Question 1

If person A sells a 2003 Treasury bond futures contract to person B, in market terminology,

Accepted Answer

A)  A is long and B is short. 
B)  A is short and B is long. 
C)  A is short and B is the broker. 
D)  A is long and B is the dealer. 
A)  A is long and B is short. 
B)  A is short and B is long. 
C)  A is short and B is the broker. 
D)  A is long and B is the dealer.

Question 2

The precise terms of each futures contract are

Accepted Answer

A)  negotiated by the long and the short. 
B)  set by the short position. 
C)  set by the long position. 
D)  established by the exchange on which the trade takes place. 
A)  negotiated by the long and the short. 
B)  set by the short position. 
C)  set by the long position. 
D)  established by the exchange on which the trade takes place.

Question 3

A speculator who feels strongly that short rates will be rising over the next few years might want to be a __________ payer in a swap contract; if she 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 4

Futures contract prices are established

Accepted Answer

A)  through an auction process in the "pit" on the exchange floor. 
B)  through brokers. 
C)  through an over-the-counter network of futures dealers. 
D)  through specialists on the stock and bond exchanges. 
A)  through an auction process in the "pit" on the exchange floor. 
B)  through brokers. 
C)  through an over-the-counter network of futures dealers. 
D)  through specialists on the stock and bond exchanges.

Question 5

In the financial futures quotations, the total number of long positions outstanding is called

Accepted Answer

A)  settlements. 
B)  market activity. 
C)  open interest. 
D)  arbitrage. 
A)  settlements. 
B)  market activity. 
C)  open interest. 
D)  arbitrage.

Question 6

The relationship between the price in the cash market and the price in the futures market is

Accepted Answer

A)  nonexistent. 
B)  negative. 
C)  positive. 
D)  None of the above. 
A)  nonexistent. 
B)  negative. 
C)  positive. 
D)  None of the above.

Question 7

For the buyer of a call option, the downside risk

Accepted Answer

A)  is unlimited, but upside potential is limited. 
B)  is limited, but upside potential is unlimited. 
C)  and upside potential are unlimited. 
D)  and upside potential are limited. 
A)  is unlimited, but upside potential is limited. 
B)  is limited, but upside potential is unlimited. 
C)  and upside potential are unlimited. 
D)  and upside potential are limited.

Question 8

Which of the following is not a derivative?

Accepted Answer

A)  Treasury bond futures 
B)  Common stock 
C)  Swaps 
D)  Options 
A)  Treasury bond futures 
B)  Common stock 
C)  Swaps 
D)  Options

Question 9

The price paid for an option is called the

Accepted Answer

A)  settlement price. 
B)  mark-to-market price. 
C)  option premium. 
D)  call price. 
A)  settlement price. 
B)  mark-to-market price. 
C)  option premium. 
D)  call price.

Question 10

The parties to a swap are formally called the

Accepted Answer

A)  counterparties. 
B)  optioners. 
C)  short and long positions. 
D)  bond- and billholders. 
A)  counterparties. 
B)  optioners. 
C)  short and long positions. 
D)  bond- and billholders.

Question 11

A speculator becomes the floating-rate payer in an interest-rate swap. She hopes 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.

Question 12

The seller of a call option has the

Accepted Answer

A)  right to buy shares at a specified price. 
B)  obligation to buy shares at a specified price if the option is exercised. 
C)  right to sell shares at a specified price. 
D)  obligation to sell shares at a specified price if the option is exercised. 
A)  right to buy shares at a specified price. 
B)  obligation to buy shares at a specified price if the option is exercised. 
C)  right to sell shares at a specified price. 
D)  obligation to sell shares at a specified price if the option is exercised.

Question 13

Futures contracts are marked-to-market

Accepted Answer

A)  every day. 
B)  every week. 
C)  every month. 
D)  every quarter. 
A)  every day. 
B)  every week. 
C)  every month. 
D)  every quarter.

Question 14

For the settlement of futures contracts, the clearing corporation requires that a margin be placed with the corporation by

Accepted Answer

A)  the short position only. 
B)  the long position only. 
C)  the short and the long in all contracts. 
D)  the short and the long only in extraordinary circumstances. 
A)  the short position only. 
B)  the long position only. 
C)  the short and the long in all contracts. 
D)  the short and the long only in extraordinary circumstances.

Question 15

__________ trading volume promotes __________ bid-asked spreads.

Accepted Answer

A)  Large; wide 
B)  Large; narrow 
C)  Small; narrow 
D)  None of the above. 
A)  Large; wide 
B)  Large; narrow 
C)  Small; narrow 
D)  None of the above.

Question 16

The Chicago Board of Trade promotes liquidity in the futures market by

Accepted Answer

A)  setting prices. 
B)  establishing a price floor. 
C)  allowing the short or the long to renegotiate contract terms. 
D)  standardizing contract terms. 
A)  setting prices. 
B)  establishing a price floor. 
C)  allowing the short or the long to renegotiate contract terms. 
D)  standardizing contract terms.

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Option buyers have rights; option sellers have obligations. 
B)  Option sellers have rights; option buyers have obligations. 
C)  Option buyers and sellers have obligations but not rights. 
D)  Options buyers and sellers each have both rights and obligations. 
A)  Option buyers have rights; option sellers have obligations. 
B)  Option sellers have rights; option buyers have obligations. 
C)  Option buyers and sellers have obligations but not rights. 
D)  Options buyers and sellers each have both rights and obligations.

Question 18

Futures contracts are least likely to be traded on which of the following exchanges?

Accepted Answer

A)  New York Stock Exchange 
B)  Chicago Board of Trade 
C)  Chicago Mercantile Exchange 
D)  All of the above are equally likely to trade futures contracts. 
A)  New York Stock Exchange 
B)  Chicago Board of Trade 
C)  Chicago Mercantile Exchange 
D)  All of the above are equally likely to trade futures contracts.

Question 19

Which of the following is not a determinant of option premiums?

Accepted Answer

A)  The volatility of the underlying stock 
B)  The price of the underlying stock 
C)  The time to expiration of the option 
D)  All of the above are determinants of option premiums. 
A)  The volatility of the underlying stock 
B)  The price of the underlying stock 
C)  The time to expiration of the option 
D)  All of the above are determinants of option premiums.

Question 20

A speculator may choose to buy a call option because

Accepted Answer

A)  the possible gain is greater than with a futures contract. 
B)  the potential loss on the call is limited to the premium, while the potential loss is unlimited with a futures contract. 
C)  the possible gain with the option is great than the possible gain from buying the underlying stock itself. 
D)  calls eliminate the risk of loss so a speculator can lose nothing or just make a gain. 
A)  the possible gain is greater than with a futures contract. 
B)  the potential loss on the call is limited to the premium, while the potential loss is unlimited with a futures contract. 
C)  the possible gain with the option is great than the possible gain from buying the underlying stock itself. 
D)  calls eliminate the risk of loss so a speculator can lose nothing or just make a gain.

Exam 9: Demystifying Derivatives

If person A sells a 2003 Treasury bond futures contract to person B, in market terminology,

The precise terms of each futures contract are

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

Futures contract prices are established

In the financial futures quotations, the total number of long positions outstanding is called

The relationship between the price in the cash market and the price in the futures market is

For the buyer of a call option, the downside risk

Which of the following is not a derivative?

The price paid for an option is called the

The parties to a swap are formally called the

A speculator becomes the floating-rate payer in an interest-rate swap. She hopes that

The seller of a call option has the

Futures contracts are marked-to-market

For the settlement of futures contracts, the clearing corporation requires that a margin be placed with the corporation by

__________ trading volume promotes __________ bid-asked spreads.

The Chicago Board of Trade promotes liquidity in the futures market by

Which of the following statements is correct?

Futures contracts are least likely to be traded on which of the following exchanges?

Which of the following is not a determinant of option premiums?

A speculator may choose to buy a call option because

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

trading volume promotes bid-asked spreads.