Question 1

Describe the condition that would have a call option in the money. Now describe the condition that has a put option out of the money.

Accepted Answer

A call option will be in the money when

Question 2

Consider a call option; in terms of the option writer and option holder, who is the buyer? Who is the seller? Finally, who has the option? Explain.

Accepted Answer

In the case of a call option, the option

Question 3

Which of the following statements is true?

Accepted Answer

A)  Call options can be sold prior to expiration but put options cannot. 
B)  Put options can be sold prior to expiration but call options cannot. 
C)  No option can be sold prior to expiration. 
D)  Both American and European options can be sold prior to expiration. 
A)  Call options can be sold prior to expiration but put options cannot. 
B)  Put options can be sold prior to expiration but call options cannot. 
C)  No option can be sold prior to expiration. 
D)  Both American and European options can be sold prior to expiration.

Question 4

Marking to market is a process that:

Accepted Answer

A)  involves a transfer of risk. 
B)  ensures that the buyers and sellers receive what the contract promises. 
C)  always requires the sellers of contracts to transfer funds to the buyers of contracts. 
D)  buyers and sellers can request for an additional fee when the contract is created. 
A)  involves a transfer of risk. 
B)  ensures that the buyers and sellers receive what the contract promises. 
C)  always requires the sellers of contracts to transfer funds to the buyers of contracts. 
D)  buyers and sellers can request for an additional fee when the contract is created.

Question 5

Interest-rate swaps are:

Accepted Answer

A)  exchanges of equity securities for debt securities. 
B)  agreements between two parties to exchange periodic interest-rate payments over some future period. 
C)  agreements involving swapping of option contracts. 
D)  agreements that allow both parties to convert floating interest rates to fixed interest rates. 
A)  exchanges of equity securities for debt securities. 
B)  agreements between two parties to exchange periodic interest-rate payments over some future period. 
C)  agreements involving swapping of option contracts. 
D)  agreements that allow both parties to convert floating interest rates to fixed interest rates.

Question 6

A pension fund manager who plans on purchasing bonds in the future:

Accepted Answer

A)  wants to insure against the price of bonds falling. 
B)  can offset the risk of bond prices rising by selling a futures contract. 
C)  will take the long position in a futures contract. 
D)  will take the short position in a futures contract. 
A)  wants to insure against the price of bonds falling. 
B)  can offset the risk of bond prices rising by selling a futures contract. 
C)  will take the long position in a futures contract. 
D)  will take the short position in a futures contract.

Question 7

If the current closing price of the stock of XYZ, Inc. is $87.50 and the July expiration call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of the option? What is the time value of the option?

Accepted Answer

The intrinsic value of a call option is

Question 8

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

Accepted Answer

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

Question 9

The key difference between a forward and a futures contract is:

Accepted Answer

A)  a forward contract is customized where a futures contract is not. 
B)  a forward contract is bought and sold on organized exchanges. 
C)  only the forward contracts have settlement dates. 
D)  the amount of time involved. 
A)  a forward contract is customized where a futures contract is not. 
B)  a forward contract is bought and sold on organized exchanges. 
C)  only the forward contracts have settlement dates. 
D)  the amount of time involved.

Question 10

There is a futures contract for the purchase of 1,000 bushels of corn at $3.00 per bushel. At the end of the day when the market price of corn falls to $2.50:

Accepted Answer

A)  the buyer (long position) needs to transfer $500 to the seller (short position). 
B)  the seller (long position) needs to transfer $500 to the buyer (short position). 
C)  nothing happens since marked to market adjustments only occur if the market price rises above the contract price. 
D)  nothing happened since no funds are transferred until the settlement date. 
A)  the buyer (long position) needs to transfer $500 to the seller (short position). 
B)  the seller (long position) needs to transfer $500 to the buyer (short position). 
C)  nothing happens since marked to market adjustments only occur if the market price rises above the contract price. 
D)  nothing happened since no funds are transferred until the settlement date.

Question 11

The main difference between European and American options is:

Accepted Answer

A)  holders of European options have more options than holders of American options. 
B)  American option holders have more options than European option holders. 
C)  European option holders can exercise the option prior to expiration. 
D)  European options cannot be resold. 
A)  holders of European options have more options than holders of American options. 
B)  American option holders have more options than European option holders. 
C)  European option holders can exercise the option prior to expiration. 
D)  European options cannot be resold.

Question 12

In a derivative transaction:

Accepted Answer

A)  the dollar amount of the transaction increases as the contract date approaches. 
B)  the risk is less than if actually purchasing the underlying asset. 
C)  what one person gains is what the other person loses. 
D)  there is always a futures contract. 
A)  the dollar amount of the transaction increases as the contract date approaches. 
B)  the risk is less than if actually purchasing the underlying asset. 
C)  what one person gains is what the other person loses. 
D)  there is always a futures contract.

Question 13

Assume we have a stock currently worth $100. We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $100. If the stock can rise or fall by $5 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of the option?

Accepted Answer

A)  $10 
B)  $5 
C)  $0 
D)  None of the answers is correct. 
A)  $10 
B)  $5 
C)  $0 
D)  None of the answers is correct.

Question 14

Imagine a baker who has the opportunity to bid on a contract to supply a local military base with bread for an entire year. The problem is the baker must commit to a price today and hold to that price for the entire year. Identify the risk faced by the baker, and explain how the use of a futures contract could transfer the risk.

Accepted Answer

The baker faces the problem of not knowi

Question 15

Why do government debt managers often use interest-rate swaps?

Accepted Answer

Government debt managers find that often

Question 16

What are the three main ways to categorize derivatives?

Accepted Answer

Derivatives can be c

Question 17

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

Accepted Answer

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

Question 18

What is a credit-default swap?

Accepted Answer

A CDS is a credit derivative that allows

Question 19

On the settlement date of a futures contract:

Accepted Answer

A)  the future's price is always above the price of the underlying asset. 
B)  the future's price is always below the price of the underlying asset. 
C)  the future's price is equal to the price of the underlying asset. 
D)  the future's price may be above or below the price of the underlying asset but not equal to it. 
A)  the future's price is always above the price of the underlying asset. 
B)  the future's price is always below the price of the underlying asset. 
C)  the future's price is equal to the price of the underlying asset. 
D)  the future's price may be above or below the price of the underlying asset but not equal to it.

Question 20

The clearing corporation's main role in the futures market is to:

Accepted Answer

A)  set the market price of the contract. 
B)  act as the counterparty to both sides of the transaction, thereby guaranteeing payment. 
C)  provide the underlying assets so the contracts can be created. 
D)  all of the above. 
A)  set the market price of the contract. 
B)  act as the counterparty to both sides of the transaction, thereby guaranteeing payment. 
C)  provide the underlying assets so the contracts can be created. 
D)  all of the above.

Exam 9: Derivatives: Futures, Options, and Swaps

Describe the condition that would have a call option in the money. Now describe the condition that has a put option out of the money.

Consider a call option; in terms of the option writer and option holder, who is the buyer? Who is the seller? Finally, who has the option? Explain.

Which of the following statements is true?

Marking to market is a process that:

Interest-rate swaps are:

A pension fund manager who plans on purchasing bonds in the future:

If the current closing price of the stock of XYZ, Inc. is $87.50 and the July expiration call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of the option? What is the time value of the option?

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

The key difference between a forward and a futures contract is:

There is a futures contract for the purchase of 1,000 bushels of corn at $3.00 per bushel. At the end of the day when the market price of corn falls to $2.50:

The main difference between European and American options is:

In a derivative transaction:

Why do government debt managers often use interest-rate swaps?

What are the three main ways to categorize derivatives?

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

What is a credit-default swap?

On the settlement date of a futures contract:

The clearing corporation's main role in the futures market is to:

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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