FINC306 LATEST 2026 PRACTICE EXAM QUESTIONS AND
ANSWERS GUARANTEE A+
✔✔What is the return of the forward contract? (from 0 to t) - ✔✔Return is unknown
=(Vt-V0)/V0 = positive or negative depending on how the forward price of underlying
has changed since inception
✔✔What is the return of the forward contract? (from t to T - ✔✔Return is unknown
=(VT-Vt)/Vt = positive or negative depending on how the forward price of underlying has
changed since inception
✔✔What is a future contract and what are the standard features? - ✔✔Exchange-traded
"forward contracts"
Typical features
→ Standardized, with specified delivery dates, locations, procedures
→ A clearing house
→ Matches buy and sell orders
→ Keeps track of members' obligations and payments
→ After matching the trades, becomes the counterparty.
✔✔What is the main use of currency contracts? - ✔✔To hedge against exchange rate
changes
✔✔What are the different types of futures? - ✔✔Margin and Mark to Market
- Focused in multiplier, initial margin, maintenance margin and margin calls
Currency
- Used for hedging against interest rate changes
Other
- Index
- Commodity
- Interest rates (FRA and Swaps)
✔✔What is a bill vs a note vs a bond vs a STRIP? - ✔✔US treasury instruments
- Bills: <1 year, no coupon
- Notes: 1-10 years, coupons and sold at par
- Bond: 10-30 years, coupons and sold at par
- STRIPS: Zero Coupon
✔✔What is the meaning of rt(t<T) - ✔✔The yield to maturity which is annually
compounded rate of return on a ZCB at time t w/ maturity T
, ✔✔What is the term structure of yield? - ✔✔The YTM, rt (t, T), as a function of time to
maturity, T − t
✔✔What is the 3 month LIBOR? What is the SOFR? How does it affect FR and FRA
calculations? - ✔✔LIBOR: London Interbank Offering Rate - it is what banks estimate
the interest rate for borrowing and lending between banks to be
SOFR: Calculated by FED in NY. Futures are written on the SOFR e.g. CMOE
- Why 3 months: Makes it liquid and calculations easier
Ensure rates are adjusted for quarterly compounding
✔✔What is an FRA? - ✔✔An OTC contract that guarantees a borrowing or lending rate
on a given notional principal amount
✔✔What's the approximate ratio between the FRA market and Global GDP? - ✔✔They
are approximately equal - FRA market is slightly smaller.
✔✔What is a swap? What is it used for? What is a single payment swap equivalent to? -
✔✔→ A swap is an agreement between two parties to exchange one or multiple
payments, on one or more dates, determined by the difference between two prices.
→ A swap provides a way of hedging a stream of risky payments
→ A single-payment swap is the same as a cash-settled forward contract
✔✔What was the notional value of swaps compared to Global GDP? - ✔✔200ish million
vs 70ish million
✔✔How can a commodity buyer achieve financial settlement if the oil seller only
accepts the spot price? - ✔✔The buyer enters a swap: it pays the fixed swap price (e.g.,
$110.483) to the swap counterparty and receives the spot price in return. It then pays
the spot price to the oil seller. The net effect is that, regardless of the market price, it
effectively pays only the fixed swap price for the oil.
✔✔What role does the swap dealer play in a swap transaction? - ✔✔The swap dealer
acts as an intermediary (broker) between buyer and seller, earning the bid-ask spread
as a fee. The dealer bears credit risk from both parties but no price risk. When the
dealer directly matches buyer and seller, it's called a back-to-back or "matched book"
transaction.
✔✔How can a swap dealer hedge when acting as counterparty? - ✔✔The dealer
hedges by entering a long forward/futures contract. The payoff is (Swap Price−Forward
Price). If Swap Price > Forward Price (e.g., 110.483 − 110 = 0.483), the dealer
effectively receives a loan today, which must be repaid later with interest (e.g., −0.517
ANSWERS GUARANTEE A+
✔✔What is the return of the forward contract? (from 0 to t) - ✔✔Return is unknown
=(Vt-V0)/V0 = positive or negative depending on how the forward price of underlying
has changed since inception
✔✔What is the return of the forward contract? (from t to T - ✔✔Return is unknown
=(VT-Vt)/Vt = positive or negative depending on how the forward price of underlying has
changed since inception
✔✔What is a future contract and what are the standard features? - ✔✔Exchange-traded
"forward contracts"
Typical features
→ Standardized, with specified delivery dates, locations, procedures
→ A clearing house
→ Matches buy and sell orders
→ Keeps track of members' obligations and payments
→ After matching the trades, becomes the counterparty.
✔✔What is the main use of currency contracts? - ✔✔To hedge against exchange rate
changes
✔✔What are the different types of futures? - ✔✔Margin and Mark to Market
- Focused in multiplier, initial margin, maintenance margin and margin calls
Currency
- Used for hedging against interest rate changes
Other
- Index
- Commodity
- Interest rates (FRA and Swaps)
✔✔What is a bill vs a note vs a bond vs a STRIP? - ✔✔US treasury instruments
- Bills: <1 year, no coupon
- Notes: 1-10 years, coupons and sold at par
- Bond: 10-30 years, coupons and sold at par
- STRIPS: Zero Coupon
✔✔What is the meaning of rt(t<T) - ✔✔The yield to maturity which is annually
compounded rate of return on a ZCB at time t w/ maturity T
, ✔✔What is the term structure of yield? - ✔✔The YTM, rt (t, T), as a function of time to
maturity, T − t
✔✔What is the 3 month LIBOR? What is the SOFR? How does it affect FR and FRA
calculations? - ✔✔LIBOR: London Interbank Offering Rate - it is what banks estimate
the interest rate for borrowing and lending between banks to be
SOFR: Calculated by FED in NY. Futures are written on the SOFR e.g. CMOE
- Why 3 months: Makes it liquid and calculations easier
Ensure rates are adjusted for quarterly compounding
✔✔What is an FRA? - ✔✔An OTC contract that guarantees a borrowing or lending rate
on a given notional principal amount
✔✔What's the approximate ratio between the FRA market and Global GDP? - ✔✔They
are approximately equal - FRA market is slightly smaller.
✔✔What is a swap? What is it used for? What is a single payment swap equivalent to? -
✔✔→ A swap is an agreement between two parties to exchange one or multiple
payments, on one or more dates, determined by the difference between two prices.
→ A swap provides a way of hedging a stream of risky payments
→ A single-payment swap is the same as a cash-settled forward contract
✔✔What was the notional value of swaps compared to Global GDP? - ✔✔200ish million
vs 70ish million
✔✔How can a commodity buyer achieve financial settlement if the oil seller only
accepts the spot price? - ✔✔The buyer enters a swap: it pays the fixed swap price (e.g.,
$110.483) to the swap counterparty and receives the spot price in return. It then pays
the spot price to the oil seller. The net effect is that, regardless of the market price, it
effectively pays only the fixed swap price for the oil.
✔✔What role does the swap dealer play in a swap transaction? - ✔✔The swap dealer
acts as an intermediary (broker) between buyer and seller, earning the bid-ask spread
as a fee. The dealer bears credit risk from both parties but no price risk. When the
dealer directly matches buyer and seller, it's called a back-to-back or "matched book"
transaction.
✔✔How can a swap dealer hedge when acting as counterparty? - ✔✔The dealer
hedges by entering a long forward/futures contract. The payoff is (Swap Price−Forward
Price). If Swap Price > Forward Price (e.g., 110.483 − 110 = 0.483), the dealer
effectively receives a loan today, which must be repaid later with interest (e.g., −0.517
