Interest Rate Derivatives FAQs – Questions and Answers

Short Futures Profit: A trader sells futures at ₹900. Price at expiry is ₹850. Lot size = 400. Profit?

Options:

A. ₹10,000 | B. ₹15,000 | C. ₹20,000 | D. ₹25,000

Futures Loss
Interest Rate Derivatives Question Bank: A Trader buys futures at ₹1,500. Price falls to ₹1,420. Lot size = 300. Loss?

Options:

A. ₹21,000 | B. ₹24,000 | C. ₹27,000 | D. ₹30,000

Basis Calculation: Spot price = ₹1,000 Futures price = ₹1,020 Basis = ?

Options:

A. 20 | B. −20 | C. 10 | D. −10

Mark-to-Market: Futures price yesterday = ₹2,000 Today = ₹2,040 Lot size = 100 MTM gain?

Options:

A. ₹3,000 | B. ₹4,000 | C. ₹5,000 | D. ₹6,000

Options Intrinsic Value: Call Intrinsic Value: Stock price = ₹1,150 Strike price = ₹1,100 Intrinsic value?

Options:

A. 30 | B. 40 | C. 50 | D. 60

Put Intrinsic Value: Stock price = ₹850 Strike price = ₹900 Intrinsic value?

Options:

A. 30 | B. 40 | C. 50 | D. 60

Out-of-the-Money Call: Spot price = ₹700 Strike price = ₹750 Intrinsic value?

Options:

A. 0 | B. 25 | C. 50 | D. 75

Option Break-Even
Call Break-even: Strike = ₹500, Premium = ₹25, Break-even?

Options:

A. ₹510 | B. ₹515 | C. ₹520 | D. ₹525

Put Break-even: Strike = ₹900, Premium = ₹40, Break-even?

Options:

A. ₹840 | B. ₹850 | C. ₹860 | D. ₹870

Option Profit/Loss
Call Buyer Profit: Strike = ₹1,000, Premium = ₹40, Spot at expiry = ₹1,080, Profit?

Options:

A. ₹20 | B. ₹30 | C. ₹40 | D. ₹60

Call Buyer Loss: Strike = ₹600, Premium = ₹30, Spot at expiry = ₹580, Loss?

Options:

A. ₹20 | B. ₹30 | C. ₹40 | D. ₹50

Put Buyer Profit: Strike = ₹800, Premium = ₹25, Spot at expiry = ₹740, Profit?

Options:

A. ₹20 | B. ₹25 | C. ₹35 | D. ₹45

Lot Size Calculations
Nifty Futures Profit: Trader buys NIFTY 50 futures at 18,000. Expiry price = 18,150, Lot size = 50, Profit?

Options:

A. ₹6,000 | B. ₹7,500 | C. ₹8,000 | D. ₹9,000

Futures Loss: Sell futures at ₹1,500, Expiry = ₹1,560, Lot size = 200, Loss?

Options:

A. ₹10,000 | B. ₹12,000 | C. ₹14,000 | D. ₹16,000

Time Value: Option premium = ₹70, Intrinsic value = ₹45, Time value?

Options:

A. 20 | B. 25 | C. 30 | D. 35

Hedging
Hedge using Futures: Portfolio value = ₹10,00,000, Index futures value = ₹2,00,000 per contract, Contracts required?

Options:

A. 3 | B. 4 | C. 5 | D. 6

Portfolio Hedge: Portfolio = ₹25 lakh, Index futures = ₹5 lakh, Contracts needed?

Options:

A. 4 | B. 5 | C. 6 | D. 7

Cost of Carry
Futures Price, Spot price = ₹1,000, Interest cost = ₹50, Futures price?

Options:

A. ₹1,020 | B. ₹1,040 | C. ₹1,050 | D. ₹1,060

Arbitrage
Arbitrage Opportunity: Spot price = ₹900, Futures price = ₹960, Cost of carry = ₹40, Is arbitrage possible?

Options:

A. Yes | B. No

Strategy Payoff
Covered Call Profit: Stock price = ₹1,000, Call premium received = ₹50, Stock at expiry = ₹1,100, Profit?

Options:

A. ₹50 | B. ₹100 | C. ₹150 | D. ₹200

Protective Put Loss: Stock price = ₹1,000, Put premium = ₹40, Stock falls to ₹900, Loss?

Options:

A. ₹60 | B. ₹40 | C. ₹50 | D. ₹30

Maximum Loss (Call Buyer): Strike = ₹700, Premium = ₹35, Maximum loss?

Options:

A. ₹35 | B. ₹70 | C. ₹700 | D. Unlimited

Maximum Profit (Put Buyer): Put buyer profit when price falls to:

Options:

A. Unlimited | B. Limited to strike price | C. Premium only | D. Interest only

Call Payoff: Strike = ₹500, Premium = ₹20, Spot at expiry = ₹560, Profit?

Options:

A. ₹20 | B. ₹30 | C. ₹40 | D. ₹50

Interest Rate Futures – Contract Value: Face value of Government Security = ₹100, Quoted futures price = 102.50, What is the contract value?

Options:

A. ₹100 | B. ₹102.50 | C. ₹10,250 | D. ₹1,025

Interest Rate Risk: A bank holds large amount of long-term bonds and expects interest rates to rise. Which derivative position should it take?

Options:

A. Buy interest rate futures | B. Sell interest rate futures | C. Buy call option | D. Buy swap

Bond Price Relationship: Which statement correctly describes the relationship between bond price and interest rate?

Options:

A. Both move in same direction | B. Both move randomly | C. They move in opposite directions | D. They are unrelated

Treasury Bill Futures: An investor buys a T-bill futures at price 98.20 and sells at 98.50. Profit per contract if face value = ₹1,00,000?

Options:

A. ₹300 | B. ₹200 | C. ₹250 | D. ₹500

Duration Risk: Which bond will have highest interest rate risk?

Options:

A. Short maturity bond | B. Long maturity bond | C. Floating rate bond | D. Zero coupon short term bond

Interest Rate Swap: In a plain vanilla interest rate swap, one party exchanges:

Options:

A. Currency payments | B. Fixed interest for floating interest | C. Equity returns | D. Commodity payments

Futures Profit: Trader buys interest rate futures at 101.40 and sells at 101.60. Face value ₹2,00,000. Profit?

Options:

A. ₹400 | B. ₹200 | C. ₹300 | D. ₹500

Hedging Objective: An investor holding government bonds expects interest rates to fall. Best strategy?

Options:

A. Sell futures | B. Buy futures | C. Buy put | D. Sell call

Interest Rate Options: A call option on interest rate futures gives the buyer the right to:

Options:

A. Buy bond at strike price | B. Sell bond at strike price | C. Buy futures contract at strike price | D. Sell interest payments

Futures Loss: Sell interest rate futures at 102.20 and square at 102.50. Face value ₹1,00,000. Loss?

Options:

A. ₹200 | B. ₹300 | C. ₹150 | D. ₹250

Basis in Interest Rate Futures: Basis is defined as:

Options:

A. Futures − Spot | B. Spot − Futures | C. Strike − Spot | D. Spot + Futures

Interest Rate Swap Purpose: Corporates typically enter interest rate swaps to:

Options:

A. Avoid taxation | B. Hedge interest rate exposure | C. Increase leverage | D. Avoid margin

Bond Duration: Duration measures:

Options:

A. Bond maturity | B. Price volatility due to interest rate changes | C. Coupon rate | D. Yield

MTM Settlement: In interest rate futures, profits and losses are settled:

Options:

A. At expiry | B. Weekly | C. Daily mark-to-market | D. Monthly

Futures Hedge: A portfolio manager expects interest rates to increase and bond prices to fall. What hedge should be used?

Options:

A. Buy bond futures | B. Sell bond futures | C. Buy call option | D. Buy swap

Numerical – Profit Calculation: Buy bond futures at 103.00 and sell at 103.25. Contract size ₹2,00,000. Profit?

Options:

A. ₹400 | B. ₹500 | C. ₹300 | D. ₹250

Interest Rate Swap Example: A company pays fixed 7% and receives floating MIBOR. This is known as:

Options:

A. Currency swap | B. Interest rate swap | C. Equity swap | D. Commodity swap

Floating Rate: Floating rate in Indian swaps is generally linked to:

Options:

A. Repo rate | B. MIBOR | C. CPI | D. GDP

Futures Loss: Buy interest rate futures at 101.80 and close at 101.60. Face value ₹1,00,000. Loss?

Options:

A. ₹200 | B. ₹150 | C. ₹300 | D. ₹100

Bond Sensitivity: Which bond will react most to interest rate changes?

Options:

A. Low duration bond | B. High duration bond | C. Floating bond | D. Short maturity bond

Interest Rate Cap: Interest rate cap protects borrower against:

Options:

A. Falling interest rates | B. Rising interest rates | C. Currency risk | D. Credit risk

Interest Rate Floor: Interest rate floor protects lender against:

Options:

A. Rising interest rates | B. Falling interest rates | C. Currency depreciation | D. Inflation

Numerical – Hedge Ratio: Bond portfolio value ₹50,00,000. Futures contract value ₹5,00,000. Contracts needed for hedge?

Options:

A. 5 | B. 10 | C. 20 | D. 25

Swap Benefit: Main advantage of swaps is:

Options:

A. Reduce tax | B. Reduce borrowing cost | C. Avoid regulation | D. Avoid interest payment

Futures Arbitrage: Arbitrage occurs when:

Options:

A. Futures equals spot | B. Price differences exist in markets | C. Interest rates fall | D. Inflation rises

Numerical – Futures Gain: Buy futures at 100.80 and sell at 101.10. Face value ₹1,00,000. Profit?

Options:

A. ₹300 | B. ₹250 | C. ₹200 | D. ₹150

Interest Rate Derivatives: Interest rate derivatives are mainly used to manage:

Options:

A. Equity risk | B. Currency risk | C. Interest rate risk | D. Commodity risk

Swap Market: Interest rate swaps are mainly traded in:

Options:

A. Stock exchange | B. OTC market | C. Commodity exchange | D. Forex exchange

Numerical – Bond Futures Loss: Sell futures at 102.80 and buy back at 103.10. Contract size ₹1,00,000. Loss?

Options:

A. ₹200 | B. ₹300 | C. ₹250 | D. ₹150

Yield Movement: If yields increase sharply, bond prices will:

Options:

A. Increase | B. Decrease | C. Stay constant | D. Double

Swap Participants: Typical participants in interest rate swap markets include:

Options:

A. Banks | B. Corporates | C. Financial institutions | D. All of the above

Numerical – Portfolio Hedge: Bond portfolio ₹1 crore. Futures contract value ₹10 lakh. Contracts required?

Options:

A. 5 | B. 10 | C. 15 | D. 20

Interest Rate Futures Settlement: Settlement in interest rate futures is generally:

Options:

A. Physical delivery | B. Cash settlement | C. Commodity settlement | D. Currency settlement

Duration Concept: Higher duration implies:

Options:

A. Lower risk | B. Higher interest rate sensitivity | C. No interest risk | D. Fixed price

Final Concept: Interest rate derivatives are mainly used by institutions to:

Options:

A. Reduce exchange rate risk | B. Hedge interest rate movements | C. Hedge commodity price | D. Hedge inflation

Which of the following has higher credit risk?

Options:

A. Bond rated AAA | B. Bond rated A | C. Bond rated BBB | D. All of them have same credit risk

Credit spread is the price of ___________.

Options:

A. Credit risk | B. Reinvestment risk | C. Price risk | D. All of the above

If the long-term rate is 10% and short-term rate is 8%, the shape of term structure of rates is ___________.

Options:

A. Normal/positive | B. Inverted/negative | C. Flat | D. humped

The concept of “accrued interest” applies to which of the following?

Options:

A. Zero coupon bond | B. Coupon bond | C. Both (a) and (b) | D. None of the above

If the coupon of the bond increases, its Modified Duration will __________. (Other things remaining constant).

Options:

A. Increase | B. Decrease | C. May increase or decrease | D. Remain constant

What is the settlement method for 91-day bill futures?

Options:

A. Cash | B. Physical | C. Can be cash or physical | D. None of the above

Which of the following is the last trading day for cash settled 10-year bond futures?

Options:

A. Two business days after the first business day of the Expiry Month | B. Two business days before 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

Total number of derivatives contracts outstanding is called __________.

Options:

A. Long position | B. Short position | C. Open interest | D. None of the above

Person goes short in a futures contract at Rs.100 and on expiry underlying price is Rs. 101, he will ________.

Options:

A. Make profit of Rs. 1 | B. Make loss of Rs. 1 | C. No profit no loss | D. None of the above

If participant buy 10 lot of single bond futures at Rs. 99, then contract value _________.

Options:

A. Rs. 20,00,000 | B. Rs. 19,99,000 | C. Rs. 19,80,000 | D. None of the above

Participants buy a put option with strike price of 98.50 at a premium of Rs. 0.20. On Expiry the bond price is Rs. 98.50. What is his net pay-off?

Options:

A. Profit of Rs. 0.20 | B. Profit of Rs. 0.25 | C. No profit & no loss | D. Loss of Rs. 0.20

Hedging for multiple bonds in portfolio can be done by using _________.

Options:

A. Duration based hedge ratio | B. Market value ratio | C. Year to maturity ratio | D. None of the above

In Bullish vertical spread using put strategy, trader _________.

Options:

A. buy put option with lower strike and sell a put option with higher strike | B. buy put option with higher strike and sell a put option with lower strike | C. buy call with lower strike and sell a put option with higher strike | D. None of the above

If you expect the interest rate will go up in future, today you should _________.

Options:

A. Sell GOI Bond futures | B. Buy GOI bond futures | C. Buy underlying bond | D. None of the above

Due to denial of matched orders by client/s, which type of risk arises?

Options:

A. Operational | B. Market | C. Regulatory | D. None of the above

If the base rate of Overnight MIBOR futures is 5, then its operating range will be _______.

Options:

A. 5.05 & 4.95 | B. 5.10 & 4.90 | C. 5.25 & 4.75 | D. 5.50 & 4.50