Question 1

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 2

A key use of interest-rate swaps is to:

Accepted Answer

A) eliminate risk for both parties involved in the transaction. 
B) earn the fees for constructing the swaps. 
C) provide a hedge against interest-rate risk. 
D) manage government revenues. 
A) eliminate risk for both parties involved in the transaction. 
B) earn the fees for constructing the swaps. 
C) provide a hedge against interest-rate risk. 
D) manage government revenues.

Question 3

An individual who neither uses nor produces a commodity but sells a futures contract for the asset is:

Accepted Answer

A) speculating that the price of the commodity is going to fall. 
B) speculating that the price of the commodity is going to increase. 
C) hedging trying to transfer risk. 
D) using arbitrage to earn profits without taking a risk. 
A) speculating that the price of the commodity is going to fall. 
B) speculating that the price of the commodity is going to increase. 
C) hedging trying to transfer risk. 
D) using arbitrage to earn profits without taking a risk.

Question 4

For a given call option price, which of the following statements is correct?

Accepted Answer

A) The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option. 
B) The closer the strike price is to the current price of the underlying asset, the larger the time value of the option. 
C) As the strike price approaches the price of the underlying asset, the time value of the option approaches zero. 
D) As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases. 
A) The closer the strike price is to the current price of the underlying asset, the smaller the time value of the option. 
B) The closer the strike price is to the current price of the underlying asset, the larger the time value of the option. 
C) As the strike price approaches the price of the underlying asset, the time value of the option approaches zero. 
D) As the strike price approaches the price of the underlying asset, the intrinsic value of the option increases and the time value of the option decreases.

Question 5

A put option that is described as in the money would find:

Accepted Answer

A) the market price of the stock above the strike price. 
B) the strike price is above the market price of the stock. 
C) the market and strike prices are the same. 
D) the option has been exercised. 
A) the market price of the stock above the strike price. 
B) the strike price is above the market price of the stock. 
C) the market and strike prices are the same. 
D) the option has been exercised.

Question 6

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) $1200.00. 
C) $375.00. 
D) $240.00. 
A) $120.00. 
B) $1200.00. 
C) $375.00. 
D) $240.00.

Question 7

A price of a futures contract for U.S.Treasury bonds listed as "111-15" is measured in:

Accepted Answer

A) 32nds. 
B) 12ths. 
C) 4ths. 
D) dollars; it stands for $111.15 but a dash is used instead of a period. 
A) 32nds. 
B) 12ths. 
C) 4ths. 
D) dollars; it stands for $111.15 but a dash is used instead of a period.

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

Why does the time value of the option tend to vary directly with the time to expiration?

Accepted Answer

Prior to expiration there is always the

Question 10

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 11

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 12

Explain why the two parties in a futures contract technically do not make a bilateral agreement with each other.

Accepted Answer

With a futures contract, the high degree

Question 13

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 14

With a put option, what specifically does the option holder receive for the price paid for the option?

Accepted Answer

The option holder (buyer) receives the r

Question 15

We have a stock selling for $90.00.There is a put option for this stock with a strike price of $85 and an option price of $1.20:

Accepted Answer

A) the intrinsic value of this option is $0.00 and the time value of the option is $1.20. 
B) the intrinsic value of this option is $90.00 and the time value of the option is $1.20. 
C) the intrinsic value of this option is -$5.00 and the time value of the option is $1.20. 
D) you cannot determine the intrinsic value or time value of the option since the strike price is less than the underlying asset price. 
A) the intrinsic value of this option is $0.00 and the time value of the option is $1.20. 
B) the intrinsic value of this option is $90.00 and the time value of the option is $1.20. 
C) the intrinsic value of this option is -$5.00 and the time value of the option is $1.20. 
D) you cannot determine the intrinsic value or time value of the option since the strike price is less than the underlying asset price.

Question 16

At expiration, the value of an option:

Accepted Answer

A) is greater than the intrinsic value. 
B) is less than the intrinsic value. 
C) is equal to the time value of the option. 
D) is equal to the intrinsic value. 
A) is greater than the intrinsic value. 
B) is less than the intrinsic value. 
C) is equal to the time value of the option. 
D) is equal to the intrinsic value.

Question 17

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 18

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 19

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 20

Explain how an interest rate futures contract differs from an outright purchase of a bond.

Accepted Answer

An investor who purchases a bond does so

Exam 9: Derivatives: Futures, Options, and Swaps

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

A key use of interest-rate swaps is to:

An individual who neither uses nor produces a commodity but sells a futures contract for the asset is:

For a given call option price, which of the following statements is correct?

A put option that is described as in the money would find:

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

A price of a futures contract for U.S.Treasury bonds listed as "111-15" is measured in:

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:

Why does the time value of the option tend to vary directly with the time to expiration?

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:

In a derivative transaction:

Explain why the two parties in a futures contract technically do not make a bilateral agreement with each other.

Futures markets and derivatives contribute to economic growth by:

With a put option, what specifically does the option holder receive for the price paid for the option?

We have a stock selling for $90.00.There is a put option for this stock with a strike price of $85 and an option price of $1.20:

At expiration, the value of an option:

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

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):

Explain how an interest rate futures contract differs from an outright purchase of a bond.

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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