Chapter 11 – Practice Set

1. It is an option that gives the holder the right to buy.

a. purchased option c. call option
b. written option d. put option

2. It is an option that gives the holder the right to sell.

a. purchased option c. call option
b. written option d. put option

3. It is a contract between two parties who agree to exchange future interest payments on a
given loan amount; usually, one set of interest payments in based on a fixed interest rate and
the other is based on a variable interest rate.
a. interest rate option c. foreign currency swap
b. interest rate swap d. interest rate futures

4. Which of the following risks is inherent in an interest rate swap agreement?

a. The risk of exchanging a lower interest rate for a higher interest rate.
b. The risk of nonperformance by the counterparty to the agreement.
c. a and b
d. neither a nor b

5. It is a contract between two parties who agree to exchange sum of money in one currency for
another currency.
a. interest rate option c. foreign currency swap
b. interest rate swap d. interest rate futures

6. If the strike price is greater than the market price, a put option is said to be
a. out of the money c. at the money
b. in the money d. in the monkey

7. If the strike price is greater than the market price, a call option is said to be
a. out of the money c. at the money
b. in the money d. in the monkey

8. Which of the following statements most likely describes an option rather than other types of
derivatives?
a. Requires payment only when exercised.
b. Always traded on an exchange.
c. Settled on a future date.
d. Requires payment for the right obtained at the inception of the contract.

9. It refers to the amount paid to obtain a right under an option contract.

a. strike price c. notional amount
b. option premium d. underlying amount

10. This type of derivative protects the holder from unfavorable movements in prices while
allowing the holder to benefit from favorable movements in prices?
a. forward contract
b. futures contract
c. swap
d. option

Reference: Millan, Z. V. Accounting for Business Combinations (Advanced Accounting 2). Baguio: Bandolin Enterprise, © 2020