Exam 29: The Applications of Futures and Options Contracts

The purchase of a call option can be used to guarantee that the maximum price that will be paid in the future is the strike price plus the option price.

An institutional investor can use interest rate options or options on interest rate futures to speculate on ________ based on expectations of interest rate changes.

Which of the below statements is TRUE?

Prior to the development of ________, an investor who wanted to speculate on the future course of aggregate stock prices had to buy or short individual stocks.

Market participants can employ interest rate futures in various ways. These include ________.

There are three advantages of using interest rate futures instead of the cash market (trading long-term Treasuries themselves). One of these advantages is that ________.

If the futures price is ________ the theoretical futures price (that is, the futures contracts are cheap), the index fund manager can ________ the indexed portfolio's return by buying the futures and buying the Treasury bills.

While investment managers can alter the interest rate sensitivity of their portfolios with cash market instruments, a quick and inexpensive means for doing so (on either a temporary or permanent basis) is to use ________.

An institutional investor can create a put option synthetically by using either ________.

Buying a futures contract decreases a market participant's exposure to a market; selling a futures contract decreases a market participant's exposure to a market.

The effectiveness of a cross hedge will be determined by ________.

The major function of futures markets is to transfer price risk from ________.

A protective put buying strategy can be used to reduce the risk exposure of a stock portfolio to a decline in stock prices, guaranteeing a maximum price equal to the strike price plus the cost of buying the put option.

Market participants can use interest rate futures in various ways. Name three of these ways.

Give two examples of how interest rate futures can be used to hedge against adverse interest rate movements by locking in either a price or an interest rate.

By taking an appropriate position in a suitable stock index option, an institutional investor can create a protective call for a diversified portfolio.

A corporation that plans to sell commercial paper one month from now can use ________ to lock in a commercial paper rate.

Institutional investors can use stock index futures for seven distinct investment strategies. These include ________.

The difference between the cash price and the futures price is called the ________.

An institution that wishes to alter its exposure to the market can do so by revising the portfolio's beta. Describe how this can be done.