Exam 9: Exploring Financial Markets and Hedging Strategies

Interest rates are notoriously difficult to predict, however they do tend to follow the business cycle.

The futures and options markets tend to promote greater efficiency in the use of scarce financial resources.

Are market interest rates subject to seasonal movements? When do short-term interest rates tend to rise due to seasonal pressures? What about long-term interest rates?

Arbitrageurs hope to profit from price differences in markets around the world.

Trading in Treasury note futures began at the Chicago Board of Trade in 1967.

For the purchaser of a put option, the option will normally be exercised for profit if the difference between the strike price and the value of the underlying futures contract or security exceeds the sum of the option premium, taxes and transactions costs.

Accurate prediction of interest rates would lead to substantial gains to the predictor.

Implied market forecasts are predictions that are based on the interest rate expectations of the market.

Using each of the following definitions, identify which term or concept presented in this chapter matches them. a. Sale of futures contracts. b. Trading different financial assets in futures and cash (spot) markets. c. Price of acquiring financial assets listed in an option contract. d. Right to purchase a specified volume of assets at a specified price before expiration. e. Right to sell a specified volume of financial assets at a specified price before expiration. f. Price of an option.

One of the most active markets for forward delivery of an asset to be found anywhere in the world is the futures market for:

A low-cost method of transferring the risk of unanticipated changes in asset prices or interest rates from one investor or institution to another is called:

There is a relatively stable relationship between spot and futures prices.

According to the textbook the investor who chooses long-term securities over comparable quality short-term securities encounters:

Normally arbitrage trading based upon price difference between two different securities markets is highly risky due to the simultaneous holding of both long and short positions.

In the international money market interest-rate risk associated with large commercial loans can be dealt with using the one-month LIBOR futures contract, according to the textbook.

One of the major options involving money market instruments is the Eurodollar deposit futures option.

Long-term security prices tend to be more volatile than the prices of short-term securities.

According to the expectations hypothesis, an upward-sloping yield curve implies that investors in the financial markets expect interest rates to rise above their current levels in the future.

Swaps are used to reduce default risk.

Using each of the following definitions, identify which term or concept presented in this chapter matches them. a. Fluctuations in economic activity. b. Patterns in market interest rates during the year. c. Money supply increases push interest rates downward. d. Actual money growth versus expected money growth. e. Changes in spending and income receipts result in interest rate movements in the same direction.