In which of these derivative positions is the loss limited to the amount paid when the trade starts?
Quiz: Basic Structures
Last reviewed: September 24, 2026
This is a draft, shown for review before publication.
5 questions to check your understanding of the chapter “Basic Structures”. 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
Answer and explanation
Answer: D
An option is a trade in a right to choose whether to buy or sell a financial instrument (the underlying asset) at a price set in advance (the strike price), and the buyer pays a fee for the right (the option premium). The buyer exercises the right only when doing so is profitable, so its loss is limited to the premium paid. If the price moves past the strike price in the buyer's favor by more than the premium paid, the buyer gains.
The seller receives the premium and in return takes on the obligation to perform if the buyer exercises. Its loss can therefore far exceed the premium received. For the seller of a right to buy (a call), the loss grows as the price of the underlying asset rises, with no upper limit.
The buyer in a forward contract gains if the price of the underlying asset rises after the agreement and loses if it falls, and the loss grows with the size of the fall. The side of an interest rate swap that pays the fixed rate and receives the floating rate gains if rates rise and loses if they fall. In both cases, the direction of the move decides whether there is a gain or a loss.
Learn more: What Is a Derivative?
Question 2
As a fictional example, suppose an investor buys futures on 200 million yen of the underlying asset by depositing 10 million yen of margin. If the price of the underlying asset falls 8%, what is the loss on the futures?
Answer and explanation
Answer: B
The profit or loss on futures depends on the size of the trade, 200 million yen of the underlying asset, not on the margin deposited. 200 million yen × 8% gives a loss of 16 million yen, more than the 10 million yen of margin deposited. If the price rises by the same 8%, the profit is 16 million yen. The ability to make large trades with little money is called the leverage effect. A large profit is possible, but if the forecast is wrong, the loss is large too.
800,000 yen is 8% of the 10 million yen of margin, the answer you get if you assume the profit or loss depends on the margin. 10 million yen comes from assuming that the loss is limited to the margin deposited. A loss on futures can exceed the margin deposited.
Learn more: What Is a Derivative?
Question 3
As a fictional example, suppose the underlying asset costs 200 yen today, you can borrow for one year at 3% a year, and holding the asset for one year pays 2 yen of interest. Using the cost of carry model, which sets the forward price at the spot price plus the funding cost, minus the income received while holding the asset, what is the forward price for one year?
Answer and explanation
Answer: A
The funding cost is 200 × 3%, or 6 yen, so the forward price is 200 + 6 − 2, or 204 yen. To see why the price comes out at this level, consider the side that has agreed to deliver the asset. It can buy the asset now and hold it until maturity, then deliver it as promised. If the price is the purchase price plus the cost of funding the purchase, minus the interest received while holding the asset, that side does not lose money.
The 206 yen answer adds the 6 yen funding cost but forgets to subtract the 2 yen of interest received. The 200 yen answer uses the spot price as the forward price and leaves out the cost of holding the asset until maturity. The 196 yen answer subtracts the funding cost and adds the interest, which gets both signs the wrong way round.
Learn more: Forwards and Futures
Question 4
Which statement about the differences between forward contracts and futures contracts is correct?
Answer and explanation
Answer: C
In futures, you trade through an exchange with many counterparties you do not know, so whether the other side will keep its promise becomes an issue. Open positions are therefore revalued at each day's closing price to calculate the profit or loss (mark-to-market), that profit or loss is settled, and sufficient margin is required. Forwards have no mark-to-market by an exchange. Both are agreements to buy or sell in the future. They differ in where they are traded and in the rules that come with that.
A futures contract is a forward whose terms, such as what is traded and when it is delivered, are standardized by the exchange so that it can be closed out with an offsetting trade before maturity. In a forward, the parties set the terms, and there is no mechanism for closing out with an offsetting trade on an exchange. The method of settlement at maturity is set for each product: Nikkei 225 Futures are cash-settled, paying only the difference, while 10-year JGB Futures are settled by physical delivery, exchanging bonds for cash.
Learn more: Forwards and Futures
Question 5
As a fictional example, Company A has borrowed 3 billion yen at a floating rate and has entered into a swap with Bank B, with a notional amount of 3 billion yen, in which Company A pays a fixed rate of 3% a year and receives the floating rate. The loan's rate equals the swap's floating rate, and the two sides pay only the difference. In a year when the floating rate is 1%, what is Company A's total cost, combining the loan interest and the swap payments?
Answer and explanation
Answer: B
In the swap, Company A pays 90 million yen at the fixed rate (3 billion yen × 3%) and receives 30 million yen at the floating rate (3 billion yen × 1%), so it pays a net 60 million yen to Bank B. The loan interest is 30 million yen, so the total cost is 90 million yen (3% a year).
In a year when the floating rate is 4%, the loan interest rises to 120 million yen. In the swap, Company A receives 120 million yen and pays 90 million yen, a net receipt of 30 million yen. The cost is again 90 million yen. Adding a swap that pays the fixed rate to a floating-rate loan gives the equivalent of a fixed-rate loan, which is a form of hedging against the cost of higher rates. Bank B's swap payments in either year are the same amounts as Company A's, with the direction reversed.
The 30 million yen answer looks only at the loan interest and assumes Company A keeps the saving in loan interest compared with the 4% year. In fact, the larger swap payment offsets the fall in the loan interest, so Company A does not receive that benefit. The 60 million yen answer looks only at the net swap payment and forgets to add the loan interest. The 120 million yen answer adds the 30 million yen of loan interest to the 90 million yen fixed-rate swap payment and forgets to subtract the 30 million yen received at the floating rate.
Learn more: How Swaps Work