Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

EXERCISE

Theory questions

1. Define a derivative instrument as per the accounting standards—both US GAAP as well as IFRS.

2. What are the major differences between US GAAP and IFRS as far as derivative contracts are concerned?

3. What are over-the-counter derivative contracts? How are these different from exchange-traded derivative contracts?

4. What is an interest rate derivative?

5. What are the benefits of interest rate derivatives?

6. What is ISDA and how is it useful to over-the-counter derivative trades?

7. What is meant by close-out netting? Is it really useful for the counterparties to a trade?

8. What is meant by forward rate agreements?

9. Explain the nuances of an interest rate swap contract.

10. What is a cap and floor? Compare and contrast caps vs. floors.

11. What is y an interest rate collar? How is it different from a reverse collar instrument?

12. “An interest collar should always command a premium.” Explain this myth.

13. What is a swaption contract, and what are the two types of swaption contracts?

Objective—questions

1. Derivatives are generally used by ______.

a) Retail investors

b) Institutional investors

c) Insurance companies

d) All of the above

2. All derivatives are based on some underlying _________ product.

a) Asset

b) Cash

c) Credit

d) All of the above

3. A purchased or written treasury bond option (call or put) is a derivative contract with the underlying as ________.

a) Currency rates

b) Commodity prices

c) Interest rates

d) None of the above ...