Derivatives activities in end users are primarily conducted by Answer a.the huma

Question

Derivatives activities in end users are primarily conducted by
Answer
a.the human resources group
b.the sales staff
c.the chief financial officer
d.the board of directors
e.the treasury group

Which of the following best describes a company that practices enterprise risk management?
Answer
a.interest rate risk and currency risk would be managed in unison
b.a single department to manage risk
c.it would manage insurance-related risks along with financial risk
d.credit risk would be managed the same way as market risk
e.operational risk would be managed

Ultimate authority for risk management lies with
Answer
a.legal counsel
b.the head trader
c.senior management
d.the internal auditors
e.the external auditors

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called
Answer
a.covered interest arbitrage
b.triangular arbitrage
c.a conversion
d.interest-rate parity
e.none of the above

The cost of carry consists of all the following except
Answer
a.the riskfree rate
b.the cost of storage
c.insurance on the asset
d.the risk premium
e.none of the above

Explanation / Answer

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Derivatives activities in end users are primarily conducted by
Answer
a. the human resources group
b. the sales staff
c. the chief financial officer
d. the board of directors
e. the treasury group

The derivative trading is done by finance function. The CFO is not directly involved in derivative activities , he/she supervises the entire finance function The treasury group is involved in investment, hedging and arbitraging hedging activities and hence derivative activities.

Which of the following best describes a company that practices enterprise risk management?
Answer
a. interest rate risk and currency risk would be managed in unison
b. a single department to manage risk
c. it would manage insurance-related risks along with financial risk
d. credit risk would be managed the same way as market risk
e. operational risk would be managed

ERM is a method that is used by organizations to manage all types of risk (credit, interest rate, currency, operational risk , all risks mentioned above) hence it is effected by the company’s board of directors along with senior managerial involved in setting up strategy and goals. All the decisions are taken by a team though execution can take place by different departments.

Ultimate authority for risk management lies with
Answer
a. legal counsel
b. the head trader
c. senior management
d. the internal auditors
e. the external auditors

The legal counsel in consulted, the head trader executes , the internal auditors monitors and reviews the risk management methods and processes and external auditors(outside company or agency)provide a review of financial statement.

A transaction that exploits differences in the theoretical and actual values of a foreign currency forward or futures contract is called
Answer
a. covered interest arbitrage
b. triangular arbitrage
c. a conversion
d. interest-rate parity
e. none of the above

A Covered interest arbitrage is where an investor buys a financial instrument in a foreign currency and then hedges this risk by selling a forward and then invests back into the base currency.

It is the process of conversion of one currency to another and then converting it again to a third currency and finally converting it back to the original currency.

A conversion could be interest rate , currency or one of the option strategies

Interest rate parity is a theory where interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

The statement given above is called currency arbitrage.

The cost of carry consists of all the following except
Answer
a. the risk–free rate
b. the cost of storage
c. insurance on the asset
d. the risk premium
e. none of the above

Cost of carry is the difference between the futures and the spot price. It includes the cost of financing, insurance, transportation and all types of storage costs , less benefits derived from lending the asset at risk free rate of return and any convenience yield. Risk premium will be there for both spot as well as future price.

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