Quiz: From Trade to Maturity

Last reviewed: September 26, 2026

This is a draft, shown for review before publication.

6 questions to check your understanding of the chapter “From Trade to Maturity”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.

Question 1
A trade report (a document delivered at the conclusion of a contract) is a separate document from a trade confirmation. Which statement about the trade report is correct?
1. A.It sets out the terms common to trades with the same counterparty, and one is prepared for each counterparty
2. B.It is provided each time an OTC derivatives trade is executed, even if the client is a professional investor
3. C.It is a document required by law, and besides the terms of the trade it states the fees
4. D.It is delivered before execution, and the client reads it to check its contents before entering into the contract
Answer and explanation
Answer: C
A trade report is how a financial institution informs a client of a trade under the rule on "provision of information upon conclusion of a contract, etc." in Article 37-4 of the Financial Instruments and Exchange Act. A Cabinet Office Order sets out what it contains. Besides the terms of the trade, such as whether it is a purchase or a sale, the quantity and the unit price, it includes the fees and how the client can contact the financial institution.

The document that sets out the terms common to trades with the same counterparty, one for each counterparty, is the master agreement. If the client is a professional investor, this rule does not apply in principle. For OTC derivatives, this information also does not have to be provided if a contract document setting out the terms of the trade is delivered for each contract. The document delivered before execution is the pre-contract document.
Learn more: Trade Confirmations
Question 2
According to the 1998 examination manual of the US Federal Reserve Board, who sends the confirmation of an FX forward with a corporate client, and to whom?
1. A.The bank's back office (operations and settlement) sends it, and on the client's side it is addressed to a department independent of the people who made the trade
2. B.The bank's front office (sales and trading) staff who made the trade send it, and on the client's side it is addressed to the people who made the trade
3. C.The bank's back office sends it, and on the client's side it is addressed to the people who made the trade
4. D.The bank's front office staff who made the trade send it, and on the client's side it is addressed to a department independent of the people who made the trade
Answer and explanation
Answer: A
In the examination manual, the confirmation is sent by the back office, not by the front office that made the trade. The front office executes the trade and enters its terms into the system, and the back office checks what was entered before preparing and sending the confirmation. On the counterparty's side, too, the confirmation is addressed to a department independent of the people who made the trade.

The same manual described the confirmation as a tool that helps with practical checking and fraud prevention, and treated it as the final safeguard against errors and fraud in trading. If the people who made the trade handle the confirmation on either the sending or the receiving side, the arrangement differs from the procedure in the manual. A client that receives a confirmation checks it against its own records. If everything matches, it signs and returns one copy, and if anything differs, it tells the bank which terms differ.
Learn more: Trade Confirmations
Question 3
Which statement correctly describes how the market value of an OTC derivative is delivered through a bank balance confirmation (the "balance confirmation" below)?
1. A.The financial institution tells a client that is not a professional investor the details of unsettled trades and the valuation gains and losses as of the last day of the reporting period
2. B.At the client's request, the financial institution tells the client the market value and the termination payment amount at that time, among other things
3. C.On receiving a request letter from the client's auditor, the financial institution tells the auditor directly the trade balances, including the market value on the date set in the letter
4. D.On receiving a request letter from the client's auditor, the financial institution tells the client the trade balances, including the market value on the date set in the letter, and the client passes them to the auditor
Answer and explanation
Answer: C
With a balance confirmation, the client's auditor sends the financial institution a request letter in the client's name. The financial institution replies directly to the auditor with the trade balances, including the market value on the date set in the letter (the confirmation date). Because the auditor receives the reply directly from the financial institution, it is strong evidence. If the financial institution tells the client and the client passes the figures on to the auditor, the auditor does not receive them directly.

Telling a client that is not a professional investor the details of unsettled derivative transactions and the valuation gains and losses as of the last day of the reporting period is the role of the trade balance report under the Financial Instruments and Exchange Act. Telling a client, at its request, the market value and the termination payment amount, among other things, is a different report. The Financial Services Agency's "Comprehensive Guidelines for Supervision of Major Banks, etc." and "Comprehensive Guidelines for Supervision of Financial Instruments Business Operators, etc." list this report as a point of focus when checking financial institutions' frameworks. In both cases, the information goes from the financial institution to the client.
Learn more: Mark-to-Market Reporting to Clients
Question 4
As a hypothetical example, a company has borrowed 3 billion yen at a floating rate (a reference rate plus a spread). It has entered into an interest rate swap with a notional amount of 3 billion yen, in which it pays a fixed rate of 1.2% and receives a floating rate based on the same reference rate as the loan. In the market value report at the fiscal year-end, the swap's market value was −15 million yen. Which reading of this report is correct?
1. A.It is classified as a financial asset, and the interest rate on the loan and the swap combined, excluding the spread, stays at 1.2%
2. B.It is classified as a financial liability, and the interest rate on the loan and the swap combined, excluding the spread, stays at 1.2%
3. C.It is classified as a financial liability, and the interest rate on the loan and the swap combined, excluding the spread, has risen above 1.2%
4. D.It is classified as a financial asset, and the interest rate on the loan and the swap combined, excluding the spread, has risen above 1.2%
Answer and explanation
Answer: B
The value of a derivative transaction is the net value of the rights and obligations under the contract, and if it is negative, it is a financial liability. A market value of −15 million yen means that, measured in the market at the fiscal year-end, the value of the company's right (receiving the floating rate) is below the value of its obligation (paying the fixed rate). A market value of +15 million yen would mean the opposite and would be a financial asset. Reading a negative market value as a financial asset reverses the sign.

Whether the market value is positive or negative, the company still uses the floating rate it receives on the swap to pay interest on the loan and pays the fixed rate of 1.2%. So if it keeps both until maturity, its interest rate on the loan, excluding the spread, stays at 1.2%. Reading the negative market value as a rise in the interest rate is a mistake.
Learn more: Mark-to-Market Reporting to Clients
Question 5
As a hypothetical example, a company combines a floating-rate loan with an interest rate swap in which it pays a fixed rate and receives a floating rate. It decides to repay the loan before its due date and ends the swap by early termination at the client's request (mid-term cancellation). From the company's side, the swap's market value is +8 million yen, and the costs added to the market value are 1.5 million yen (in the direction of increasing what it pays and reducing what it receives). What is the termination payment from the company's side?
1. A.It receives 6.5 million yen
2. B.It receives 8 million yen
3. C.It pays 1.5 million yen
4. D.It pays 9.5 million yen
Answer and explanation
Answer: A
The market value is positive, so the company is on the receiving side. The costs work to reduce what it receives. The amount it receives is 8 million yen − 1.5 million yen = 6.5 million yen.

8 million yen is the result of treating the market value itself as the termination payment. Market value is calculated without transaction costs, so the amount actually paid to end a trade is not necessarily the same as its market value. Paying 1.5 million yen is the result of leaving the market value out of the settlement and paying only the costs. The starting point for a termination payment is the market value of the trade, and the costs are added to it.

Paying 9.5 million yen is the case in which market rates fall and the market value from the company's side becomes −8 million yen. The commitment to keep paying the fixed rate then works against the company, and it pays the market value plus the costs. That is 8 million yen + 1.5 million yen = 9.5 million yen. If the company kept both the loan and the swap, changes in the swap payments would offset changes in the interest on the loan, and the rate it pays would stay fixed. In a mid-term cancellation, only the swap side is settled, in a lump sum covering the remaining term.
Learn more: Early Termination
Question 6
Each of the Financial Services Agency's three supervisory guidelines (October 2026 versions), for major banks, for small and medium-sized and regional financial institutions, and for financial instruments business operators, lists as a point of focus the matters about mid-term cancellation and termination payments to explain before the trade. Which item is in the guidelines for major banks and for small and medium-sized and regional financial institutions but not in those for financial instruments business operators?
1. A.If the trade cannot, in principle, be cancelled mid-term, a statement to that effect
2. B.The estimated termination payment under a worst-case scenario, and the possibility of exceeding it
3. C.Confirming the termination payment the client can tolerate, and the possibility of exceeding that amount
4. D.That losing the benefit of time may create a termination payment obligation
Answer and explanation
Answer: D
An explanation of how events that cause the loss of the benefit of time can lead to a termination payment is only in the guidelines for major banks and for small, medium-sized and regional financial institutions. These two apply when a bank's lending business includes derivatives trades (including when the bank enters into derivatives trades alone). In a trade with a bank, an event under the bank transaction agreement or similar documents can cause the client to lose the benefit of time (the right not to repay before the due date). The client may then also lose the benefit of time under the derivatives trade and become obliged to pay a termination payment.

The other three items are in all three sets of guidelines. If a trade cannot, in principle, be cancelled mid-term, the financial institution explains that fact. It also explains the estimated termination payment under a worst-case scenario and, if the estimate could be exceeded, that possibility. Confirming the termination payment the client can tolerate, and explaining that the payment could exceed that amount even outside the worst-case scenario, are also part of the explanation.
Learn more: Early Termination

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