1. Which of the following statements about the mechanics of futures contracts is false?
a. All futures contracts are made with a futures exchange, not with an individual.
b. Investor A might buy a futures contract and investor B might sell one, but instead of one contract between A and B, there are two contracts involving each individual and the exchange.
c. The riskier the asset, the higher the margin.
d. All futures contracts are marked to market each month, as the value of the contract changes.

2. Which of the following statements about hedging with futures contracts is false?
a. Futures have less basis risk than forwards.
b. Basis risk is the risk associated with a hedged position that is attributable to the fact that the asset to be hedged is not identical to the asset used as the hedge.
c. One of the advantages of forward contracts is that they can be structured to minimize (or even eliminate) basis risk.
d. Unlike futures contracts, forwards are not standardized and can therefore be tailor-made with respect to underlying assets and maturity dates.

3. What are NOT traded on the Montreal Exchange?
a. Futures on the bankers’ acceptances futures contracts (BAX)
b. Futures on two-year and 10-year Government of Canada bonds
c. Futures on S&P/TSX 60 Index (SXF)
d. Futures on S&P 500 Index

4. Which of the following statements about forwards and futures is true?
a. Forwards are customized and futures are standardized.
b. Forwards are traded on exchanges while futures are traded on the dealer or OTC markets.
c. Credit risk is less important for forwards because they are guaranteed by the clearing-house.
d. Forwards are marked to market daily.

5. Suppose ABC Inc. pays a fixed rate of 9.5 percent and DEF Inc. pays a floating rate of LIBOR + 1.5 percent. They enter into a swap in which ABC Inc. agrees to pay LIBOR to DEF Inc. and DEF Inc. agrees to pay 9.5 percent to ABC Inc. What is the net paying interest rate for ABC Inc.?
a. LIBOR + 1%
b. LIBOR
c. 12%
d. LIBOR + 0.5%

6. Suppose ABC Inc. borrows at a fixed rate of 9.5 percent or a floating rate of LIBOR + 1 percent. DEF Inc. borrows at a fixed rate of 12 percent or a floating rate of LIBOR + 1.5 percent. Currently, ABC Inc. borrows at its fixed rate and DEF Inc. borrows at its floating rate. They enter into a swap in which ABC Inc. agrees to pay LIBOR to DEF Inc. and DEF Inc. agrees to pay 9.5 percent to ABC Inc. How much, in percentage, could ABC Inc. and DEF Inc. save through the swap, respectively?
a. 1% and 1%
b. 0.5% and 1.5%
c. 1.5% and 0.5%
d. 2% and 0%

7. Which of the following statements about interest rate swaps is false?
a. Credit risk exists in interest rate swaps.
b. The actual cash flows depend on the notional value of the swap.
c. Net cash settlement increases the credit risk of the interest rate swap.
d. Interest rate swaps are settled by paying a net amount between the two parties.

8. Which of the following statements about currency swaps is false?
a. The swap rate for currency swaps is the exchange rate.
b. The swap rate for currency swaps is the interest rate.
c. The notional amounts of the currency swap are exchanged at the beginning and end of the swap only.
d. Usually, one party pays a fixed rate, while counterparty pays a floating rate.

9. Which of the following statements about plain vanilla interest swaps is false?
a. It is a “fixed for floating” interest rate swap denominated in one currency.
b. Counterparties exchange payments representing the difference between the fixed and floating rates.
c. The semi-annual payment from the fixed rate payee is the notional amount multiplied by the difference between the fixed rate and the floating rate, and divided by two.
d. The semi-annual payment from the floating rate payee is exactly the same as that from the fixed rate payee.

10. Which of the following are traded over the counter?
a. Equities
b. Bonds
c. Futures
d. Credit default swaps

11. Which of the following statements is false?
a. FRAs are normally based on six-month LIBOR.
b. FRAs are designed to hedge against exchange rates only.
c. FRAs are tailored to match the maturities of floating rate notes.
d. FRAs could be viewed as a series of interest rate forward contracts.