Question 1

The option writer is:

Accepted Answer

A) the seller of an option. 
B) the buyer of an option. 
C) the underlying asset of the option. 
D) the individual who obtains the rights. 
A) the seller of an option. 
B) the buyer of an option. 
C) the underlying asset of the option. 
D) the individual who obtains the rights. A

Question 2

The primary risk in swaps is that:

Accepted Answer

A) interest rates will not change. 
B) one of the parties will default. 
C) they are highly liquid and the market price will change. 
D) high U.S.government deficits will limit the availability of swaps. 
A) interest rates will not change. 
B) one of the parties will default. 
C) they are highly liquid and the market price will change. 
D) high U.S.government deficits will limit the availability of swaps. B

Question 3

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

Accepted Answer

A) the strike price is below the market price of the stock. 
B) the market price of the stock and the strike price are equal. 
C) the market price of the stock is below the strike price. 
D) the option has expired. 
A) the strike price is below the market price of the stock. 
B) the market price of the stock and the strike price are equal. 
C) the market price of the stock is below the strike price. 
D) the option has expired. A

Question 4

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

Accepted Answer

A forward contract is a private agreemen

Question 5

What is the process that makes sure the market price of an underlying asset equals the price of a futures contract at the settlement date? Provide an example.

Accepted Answer

The process that makes sure the price of

Question 6

With a call option that is described as in the money:

Accepted Answer

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

Question 7

As the volatility of the stock price increases, the time value of the option:

Accepted Answer

A) decreases. 
B) is zero. 
C) increases. 
D) doesn't change. 
A) decreases. 
B) is zero. 
C) increases. 
D) doesn't change.

Question 8

There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.At the end of the day when the market price of wheat increases to $3.00 per bushel:

Accepted Answer

A) the buyer (long position) needs to transfer $50 to the seller (short position). 
B) the seller (short position) needs to transfer $50 to the buyer (long position). 
C) nothing happens since with a futures contract all payments are made at the settlement date. 
D) nothing happens since marked to market adjustments only take place when the market price falls below the contract price. 
A) the buyer (long position) needs to transfer $50 to the seller (short position). 
B) the seller (short position) needs to transfer $50 to the buyer (long position). 
C) nothing happens since with a futures contract all payments are made at the settlement date. 
D) nothing happens since marked to market adjustments only take place when the market price falls below the contract price.

Question 9

How does trading in over-the-counter markets increase systemic risk?

Accepted Answer

By making markets less transparent.OTC t

Question 10

A baker of bread has a long-term fixed-price contract to supply bread.Which of the following would NOT reduce her risk?

Accepted Answer

A) Taking the long position in wheat futures contract 
B) Hedging this risk in the wheat futures market 
C) Finding a wheat farmer who will take the short position in a wheat futures contract 
D) Finding a wheat farmer who will take the long position in a wheat futures contract 
A) Taking the long position in wheat futures contract 
B) Hedging this risk in the wheat futures market 
C) Finding a wheat farmer who will take the short position in a wheat futures contract 
D) Finding a wheat farmer who will take the long position in a wheat futures contract

Question 11

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 12

Considering interest-rate swaps, the swap spread is:

Accepted Answer

A) another name for the swap rate. 
B) the difference between the benchmark rate and the swap rate. 
C) the benchmark rate plus the swap rate. 
D) a measure of the time value of the swap. 
A) another name for the swap rate. 
B) the difference between the benchmark rate and the swap rate. 
C) the benchmark rate plus the swap rate. 
D) a measure of the time value of the swap.

Question 13

The short position in a futures contract is the party that will:

Accepted Answer

A) deliver a commodity or financial instrument to the buyer at a future date. 
B) suffer the loss. 
C) accept the risk. 
D) benefit from increases in price of the underlying asset. 
A) deliver a commodity or financial instrument to the buyer at a future date. 
B) suffer the loss. 
C) accept the risk. 
D) benefit from increases in price of the underlying asset.

Question 14

What is a credit-default swap?

Accepted Answer

ACDS is a credit derivative that allows

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

There is a futures contract for the purchase of 1000 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 17

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 18

Someone who purchases a call option is really buying insurance to protect against:

Accepted Answer

A) the stock not being available when they want to purchase it. 
B) the price of the stock falling. 
C) a seller not being able to deliver the stock. 
D) the price of the stock rising. 
A) the stock not being available when they want to purchase it. 
B) the price of the stock falling. 
C) a seller not being able to deliver the stock. 
D) the price of the stock rising.

Question 19

The process of marking to market:

Accepted Answer

A) is done by the clearing corporation to reduce risk in futures contracts. 
B) involves the margin accounts of only the buyers of future contracts. 
C) involves the margin accounts of only the sellers of future contracts. 
D) usually requires margin accounts to be adjusted weekly by the clearing corporation. 
A) is done by the clearing corporation to reduce risk in futures contracts. 
B) involves the margin accounts of only the buyers of future contracts. 
C) involves the margin accounts of only the sellers of future contracts. 
D) usually requires margin accounts to be adjusted weekly by the clearing corporation.

Question 20

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

Exam 9: Derivatives: Futures, Options, and Swaps

The option writer is:

The primary risk in swaps is that:

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

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

What is the process that makes sure the market price of an underlying asset equals the price of a futures contract at the settlement date? Provide an example.

With a call option that is described as in the money:

As the volatility of the stock price increases, the time value of the option:

There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.At the end of the day when the market price of wheat increases to $3.00 per bushel:

How does trading in over-the-counter markets increase systemic risk?

A baker of bread has a long-term fixed-price contract to supply bread.Which of the following would NOT reduce her risk?

Interest-rate swaps are:

Considering interest-rate swaps, the swap spread is:

The short position in a futures contract is the party that will:

What is a credit-default swap?

The strike price of an option is:

There is a futures contract for the purchase of 1000 bushels of corn at $3.00 per bushel.At the end of the day when the market price of corn falls to $2.50:

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.

Someone who purchases a call option is really buying insurance to protect against:

The process of marking to market:

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

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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