To ensure an independent benchmark setting
Unit-24 process devoid of conflicts arising from the
governance structures of FIMMDA and FEDAI.
c) To act as the primary regulator for all financial
derivatives in India.
d) To replace the roles of FIMMDA and FEDAI
entirely.
Answer: b) To ensure an independent benchmark
setting process devoid of conflicts arising from the
governance structures of FIMMDA and FEDAI.
 BFM Q. What is the primary function of the Financial
Benchmarks India Pvt Ltd (FBIL)?
a) To oversee the trading activities of foreign
Mod.-C exchange in India.
b) To develop and administer benchmarks related to
Unit-24 money market, government securities, and foreign
exchange in India.
c) To act as a regulatory body for all financial
institutions in India.
d) To provide funding and investment opportunities
to Indian businesses.
Answer: b) To develop and administer benchmarks
related to money market, government securities,
and foreign exchange in India.
 BFM Q. At what time does FBIL typically announce the
benchmark rate for Overnight Mumbai Interbank
Outright Rate (MIBOR)?
Mod.-C a) At the close of the business day.
b) At 10.45 AM every day, barring certain
Unit-24 conditions.
c) At the beginning of the trading session.
d) At midnight, at the start of a new day.
Answer: b) At 10.45 AM every day, barring certain
conditions.
 BFM Q. Which of the following is NOT one of the
benchmark rates/matrix announced by FBIL on a
daily basis?
Mod.-C a) Term MIBOR for various tenors.
b) FC-Rupee Options Volatilities for different tenors.
Unit-24 c) Bank Interest Rates for all banks.
d) Certificates of Deposit (FBIL-CD).
Answer: c) Bank Interest Rates for all banks.
 BFM Q. What is the primary distinction between options
and forward contracts in the context of derivatives?
a) Options are Exchange Traded while forward
Mod.-C contracts are OTC products.
b) Forward contracts allow buying/selling at market
Unit-24 price while options do not.
c) Options provide a right without an obligation to
buy/sell, allowing the holder to choose between
strike or market price.
d) Forward contracts are based on commodities
while options are based on financial markets.
Answer: c) Options provide a right without an
obligation to buy/sell, allowing the holder to choose
between strike or market price.
 BFM Q. Which of the following statements accurately
describes futures?
a) Futures are customized forward contracts not
Mod.-C traded on an exchange.
b) Futures do not have a definite delivery and can
Unit-24 be nullified anytime.
c) Futures are standardized forward contracts
traded on an exchange with specified volumes and
delivery dates.
d) Futures do not have any margin requirements.
Answer: c) Futures are standardized forward
contracts traded on an exchange with specified
volumes and delivery dates.
 BFM Q. What purpose do currency swaps primarily
serve?
a) They involve only the exchange of cash flows in a
Mod.-C singular currency.
b) Currency swaps are used exclusively to benefit
Unit-24 from the interest rate differentials of currencies.
c) They are exclusively used to hedge exchange
rate risk but not the interest rate risk.
d) Currency swaps can hedge both exchange and
interest rate risks by combining forward exchange
rates and interest rate swaps.
Answer: d) Currency swaps can hedge both
exchange and interest rate risks by combining
forward exchange rates and interest rate swaps.
 BFM Q. What is the primary function of the Financial
Benchmarks India Pvt Ltd (FBIL)?
a) It manages the hedge funds and investments in India.
Mod.-C
b) It oversees the administration of the FBIL-O/N MIBOR
and started its operations by publishing the overnight
Unit-24 benchmark rate in 2015.
c) It deals exclusively with the trading and issuance of
bonds in the Indian market.
d) It is solely responsible for managing the interest rates
of bank loans in India.
Answer: b) It oversees the administration of the FBIL-
O/N MIBOR and started its operations by publishing the
overnight benchmark rate in 2015.
 BFM Q. Which of the following best describes an 'Embedded
Option'?
a) A standalone financial derivative used for hedging
Mod.-C purposes.
b) An option that comes inbuilt within a product, allowing
Unit-24 certain rights like selling back to the issuer at a specified
time or making early withdrawals.
c) A special type of currency swap used in international
trade.
d) A margin requirement that needs to be maintained for
transactions.
Answer: b) An option that comes inbuilt within a product,
allowing certain rights like selling back to the issuer at a
specified time or making early withdrawals.
Thank You