Financial Risk Management – Final Exam, 2026 – Study Material and
Practice Questions
Futures prices are discovered by: - ANS✔✔ when contracts are bought and sold
The premise that makes hedging possible is cash and futures prices: - ANS✔✔ generally change
in the same direction by similar amounts
Open interest refers to: - ANS✔✔ total number of futures that have not been offset or fulfilled
by delivery
To hedge against an increase in prices, you would: - ANS✔✔ purchase futures contracts
The primary function of the exchanges is to: - ANS✔✔ ensure the financial integrity of the
contracts traded, and clear every trade made at the CME Group
The CFTC's main responsibilities are to: - ANS✔✔ protect the trading public from fraud and
trading abuses on the exchange, protect the trading public from fraud and trading abuses off
the exchange, prevent price distortions and manipulations, encourage overall competitiveness
and efficiency on all U.S exchanges
Gains and losses on futures positions are settled: - ANS✔✔ each day after the close of trading
Hedging involves: - ANS✔✔ taking a futures position opposite to one's current cash market
position
Futures contacts are: - ANS✔✔ standardized agreement to buy or sell a specific quantity and
quality of an underlying asset at a certain price on a specified future date
, What do speculators do: - ANS✔✔ assume market price risk while looking for profit
opportunities, anticipate profiting from trading, believe that commodities can help diversify
portfolios, provide liquidity
The price of a stock is $64. A trader buys one put option contract on the stock with a strike price
of $60 when the option price is $10. When does the trader make a profit? - ANS✔✔ When the
stock price is below $50. The payoff must be more than the $10 paid for the option. The stock
price must, therefore, be below $50.
The price of a stock is $67. A trader sells five put option contracts (each contract is 100 options)
on the stock with a strike price of $70 when the option price is $4. The options are exercised
when the stock price is $69. What is the trader's net profit or loss? - ANS✔✔ Gain of $1500, The
option payoff is 70 − 69 = $1. The amount received for the option is $4. The gain is $3 per
option. In total 5 × 100 = 500 options are sold. The total gain is therefore $3 × 500 = $1,500.
An investor has exchange-traded put options to sell 100 shares for $20. There is a 2-for-1 stock
split. Which of the following is the investor's position after the stock split? - ANS✔✔ Put options
to sell 200 shares for $10.
The price of a stock, which pays no dividends, is $30, and the strike price of a one-year
European call option on the stock is $25. The risk-free rate is 4% (continuously compounded).
Which of the following is a lower bound for the option, such that there are arbitrage
opportunities if the price is below the lower bound and no arbitrage opportunities if it is above
the lower bound? - ANS✔✔ $5.98, The lower bound in S0 − Ke-rT. In this case it is 30 - 25e-
0.04×1 = $5.98.
When the stock price increases with all else remaining the same, which of the following is true?
- ANS✔✔ Calls increase in value while puts decrease in value
What is a call option? - ANS✔✔ the right to buy an asset for a certain price in the future
Practice Questions
Futures prices are discovered by: - ANS✔✔ when contracts are bought and sold
The premise that makes hedging possible is cash and futures prices: - ANS✔✔ generally change
in the same direction by similar amounts
Open interest refers to: - ANS✔✔ total number of futures that have not been offset or fulfilled
by delivery
To hedge against an increase in prices, you would: - ANS✔✔ purchase futures contracts
The primary function of the exchanges is to: - ANS✔✔ ensure the financial integrity of the
contracts traded, and clear every trade made at the CME Group
The CFTC's main responsibilities are to: - ANS✔✔ protect the trading public from fraud and
trading abuses on the exchange, protect the trading public from fraud and trading abuses off
the exchange, prevent price distortions and manipulations, encourage overall competitiveness
and efficiency on all U.S exchanges
Gains and losses on futures positions are settled: - ANS✔✔ each day after the close of trading
Hedging involves: - ANS✔✔ taking a futures position opposite to one's current cash market
position
Futures contacts are: - ANS✔✔ standardized agreement to buy or sell a specific quantity and
quality of an underlying asset at a certain price on a specified future date
, What do speculators do: - ANS✔✔ assume market price risk while looking for profit
opportunities, anticipate profiting from trading, believe that commodities can help diversify
portfolios, provide liquidity
The price of a stock is $64. A trader buys one put option contract on the stock with a strike price
of $60 when the option price is $10. When does the trader make a profit? - ANS✔✔ When the
stock price is below $50. The payoff must be more than the $10 paid for the option. The stock
price must, therefore, be below $50.
The price of a stock is $67. A trader sells five put option contracts (each contract is 100 options)
on the stock with a strike price of $70 when the option price is $4. The options are exercised
when the stock price is $69. What is the trader's net profit or loss? - ANS✔✔ Gain of $1500, The
option payoff is 70 − 69 = $1. The amount received for the option is $4. The gain is $3 per
option. In total 5 × 100 = 500 options are sold. The total gain is therefore $3 × 500 = $1,500.
An investor has exchange-traded put options to sell 100 shares for $20. There is a 2-for-1 stock
split. Which of the following is the investor's position after the stock split? - ANS✔✔ Put options
to sell 200 shares for $10.
The price of a stock, which pays no dividends, is $30, and the strike price of a one-year
European call option on the stock is $25. The risk-free rate is 4% (continuously compounded).
Which of the following is a lower bound for the option, such that there are arbitrage
opportunities if the price is below the lower bound and no arbitrage opportunities if it is above
the lower bound? - ANS✔✔ $5.98, The lower bound in S0 − Ke-rT. In this case it is 30 - 25e-
0.04×1 = $5.98.
When the stock price increases with all else remaining the same, which of the following is true?
- ANS✔✔ Calls increase in value while puts decrease in value
What is a call option? - ANS✔✔ the right to buy an asset for a certain price in the future
