Derivates MCQ Quiz - Objective Question with Answer for Derivates - Download Free PDF

The correct answer is  Mitigating exchange rate risks.

Key PointsImportance of Currency Swaps in International Finance Market

• Mitigating Exchange Rate Risks: Currency swaps allow parties to exchange principal and interest in different currencies, helping to hedge against currency fluctuations. This is crucial for companies and governments involved in international trade and finance.
• Managing Foreign Exchange Risk: By entering into a currency swap, entities can lock in exchange rates for future transactions, thereby minimizing the risk of adverse currency movements affecting their financial positions.
• Enhancing Liquidity: Currency swaps provide a mechanism for managing short-term foreign exchange liquidity challenges, especially during periods of economic uncertainty or financial crises.
• Supporting Regional Cooperation: As highlighted in the passage, the Reserve Bank of India (RBI)'s revised Currency Swap Arrangement for SAARC countries aims to strengthen regional financial cooperation and provide a financial safety net.
• Facilitating Long-term Financial Planning: By using currency swaps, entities can better plan their long-term financial strategies, knowing that they have mitigated the risk of currency fluctuations.

Additional Information

• Reserve Bank of India (RBI): The central banking institution of India, which controls the issuance and supply of the Indian rupee and manages the country's main payment systems.
• SAARC (South Asian Association for Regional Cooperation): An organization of South Asian nations, established in 1985, aimed at promoting economic and regional integration. Member countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency Swap: A financial derivative contract where two parties exchange principal and interest payments in different currencies. It helps in managing currency risk and liquidity issues.
• INR Swap Window: A new feature introduced in the revised framework, allowing for currency swaps in Indian Rupees with several concessions.
• US Dollar and Euro Swaps: Under the revised arrangement, the RBI will continue to provide currency swaps in US Dollars and Euros with a total corpus of US$ 2 billion.

The correct answer is  2024-2027.

Key PointsDuration of the Revised Currency Swap Arrangement

• The Reserve Bank of India (RBI), in collaboration with the Government of India, has announced a revised Currency Swap Arrangement for SAARC countries.
• This arrangement is set for the period from 2024 to 2027.
• The announcement of the revised arrangement was made on June 27, 2024.
• The primary objective of this arrangement is to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• The arrangement first came into operation on November 15, 2012, and has since been revised periodically to address the evolving financial needs of the region.
• Under the revised framework, the RBI will enter into bilateral swap agreements with the central banks of the SAARC countries wishing to avail of this facility.

Additional Information

• SAARC (South Asian Association for Regional Cooperation) is a regional intergovernmental organization of South Asian nations, established on December 8, 1985. It includes eight member countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency Swap is a financial agreement where two parties exchange principal and interest in different currencies. It helps in hedging against currency fluctuations and managing foreign exchange risk.
• The INR Swap Window introduced under the revised framework offers several concessions and supports currency swaps in Indian Rupees. Additionally, swaps in US Dollars and Euros are provided under a separate window with a total corpus of US$ 2 billion.
• The revised arrangement aims to strengthen regional financial cooperation and provide crucial liquidity support during economic crises, promoting financial stability across the SAARC region.
• The Reserve Bank of India (RBI) is India's central bank, responsible for regulating the issue and supply of the Indian rupee and managing the country's main payment systems. It plays a crucial role in the development strategy of the Government of India.

The correct answer is ₹250 billion.

Key PointsTotal Corpus of the Indian Rupee Support

• The passage discusses the revised Currency Swap Arrangement introduced by the Reserve Bank of India (RBI) for SAARC countries for the period 2024-2027.
• This arrangement aims to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• One of the key features of the revised framework is the introduction of a separate INR Swap Window.
• This new window comes with several concessions and offers ₹250 billion in support for currency swaps in Indian Rupees.
• The passage also mentions that the RBI will continue to provide swaps in US Dollars and Euros under a separate window with a total corpus of US$ 2 billion.

Additional Information

• The Reserve Bank of India (RBI) is India's central bank, responsible for regulating the issue and supply of the Indian rupee and overseeing the country's monetary policy.
• The South Asian Association for Regional Cooperation (SAARC) is an organization of South Asian nations, established in 1985, aimed at promoting economic and regional integration. Its member countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency swaps are financial agreements where two parties exchange principal and interest in different currencies. These swaps are used to hedge against currency risk and manage foreign exchange exposure.
• The Currency Swap Arrangement for SAARC countries was first introduced by the RBI on November 15, 2012, with the primary objective of offering a backstop for liquidity requirements until more permanent financial solutions are established.
• The revised arrangement for the period 2024-2027 continues to aim at strengthening regional financial cooperation and providing crucial liquidity support during economic crises, thus promoting financial stability across the SAARC region.

The correct answer is  Currency Swap.

Key PointsExplanation of Currency Swap

• Definition: A Currency Swap is a financial derivative contract where two parties exchange principal and interest in different currencies. It allows companies and governments to manage and hedge against currency fluctuations and foreign exchange risk.
• Importance: These swaps are crucial in international finance, providing a mechanism to protect against adverse currency movements and to manage liquidity in different currencies.
• Global Market: The global currency swap market has gained increased attention, especially amid rising interest rates and global economic uncertainty.
• RBI's Role: The Reserve Bank of India (RBI), in collaboration with the Government of India, has introduced a revised Currency Swap Arrangement for SAARC countries for the period 2024-2027. This arrangement aims to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• Historical Context: This arrangement first came into operation on November 15, 2012, with the primary objective of offering a backstop for liquidity requirements until more permanent financial solutions are established.
• Bilateral Agreements: Under the revised framework, the RBI will enter into bilateral swap agreements with the central banks of SAARC countries wishing to avail of the facility.
• INR Swap Window: A key feature of the revised framework is the introduction of a separate INR Swap Window, which comes with several concessions and will offer support for currency swaps in Indian Rupees.
• Other Currencies: Additionally, the RBI will continue to provide swaps in US Dollars and Euros under a separate window with a total corpus of US$ 2 billion.
• Regional Cooperation: This revised arrangement aims to further strengthen regional financial cooperation and provide crucial liquidity support during economic crises, thus promoting financial stability across the SAARC region.

Additional Information

• SAARC Countries: The South Asian Association for Regional Cooperation (SAARC) includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Foreign Exchange Risk Management: Currency swaps are a vital tool for managing foreign exchange risk, especially for organizations involved in international trade and finance.
• Interest Rate Swaps: Unlike currency swaps, interest rate swaps involve the exchange of interest payments in the same currency. They are used to manage exposure to fluctuations in interest rates.
• Future Contracts: These are standardized contracts to buy or sell assets at a future date at a predetermined price. They are used for hedging and speculative purposes.
• Options Contracts: These provide the right, but not the obligation, to buy or sell an asset at a specified price before a certain date. They are used for hedging and speculative purposes.
• Credit Default Swaps: These are financial derivatives that function as a type of insurance against the default of a borrower. They are used to manage credit risk.
• RBI Guidelines: The RBI issues guidelines and frameworks to regulate and manage financial instruments and derivatives, ensuring stability and transparency in the financial system.
• Economic Stability: Financial derivatives like currency swaps play a crucial role in maintaining economic stability by providing mechanisms to manage financial risks effectively.

The correct answer is  1 and 2.

Key PointsOptions Trading in India

• Call and put options are the two main types of options traded in the options market. A call option gives the holder the right to buy an asset at a specified price within a specific period, while a put option gives the holder the right to sell an asset at a specified price within a specific period. Hence, statement 1 is correct.
• The National Stock Exchange (NSE) is the primary platform for options trading in India. It offers a wide range of derivative products, including options on stocks, indices, and other financial instruments. Hence, statement 2 is correct.
• Options contracts in India do not always result in physical delivery of the underlying asset. In fact, most options contracts are settled in cash, meaning that the difference between the strike price and the market price is paid out in cash. Hence, statement 3 is incorrect.

Additional Information

• Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
• The National Stock Exchange (NSE) is one of the leading stock exchanges in India, founded in 1992. It introduced electronic trading to the Indian market.
• Cash settlement is a method of settling derivatives contracts where the seller pays the buyer the difference between the current market price and the agreed-upon price, rather than delivering the actual underlying asset.
• Physical delivery involves the actual transfer of the underlying asset from the seller to the buyer upon the exercise of the option.

The correct answer is  Credit risk.

Key PointsCredit Default Swaps (CDS)

• Definition: Credit Default Swaps (CDS) are financial contracts where one party, the protection buyer, pays a periodic fee to another party, the protection seller, in exchange for compensation if a third party defaults on its obligations.
• Primary Function: The main purpose of a CDS is to transfer the credit risk associated with a particular debt instrument from one party to another.
• Protection Against Credit Risk: CDS provides protection specifically against credit risk, which is the risk that a borrower will default on their debt obligations.
• Not Related to Other Risks: CDS does not provide protection against other types of financial risks such as currency risk, interest rate risk, market risk, or speculative risk.
• Usage in Financial Markets: Investors and financial institutions use CDS to hedge against potential losses due to credit events, such as default, bankruptcy, or restructuring of debt.

Additional Information

• Credit Risk:
  • Definition: Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest or both).
  • Examples: Default on corporate bonds, sovereign debt, or mortgages.
  • Mitigation: Financial instruments like CDS are used to mitigate credit risk.
• Currency Risk:
  • Definition: The risk that changes in exchange rates will affect the value of financial transactions.
  • Mitigation: Hedging using forward contracts, futures, or options.
• Interest Rate Risk:
  • Definition: The risk that changes in interest rates will affect the value of financial instruments.
  • Mitigation: Using interest rate swaps, futures, or options.
• Market Risk:
  • Definition: The risk of losses in financial markets due to movements in market prices.
  • Mitigation: Diversification, hedging, and using financial derivatives.
• Speculative Risk:
  • Definition: The risk of loss associated with investments in speculative activities.
  • Mitigation: Careful analysis and risk management strategies.

The correct answer is  Counterparty risk.

Key Points

• Counterparty risk refers to the probability that one party in a financial transaction may default on their contractual obligations.
• In a forward contract, which is a customized agreement between two parties to buy or sell an asset at a specified future date for a price agreed upon today, there is no involvement of a central clearinghouse.
• The absence of a central clearinghouse means that there is no intermediary to guarantee the performance of the contract, thereby increasing the risk of default.
• This type of risk is particularly relevant in over-the-counter (OTC) markets where such contracts are typically traded.
• Counterparty risk can have significant financial implications, including potential losses and disruptions in financial markets.
• Other types of risks such as settlement risk, arbitrage risk, and market risk are different in nature and do not specifically address the risk of default by one of the parties involved.

Additional Information

• Settlement Risk: This is the risk that one party will fail to deliver the terms of a contract at the time of settlement. It is often associated with the timing and process of financial transactions.
• Arbitrage Risk: This pertains to the risk involved in attempting to profit from price differences in different markets or forms of the same asset. Arbitrage opportunities can diminish quickly, leading to potential losses.
• Market Risk: This is the risk of losses in financial markets due to movements in market prices. It encompasses a wide range of factors including interest rates, currency exchange rates, and stock prices.
• Forward Contracts: These are agreements to buy or sell an asset at a future date for a price agreed upon today. Unlike futures contracts, they are not standardized and are traded over-the-counter (OTC).
• Central Clearinghouse: An intermediary entity that facilitates the clearing and settlement of financial transactions. It helps to mitigate counterparty risk by guaranteeing the performance of the contract.

The correct answer is  Avoidance of losses.

Key PointsPurpose of Futures Contracts in India

• Speculation: Futures contracts are often used by traders to speculate on the future direction of prices of various assets such as commodities, currencies, or financial instruments. By predicting the price movements, traders can make profits.
• Price discovery: Futures markets play a crucial role in the price discovery process. The prices of futures contracts reflect the collective expectations of market participants regarding future price movements, thereby helping in the determination of the fair market value of the underlying asset.
• Physical settlement: Although many futures contracts are settled in cash, some contracts require physical delivery of the underlying asset. This means that the seller must deliver the asset, and the buyer must take possession of it at the contract's expiration.
• Hedging: Futures contracts are commonly used for hedging purposes. Market participants, such as producers and consumers of commodities, use futures to protect themselves against adverse price movements. For instance, a farmer might use futures to lock in a price for their crop, thereby mitigating the risk of price fluctuations.
• Avoidance of losses: While futures contracts can help mitigate risks, they do not completely avoid losses. Futures trading involves significant risk, and participants can incur substantial losses if the market moves against their positions. Hence, the purpose of futures contracts does not include the complete avoidance of losses.

Additional Information

• Futures Contracts: A futures contract is a standardized legal agreement to buy or sell an asset at a predetermined price at a specified time in the future. These contracts are traded on futures exchanges.
• Uses of Futures Contracts: Futures contracts are used for various purposes including speculation, hedging, and arbitrage. They are essential tools for managing price risks in various markets.
• Standardization: Futures contracts are standardized in terms of quantity, quality, and delivery time, which makes them highly liquid and facilitates easier trading.
• Regulation in India: In India, futures trading is regulated by the Securities and Exchange Board of India (SEBI). The major commodity exchanges in India include the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).
• Risk Management: Futures contracts are a vital part of risk management strategies for businesses involved in volatile markets. They allow companies to stabilize their costs and revenues by locking in prices in advance.
• Leverage: Futures contracts provide leverage, meaning traders can control a large position with a relatively small amount of capital. However, this also increases the potential for both profits and losses.

The correct answer is  1 only.

Key PointsCredit Default Swaps (CDS)

• CDS contracts protect against credit risk: A Credit Default Swap (CDS) is a financial derivative that allows an investor to "swap" or offset their credit risk with that of another investor. For example, if a lender is concerned that a borrower might default on a loan, the lender can use a CDS to transfer that risk to another party in exchange for a fee. Hence, statement 1 is correct.
• CDS involve the exchange of principal amounts: In a typical CDS contract, there is no exchange of principal amounts. Instead, the buyer of the CDS pays periodic premiums to the seller, and in return, the seller agrees to compensate the buyer if the underlying credit instrument defaults. The focus is on the default event, not on the principal amount. Hence, statement 2 is incorrect.
• CDS contracts are used in managing interest rate risk: CDS are specifically designed to manage credit risk, not interest rate risk. Interest rate risk is typically managed using other financial instruments like interest rate swaps or options. Hence, statement 3 is incorrect.

Additional Information

• Historical Context: Credit Default Swaps gained significant attention during the 2007-2008 financial crisis. Institutions used them extensively to hedge against the risk of mortgage-backed securities defaulting.
• How CDS Work: The buyer of a CDS pays a periodic fee (like an insurance premium) to the seller. If the underlying debt instrument defaults, the seller compensates the buyer for the loss.
• Market Participants: The primary participants in the CDS market include banks, hedge funds, and insurance companies. They use CDS for hedging and speculative purposes.
• Regulation: Post the financial crisis, there was a push for greater transparency and regulation of the CDS market. The Dodd-Frank Act in the United States introduced measures to bring more transparency to the derivatives market, including CDS.
• Types of CDS: There are various types of CDS, including single-name CDS (which cover a single borrower) and index CDS (which cover a basket of borrowers).

Introduction:

Derivatives trading plays a significant role in global financial markets, offering instruments like futures, options, and swaps to hedge risks or speculate on price movements. However, derivatives also carry inherent risks due to their speculative nature and complexity. The risks associated with derivatives trading can affect both the market participants and the broader financial system, as seen during the 2008 global financial crisis. Understanding these risks and implementing mitigation measures is critical for maintaining market stability.

Risks Associated with Derivatives Trading:

1. Market Risk: Market risk refers to the possibility of financial loss due to unfavorable price movements in the underlying asset. For instance, in 2020, oil futures contracts turned negative as a result of the COVID-19 pandemic, causing massive losses for traders who were unable to liquidate positions.

2. Credit Risk: Credit risk arises when one party defaults on its obligation in a derivative contract. The collapse of Lehman Brothers in 2008 triggered a series of credit defaults on derivatives, exacerbating the financial crisis. This highlights the importance of counterparty risk assessment.

3. Liquidity Risk: Liquidity risk occurs when a trader is unable to exit a position at the desired price due to insufficient market activity. This can lead to significant losses, particularly in over-the-counter (OTC) derivatives, which lack a centralized exchange.

4. Operational Risk: Derivatives trading involves complex processes, and any operational failure such as errors in pricing, settlement, or reporting can lead to losses. In 2012, a $2 billion trading loss was reported by JPMorgan Chase due to incorrect risk modeling in derivatives.

Mitigation Strategies:

1. Clearinghouses: The use of centralized clearinghouses, such as the Chicago Mercantile Exchange (CME), mitigates credit risk by acting as intermediaries and ensuring counterparties meet their obligations.

2. Collateral and Margin Requirements: Imposing collateral and margin requirements helps reduce credit and market risks by ensuring that traders maintain sufficient capital to cover potential losses.

3. Regulation and Oversight: Regulatory frameworks like the Dodd-Frank Act (2010) in the U.S. impose stricter transparency and reporting requirements for derivatives, reducing systemic risk.

Conclusion:

Derivatives trading involves risks, but these can be mitigated through regulation, use of clearinghouses, and enforcing margin requirements. A comprehensive approach, combining prudent risk management and regulatory oversight, will ensure that derivatives markets function efficiently without jeopardizing financial stability.

The correct answer is  Mitigating exchange rate risks.

Key PointsImportance of Currency Swaps in International Finance Market

• Mitigating Exchange Rate Risks: Currency swaps allow parties to exchange principal and interest in different currencies, helping to hedge against currency fluctuations. This is crucial for companies and governments involved in international trade and finance.
• Managing Foreign Exchange Risk: By entering into a currency swap, entities can lock in exchange rates for future transactions, thereby minimizing the risk of adverse currency movements affecting their financial positions.
• Enhancing Liquidity: Currency swaps provide a mechanism for managing short-term foreign exchange liquidity challenges, especially during periods of economic uncertainty or financial crises.
• Supporting Regional Cooperation: As highlighted in the passage, the Reserve Bank of India (RBI)'s revised Currency Swap Arrangement for SAARC countries aims to strengthen regional financial cooperation and provide a financial safety net.
• Facilitating Long-term Financial Planning: By using currency swaps, entities can better plan their long-term financial strategies, knowing that they have mitigated the risk of currency fluctuations.

Additional Information

• Reserve Bank of India (RBI): The central banking institution of India, which controls the issuance and supply of the Indian rupee and manages the country's main payment systems.
• SAARC (South Asian Association for Regional Cooperation): An organization of South Asian nations, established in 1985, aimed at promoting economic and regional integration. Member countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency Swap: A financial derivative contract where two parties exchange principal and interest payments in different currencies. It helps in managing currency risk and liquidity issues.
• INR Swap Window: A new feature introduced in the revised framework, allowing for currency swaps in Indian Rupees with several concessions.
• US Dollar and Euro Swaps: Under the revised arrangement, the RBI will continue to provide currency swaps in US Dollars and Euros with a total corpus of US$ 2 billion.

The correct answer is  2024-2027.

Key PointsDuration of the Revised Currency Swap Arrangement

• The Reserve Bank of India (RBI), in collaboration with the Government of India, has announced a revised Currency Swap Arrangement for SAARC countries.
• This arrangement is set for the period from 2024 to 2027.
• The announcement of the revised arrangement was made on June 27, 2024.
• The primary objective of this arrangement is to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• The arrangement first came into operation on November 15, 2012, and has since been revised periodically to address the evolving financial needs of the region.
• Under the revised framework, the RBI will enter into bilateral swap agreements with the central banks of the SAARC countries wishing to avail of this facility.

Additional Information

• SAARC (South Asian Association for Regional Cooperation) is a regional intergovernmental organization of South Asian nations, established on December 8, 1985. It includes eight member countries: Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency Swap is a financial agreement where two parties exchange principal and interest in different currencies. It helps in hedging against currency fluctuations and managing foreign exchange risk.
• The INR Swap Window introduced under the revised framework offers several concessions and supports currency swaps in Indian Rupees. Additionally, swaps in US Dollars and Euros are provided under a separate window with a total corpus of US$ 2 billion.
• The revised arrangement aims to strengthen regional financial cooperation and provide crucial liquidity support during economic crises, promoting financial stability across the SAARC region.
• The Reserve Bank of India (RBI) is India's central bank, responsible for regulating the issue and supply of the Indian rupee and managing the country's main payment systems. It plays a crucial role in the development strategy of the Government of India.

The correct answer is ₹250 billion.

Key PointsTotal Corpus of the Indian Rupee Support

• The passage discusses the revised Currency Swap Arrangement introduced by the Reserve Bank of India (RBI) for SAARC countries for the period 2024-2027.
• This arrangement aims to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• One of the key features of the revised framework is the introduction of a separate INR Swap Window.
• This new window comes with several concessions and offers ₹250 billion in support for currency swaps in Indian Rupees.
• The passage also mentions that the RBI will continue to provide swaps in US Dollars and Euros under a separate window with a total corpus of US$ 2 billion.

Additional Information

• The Reserve Bank of India (RBI) is India's central bank, responsible for regulating the issue and supply of the Indian rupee and overseeing the country's monetary policy.
• The South Asian Association for Regional Cooperation (SAARC) is an organization of South Asian nations, established in 1985, aimed at promoting economic and regional integration. Its member countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Currency swaps are financial agreements where two parties exchange principal and interest in different currencies. These swaps are used to hedge against currency risk and manage foreign exchange exposure.
• The Currency Swap Arrangement for SAARC countries was first introduced by the RBI on November 15, 2012, with the primary objective of offering a backstop for liquidity requirements until more permanent financial solutions are established.
• The revised arrangement for the period 2024-2027 continues to aim at strengthening regional financial cooperation and providing crucial liquidity support during economic crises, thus promoting financial stability across the SAARC region.

The correct answer is  Currency Swap.

Key PointsExplanation of Currency Swap

• Definition: A Currency Swap is a financial derivative contract where two parties exchange principal and interest in different currencies. It allows companies and governments to manage and hedge against currency fluctuations and foreign exchange risk.
• Importance: These swaps are crucial in international finance, providing a mechanism to protect against adverse currency movements and to manage liquidity in different currencies.
• Global Market: The global currency swap market has gained increased attention, especially amid rising interest rates and global economic uncertainty.
• RBI's Role: The Reserve Bank of India (RBI), in collaboration with the Government of India, has introduced a revised Currency Swap Arrangement for SAARC countries for the period 2024-2027. This arrangement aims to provide a financial safety net for SAARC countries facing short-term foreign exchange liquidity challenges or balance of payment crises.
• Historical Context: This arrangement first came into operation on November 15, 2012, with the primary objective of offering a backstop for liquidity requirements until more permanent financial solutions are established.
• Bilateral Agreements: Under the revised framework, the RBI will enter into bilateral swap agreements with the central banks of SAARC countries wishing to avail of the facility.
• INR Swap Window: A key feature of the revised framework is the introduction of a separate INR Swap Window, which comes with several concessions and will offer support for currency swaps in Indian Rupees.
• Other Currencies: Additionally, the RBI will continue to provide swaps in US Dollars and Euros under a separate window with a total corpus of US$ 2 billion.
• Regional Cooperation: This revised arrangement aims to further strengthen regional financial cooperation and provide crucial liquidity support during economic crises, thus promoting financial stability across the SAARC region.

Additional Information

• SAARC Countries: The South Asian Association for Regional Cooperation (SAARC) includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.
• Foreign Exchange Risk Management: Currency swaps are a vital tool for managing foreign exchange risk, especially for organizations involved in international trade and finance.
• Interest Rate Swaps: Unlike currency swaps, interest rate swaps involve the exchange of interest payments in the same currency. They are used to manage exposure to fluctuations in interest rates.
• Future Contracts: These are standardized contracts to buy or sell assets at a future date at a predetermined price. They are used for hedging and speculative purposes.
• Options Contracts: These provide the right, but not the obligation, to buy or sell an asset at a specified price before a certain date. They are used for hedging and speculative purposes.
• Credit Default Swaps: These are financial derivatives that function as a type of insurance against the default of a borrower. They are used to manage credit risk.
• RBI Guidelines: The RBI issues guidelines and frameworks to regulate and manage financial instruments and derivatives, ensuring stability and transparency in the financial system.
• Economic Stability: Financial derivatives like currency swaps play a crucial role in maintaining economic stability by providing mechanisms to manage financial risks effectively.

The correct answer is  1 and 2.

Key PointsOptions Trading in India

• Call and put options are the two main types of options traded in the options market. A call option gives the holder the right to buy an asset at a specified price within a specific period, while a put option gives the holder the right to sell an asset at a specified price within a specific period. Hence, statement 1 is correct.
• The National Stock Exchange (NSE) is the primary platform for options trading in India. It offers a wide range of derivative products, including options on stocks, indices, and other financial instruments. Hence, statement 2 is correct.
• Options contracts in India do not always result in physical delivery of the underlying asset. In fact, most options contracts are settled in cash, meaning that the difference between the strike price and the market price is paid out in cash. Hence, statement 3 is incorrect.

Additional Information

• Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
• The National Stock Exchange (NSE) is one of the leading stock exchanges in India, founded in 1992. It introduced electronic trading to the Indian market.
• Cash settlement is a method of settling derivatives contracts where the seller pays the buyer the difference between the current market price and the agreed-upon price, rather than delivering the actual underlying asset.
• Physical delivery involves the actual transfer of the underlying asset from the seller to the buyer upon the exercise of the option.