Question 1

An option premium is

Accepted Answer

A)  paid by the short to the long as soon as the option is purchased. 
B)  paid by the long to the short as soon as the option is purchased. 
C)  paid by the long to the short when the option is exercised. 
D)  paid by the short to the long when the option is exercised. 
A)  paid by the short to the long as soon as the option is purchased. 
B)  paid by the long to the short as soon as the option is purchased. 
C)  paid by the long to the short when the option is exercised. 
D)  paid by the short to the long when the option is exercised. B

Question 2

A speculator becomes the fixed-rate payer in an interest rate swap. He expects that

Accepted Answer

A)  long rates rise. 
B)  long rates fall. 
C)  short rates rise. 
D)  short rates fall. 
A)  long rates rise. 
B)  long rates fall. 
C)  short rates rise. 
D)  short rates fall. C

Question 3

The open interest on calls __________ the open interest on puts.

Accepted Answer

A)  is always equal 
B)  is always larger 
C)  is always smaller 
D)  has no direct relationship with 
A)  is always equal 
B)  is always larger 
C)  is always smaller 
D)  has no direct relationship with D

Question 4

Puts and calls are the choices available to participants in the

Accepted Answer

A)  options market. 
B)  futures market. 
C)  swap market. 
D)  stock market. 
A)  options market. 
B)  futures market. 
C)  swap market. 
D)  stock market.

Question 5

A swap designed to compensate for mismatched securities is a type of __________ called a __________ swap.

Accepted Answer

A)  speculation; currency 
B)  speculation; generic 
C)  hedging; London 
D)  hedging; plain vanilla 
A)  speculation; currency 
B)  speculation; generic 
C)  hedging; London 
D)  hedging; plain vanilla

Question 6

The strike price of a put option for a particular stock is $48. If the stock is selling for $45 on the expiration date, a put option on this stock has an intrinsic value of __________ per share.

Accepted Answer

A)  $48 
B)  $45 
C)  $3 
D)  $0 
A)  $48 
B)  $45 
C)  $3 
D)  $0

Question 7

A long put position

Accepted Answer

A)  has a value of zero if the stock price is below the exercise price. 
B)  has a value equal to the stock price minus the exercise price if the stock price is above the exercise price. 
C)  has a value of zero if the stock price at the time of purchase exceeds the expected stock price at option expiration. 
D)  has a value equal to the exercise price minus the stock price if the stock price is below the exercise price. 
A)  has a value of zero if the stock price is below the exercise price. 
B)  has a value equal to the stock price minus the exercise price if the stock price is above the exercise price. 
C)  has a value of zero if the stock price at the time of purchase exceeds the expected stock price at option expiration. 
D)  has a value equal to the exercise price minus the stock price if the stock price is below the exercise price.

Question 8

The most popular floating rate in swaps is

Accepted Answer

A)  LIBOR. 
B)  the Treasury note rate. 
C)  the prime rate. 
D)  the six-month Treasury bill rate. 
A)  LIBOR. 
B)  the Treasury note rate. 
C)  the prime rate. 
D)  the six-month Treasury bill rate.

Question 9

The fixed-rate payer in a swap contract pays a

Accepted Answer

A)  current capital market rate. 
B)  capital market rate minus one percentage point. 
C)  capital market rate plus one percentage point. 
D)  capital market rate plus a premium based on creditworthiness. 
A)  current capital market rate. 
B)  capital market rate minus one percentage point. 
C)  capital market rate plus one percentage point. 
D)  capital market rate plus a premium based on creditworthiness.

Question 10

Speculators absorb additional risk in futures markets as a result of the actions taken by

Accepted Answer

A)  longs. 
B)  hedgers. 
C)  brokers. 
D)  shorts. 
A)  longs. 
B)  hedgers. 
C)  brokers. 
D)  shorts.

Question 11

A speculator who feels strongly that short rates will be falling over the next few years might want to be a __________ payer in a swap contract; if he is wrong there is __________ downside risk.

Accepted Answer

A)  fixed-rate; no 
B)  fixed-rate; considerable 
C)  floating-rate; no 
D)  floating-rate; considerable 
A)  fixed-rate; no 
B)  fixed-rate; considerable 
C)  floating-rate; no 
D)  floating-rate; considerable

Question 12

Swaps are __________ agreements involving the exchange of interest payments __________.

Accepted Answer

A)  standardized; against a bundle of Treasury securities 
B)  standardized; on a stated notional principal amount 
C)  customized; against a bundle of Treasury securities 
D)  customized; on a stated notional principal amount 
A)  standardized; against a bundle of Treasury securities 
B)  standardized; on a stated notional principal amount 
C)  customized; against a bundle of Treasury securities 
D)  customized; on a stated notional principal amount

Question 13

A call option has a strike price of $48. If the underlying stock is selling for $45 on the expiration date, the intrinsic value of the call option is __________ per share.

Accepted Answer

A)  $93 
B)  $45 
C)  $3 
D)  $0 
A)  $93 
B)  $45 
C)  $3 
D)  $0

Question 14

In the options market, the right to buy an underlying asset rests with

Accepted Answer

A)  call buyers. 
B)  put buyers. 
C)  call sellers. 
D)  put sellers. 
A)  call buyers. 
B)  put buyers. 
C)  call sellers. 
D)  put sellers.

Question 15

To the options buyer, the premium paid for the contract represents the

Accepted Answer

A)  maximum return. 
B)  largest potential loss. 
C)  yield. 
D)  transaction cost. 
A)  maximum return. 
B)  largest potential loss. 
C)  yield. 
D)  transaction cost.

Question 16

A drop in six-month LIBOR is good news to __________ in a swap contract.

Accepted Answer

A)  the fixed-rate payer 
B)  the floating-rate payer 
C)  both payers 
D)  neither payer 
A)  the fixed-rate payer 
B)  the floating-rate payer 
C)  both payers 
D)  neither payer

Question 17

A call option has a strike price of $80. If the underlying stock is selling for $83 on the expiration date, the intrinsic value of the call option is __________ per share.

Accepted Answer

A)  $163 
B)  $83 
C)  $3 
D)  $0 
A)  $163 
B)  $83 
C)  $3 
D)  $0

Question 18

Which of the following futures contracts is available on the various commodity exchanges in the United States?

Accepted Answer

A)  Treasury bond futures 
B)  Investment-grade bonds 
C)  Over-the-counter stocks 
D)  U.S. savings bonds 
A)  Treasury bond futures 
B)  Investment-grade bonds 
C)  Over-the-counter stocks 
D)  U.S. savings bonds

Question 19

Which of the following futures contracts is available on the Chicago Board of Trade?

Accepted Answer

A)  New York Stock Exchange Composite Index futures 
B)  Foreign currency futures 
C)  U.S. Treasury bonds 
D)  Value Line Market Index futures 
A)  New York Stock Exchange Composite Index futures 
B)  Foreign currency futures 
C)  U.S. Treasury bonds 
D)  Value Line Market Index futures

Question 20

The __________ is equal to the current stock price minus the option exercise price.

Accepted Answer

A)  settlement price 
B)  discount price 
C)  intrinsic value 
D)  mark-to-market settlement 
A)  settlement price 
B)  discount price 
C)  intrinsic value 
D)  mark-to-market settlement

Exam 9: Demystifying Derivatives

An option premium is

A speculator becomes the fixed-rate payer in an interest rate swap. He expects that

The open interest on calls __________ the open interest on puts.

Puts and calls are the choices available to participants in the

A swap designed to compensate for mismatched securities is a type of __________ called a __________ swap.

The strike price of a put option for a particular stock is $48. If the stock is selling for $45 on the expiration date, a put option on this stock has an intrinsic value of __________ per share.

A long put position

The most popular floating rate in swaps is

The fixed-rate payer in a swap contract pays a

Speculators absorb additional risk in futures markets as a result of the actions taken by

A speculator who feels strongly that short rates will be falling over the next few years might want to be a __________ payer in a swap contract; if he is wrong there is __________ downside risk.

Swaps are __________ agreements involving the exchange of interest payments __________.

A call option has a strike price of $48. If the underlying stock is selling for $45 on the expiration date, the intrinsic value of the call option is __________ per share.

In the options market, the right to buy an underlying asset rests with

To the options buyer, the premium paid for the contract represents the

A drop in six-month LIBOR is good news to __________ in a swap contract.

A call option has a strike price of $80. If the underlying stock is selling for $83 on the expiration date, the intrinsic value of the call option is __________ per share.

Which of the following futures contracts is available on the various commodity exchanges in the United States?

Which of the following futures contracts is available on the Chicago Board of Trade?

The __________ is equal to the current stock price minus the option exercise price.

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

A swap designed to compensate for mismatched securities is a type of called a swap.

A speculator who feels strongly that short rates will be falling over the next few years might want to be a payer in a swap contract; if he is wrong there is downside risk.

Swaps are agreements involving the exchange of interest payments .