Question 1

Explain why a forward contract may actually carry more risk than a futures contract.

Accepted Answer

A forward contract is a private agreemen

Question 2

There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2017: The option writer:

Accepted Answer

A)  has the requirement to sell 100 shares of GM for $85 a share on or before the third Friday of October 2017 if the option holder wants to exercise the option. 
B)  has the option to sell 100 shares of GM for $85 a share on or before the third Friday of October 2017. 
C)  can cancel the option before the third Friday of October 2017. 
D)  does not have to post margin while the option holder does. 
A)  has the requirement to sell 100 shares of GM for $85 a share on or before the third Friday of October 2017 if the option holder wants to exercise the option. 
B)  has the option to sell 100 shares of GM for $85 a share on or before the third Friday of October 2017. 
C)  can cancel the option before the third Friday of October 2017. 
D)  does not have to post margin while the option holder does.

Question 3

Forward contracts are:

Accepted Answer

A)  an agreement between more than two parties. 
B)  contracts usually involving the exchange of a commodity or financial instrument. 
C)  always standardized. 
D)  easily resold. 
A)  an agreement between more than two parties. 
B)  contracts usually involving the exchange of a commodity or financial instrument. 
C)  always standardized. 
D)  easily resold.

Question 4

As the chapter points out, there have been many cases where derivatives have led to a lot of abuse. If this is the case, why do derivatives exist?

Accepted Answer

When used properly, derivatives are very

Question 5

Identify four factors that will cause the value of call options to increase.

Accepted Answer

Call options will increase in value if t

Question 6

Futures markets and derivatives contribute to economic growth by:

Accepted Answer

A)  decreasing speculation. 
B)  increasing the risk-taking capacity of the economy. 
C)  deterring the transfer of risk. 
D)  forcing people to accept the risk their decisions create. 
A)  decreasing speculation. 
B)  increasing the risk-taking capacity of the economy. 
C)  deterring the transfer of risk. 
D)  forcing people to accept the risk their decisions create.

Question 7

Derivatives are financial instruments that:

Accepted Answer

A)  present high levels of risk and should only be used by the wealthy. 
B)  when used correctly can actually lower risk. 
C)  should only be used by people seeking high returns from low risk. 
D)  represent the outright purchase of a bond. 
A)  present high levels of risk and should only be used by the wealthy. 
B)  when used correctly can actually lower risk. 
C)  should only be used by people seeking high returns from low risk. 
D)  represent the outright purchase of a bond.

Question 8

Considering a call option, if the price of the underlying asset decreases:

Accepted Answer

A)  the intrinsic value of the option decreases if it is above zero. 
B)  the intrinsic value of the option increases if it is above zero. 
C)  the strike price decreases. 
D)  the value of the option increases. 
A)  the intrinsic value of the option decreases if it is above zero. 
B)  the intrinsic value of the option increases if it is above zero. 
C)  the strike price decreases. 
D)  the value of the option increases.

Question 9

What questions should an employee ask before accepting options as part of or instead of a salary?

Accepted Answer

Most of the time when employees receive

Question 10

If a futures contract for U.S. Treasury bonds increases by "12" in the financial page listings, the value of the contract increased by:

Accepted Answer

A)  $120.00. 
B)  $1,200.00. 
C)  $375.00. 
D)  $240.00. 
A)  $120.00. 
B)  $1,200.00. 
C)  $375.00. 
D)  $240.00.

Question 11

Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.

Accepted Answer

Let's say an investor believes that inte

Question 12

The principal in an interest rate swap is:

Accepted Answer

A)  always transferred from the originator to the counterparty of the swap. 
B)  is usually held by a clearinghouse to guarantee payment. 
C)  usually borrowed from a third party. 
D)  is not borrowed, lent, or exchanged. It just serves as the basis for the calculation of cash flows. 
A)  always transferred from the originator to the counterparty of the swap. 
B)  is usually held by a clearinghouse to guarantee payment. 
C)  usually borrowed from a third party. 
D)  is not borrowed, lent, or exchanged. It just serves as the basis for the calculation of cash flows.

Question 13

The purpose of derivatives is to:

Accepted Answer

A)  increase the risk so the return is larger. 
B)  eliminate risk for both parties in the transaction. 
C)  postpone the risk for both parties in the transaction. 
D)  transfer the risk from one person to another. 
A)  increase the risk so the return is larger. 
B)  eliminate risk for both parties in the transaction. 
C)  postpone the risk for both parties in the transaction. 
D)  transfer the risk from one person to another.

Question 14

The right to buy a given quantity of an underlying asset at a predetermined price on or before a specific date is called a(n):

Accepted Answer

A)  put option. 
B)  option writer. 
C)  call option. 
D)  arbitrage contract. 
A)  put option. 
B)  option writer. 
C)  call option. 
D)  arbitrage contract.

Question 15

The strike price of an option is:

Accepted Answer

A)  the market price at the time the option is written. 
B)  the market price at the time the option is exercised. 
C)  the price at which the option holder has the right to buy or sell. 
D)  always above the market price. 
A)  the market price at the time the option is written. 
B)  the market price at the time the option is exercised. 
C)  the price at which the option holder has the right to buy or sell. 
D)  always above the market price.

Question 16

Sue buys a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on U.S. Treasury bonds is higher than Sue expected. Sue will have:

Accepted Answer

A)  gained money on her short position. 
B)  gained money on her long position. 
C)  lost money on her long position. 
D)  lost money on her short position. 
A)  gained money on her short position. 
B)  gained money on her long position. 
C)  lost money on her long position. 
D)  lost money on her short position.

Question 17

Which of the following would tend to decrease the size of the time value of the option?

Accepted Answer

A)  The price volatility of the underlying asset is high. 
B)  The time to expiration of the contract is far away. 
C)  The underlying price of the asset approaches the strike price. 
D)  The time to expiration of the options contract is near. 
A)  The price volatility of the underlying asset is high. 
B)  The time to expiration of the contract is far away. 
C)  The underlying price of the asset approaches the strike price. 
D)  The time to expiration of the options contract is near.

Question 18

If market participants believe next year's corn crop is likely to be unusually large:

Accepted Answer

A)  the current spot market price of corn is likely to be below the futures price of corn. 
B)  the current spot market price of corn is likely to be above the futures price of corn. 
C)  it would be impossible to find someone to take the short position in a futures contract. 
D)  it will be impossible to find someone to take the long position in a futures contract. 
A)  the current spot market price of corn is likely to be below the futures price of corn. 
B)  the current spot market price of corn is likely to be above the futures price of corn. 
C)  it would be impossible to find someone to take the short position in a futures contract. 
D)  it will be impossible to find someone to take the long position in a futures contract.

Question 19

With a put option, the option holder:

Accepted Answer

A)  has the right to buy the asset. 
B)  can buy or sell the asset, it is their option. 
C)  has the right to sell the asset. 
D)  can buy the asset but only on the date specified. 
A)  has the right to buy the asset. 
B)  can buy or sell the asset, it is their option. 
C)  has the right to sell the asset. 
D)  can buy the asset but only on the date specified.

Question 20

A call option described as out of the money would find:

Accepted Answer

A)  the market price of the stock is above the strike price. 
B)  the option has been exercised. 
C)  the option has expired. 
D)  the strike price is above the market price of the stock. 
A)  the market price of the stock is above the strike price. 
B)  the option has been exercised. 
C)  the option has expired. 
D)  the strike price is above the market price of the stock.

Exam 9: Derivatives: Futures, Options, and Swaps

Explain why a forward contract may actually carry more risk than a futures contract.

There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2017: The option writer:

Forward contracts are:

As the chapter points out, there have been many cases where derivatives have led to a lot of abuse. If this is the case, why do derivatives exist?

Identify four factors that will cause the value of call options to increase.

Futures markets and derivatives contribute to economic growth by:

Derivatives are financial instruments that:

Considering a call option, if the price of the underlying asset decreases:

What questions should an employee ask before accepting options as part of or instead of a salary?

If a futures contract for U.S. Treasury bonds increases by "12" in the financial page listings, the value of the contract increased by:

Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.

The principal in an interest rate swap is:

The purpose of derivatives is to:

The right to buy a given quantity of an underlying asset at a predetermined price on or before a specific date is called a(n):

The strike price of an option is:

Sue buys a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on U.S. Treasury bonds is higher than Sue expected. Sue will have:

Which of the following would tend to decrease the size of the time value of the option?

If market participants believe next year's corn crop is likely to be unusually large:

With a put option, the option holder:

A call option described as out of the money would find:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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