Question 1

What would be the value of an option on a stock that sells at a fixed price with a standard deviation of zero? Explain.

Accepted Answer

Absent intrinsic value in the option, a

Question 2

Suppose you purchase a call option to purchase General Motors common stock at $80 per share in March.The current price of GM stock is $83 and the time value of the option is $5.What is the intrinsic value of the option? As the expiration date approaches, what will happen to the size of the time value of the option?

Accepted Answer

The intrinsic value of an option is equa

Question 3

If a futures contract for U.S.Treasury bonds decreases by "17" in the financial page listings, the price of the contract decreased by:

Accepted Answer

A) $531.25. 
B) $170.00. 
C) $340.00. 
D) $1700.00. 
A) $531.25. 
B) $170.00. 
C) $340.00. 
D) $1700.00.

Question 4

The intrinsic value of a call option:

Accepted Answer

A) is the difference between the option price and the interest rate. 
B) must be less than or equal to zero. 
C) is the greater of zero or the difference between the price of the underlying asset and the strike price. 
D) will be negative if the time value of the option is negative. 
A) is the difference between the option price and the interest rate. 
B) must be less than or equal to zero. 
C) is the greater of zero or the difference between the price of the underlying asset and the strike price. 
D) will be negative if the time value of the option is negative.

Question 5

An arbitrageur is someone who:

Accepted Answer

A) always takes the long position in a futures contract. 
B) always takes the short position in a futures contract. 
C) seeks the high returns that come from the high risk inherent in futures markets. 
D) simultaneously buys and sells financial instruments to benefit from temporary price differences. 
A) always takes the long position in a futures contract. 
B) always takes the short position in a futures contract. 
C) seeks the high returns that come from the high risk inherent in futures markets. 
D) simultaneously buys and sells financial instruments to benefit from temporary price differences.

Question 6

As an option approaches its expiration date, the value of the option approaches:

Accepted Answer

A) the intrinsic value. 
B) the price of the underlying asset. 
C) zero. 
D) infinity. 
A) the intrinsic value. 
B) the price of the underlying asset. 
C) zero. 
D) infinity.

Question 7

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 8

Explain how the clearing corporation reduces the risk it faces in the futures market through the use of margin accounts and marking-to-market.

Accepted Answer

The clearing corporation requires each p

Question 9

The user of a commodity who is trying to insure against the price of the commodity rising would:

Accepted Answer

A) take the short position in a futures contract. 
B) take the long position in a futures contract. 
C) be better off speculating on price movements and earning higher profits. 
D) want to hedge by selling a futures contract. 
A) take the short position in a futures contract. 
B) take the long position in a futures contract. 
C) be better off speculating on price movements and earning higher profits. 
D) want to hedge by selling a futures contract.

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 higher than Tom expected.Tom will have:

Accepted Answer

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

Question 11

The intrinsic value of an option:

Accepted Answer

A) is the amount the investor believes the option will be worth on the expiration date. 
B) is the amount the option is worth if it is exercised immediately. 
C) is equal to price of the underlying asset. 
D) cannot be determined without knowing the future price of the underlying asset. 
A) is the amount the investor believes the option will be worth on the expiration date. 
B) is the amount the option is worth if it is exercised immediately. 
C) is equal to price of the underlying asset. 
D) cannot be determined without knowing the future price of the underlying asset.

Question 12

The time value of the option should:

Accepted Answer

A) decrease the longer the time to expiration. 
B) increase the longer the time to expiration. 
C) not change with time to expiration. 
D) approach infinity at expiration. 
A) decrease the longer the time to expiration. 
B) increase the longer the time to expiration. 
C) not change with time to expiration. 
D) approach infinity at expiration.

Question 13

With a futures contract:

Accepted Answer

A) payment is made when the contract is created. 
B) no payment is made until the settlement date. 
C) the short position agrees to purchase the underlying asset. 
D) the risk is eliminated for both parties. 
A) payment is made when the contract is created. 
B) no payment is made until the settlement date. 
C) the short position agrees to purchase the underlying asset. 
D) the risk is eliminated for both parties.

Question 14

An option's value will never be less than zero because:

Accepted Answer

A) the intrinsic value is always less than zero. 
B) the option seller is required to make up any shortfall faced by the option buyer. 
C) an option holder will never make an additional payment to exercise the option. 
D) the time value of the option is always less than zero. 
A) the intrinsic value is always less than zero. 
B) the option seller is required to make up any shortfall faced by the option buyer. 
C) an option holder will never make an additional payment to exercise the option. 
D) the time value of the option is always less than zero.

Question 15

Considering a put option; if the price of the underlying asset increases:

Accepted Answer

A) the value of the put option also increases. 
B) the intrinsic value of the option increases. 
C) the value of the option decreases. 
D) the time value of the option decreases. 
A) the value of the put option also increases. 
B) the intrinsic value of the option increases. 
C) the value of the option decreases. 
D) the time value of the option decreases.

Question 16

If market participants believe next year's corn crop is likely to be unusually large:

Accepted Answer

A) the current spot market price of corn is likely to be below the futures price of corn. 
B) the current spot market price of corn is likely to be above the futures price of corn. 
C) it would be impossible to find someone to take the short position in a futures contract. 
D) it will be impossible to find someone to take the long position in a futures contract. 
A) the current spot market price of corn is likely to be below the futures price of corn. 
B) the current spot market price of corn is likely to be above the futures price of corn. 
C) it would be impossible to find someone to take the short position in a futures contract. 
D) it will be impossible to find someone to take the long position in a futures contract.

Question 17

Comparing an option to a futures contract it would be correct to say:

Accepted Answer

A) the risk involved in each is equal. 
B) a futures contract carries more risk than the option contract. 
C) an option contract carries more risk than the futures contract. 
D) neither involves risk; they are tools to eliminate risk. 
A) the risk involved in each is equal. 
B) a futures contract carries more risk than the option contract. 
C) an option contract carries more risk than the futures contract. 
D) neither involves risk; they are tools to eliminate risk.

Question 18

At expiration, the time value of an option:

Accepted Answer

A) is equal to the intrinsic value. 
B) is greater than the intrinsic value. 
C) is zero. 
D) is less than the intrinsic value. 
A) is equal to the intrinsic value. 
B) is greater than the intrinsic value. 
C) is zero. 
D) is less than the intrinsic value.

Question 19

A wheat farmer who must purchase his inputs now but will sell his wheat at a market price at a future date:

Accepted Answer

A) faces a market risk that cannot be offset. 
B) is a good example of what the chapter refers to as a speculator. 
C) would hedge by taking the short position in a wheat futures contract. 
D) would hedge by taking the long position in a wheat futures contract. 
A) faces a market risk that cannot be offset. 
B) is a good example of what the chapter refers to as a speculator. 
C) would hedge by taking the short position in a wheat futures contract. 
D) would hedge by taking the long position in a wheat futures contract.

Question 20

With a call option, the option holder:

Accepted Answer

A) has the right to sell the asset. 
B) has the right to buy the asset. 
C) can buy or sell, it is their option. 
D) can buy the asset but only after the date specified. 
A) has the right to sell the asset. 
B) has the right to buy the asset. 
C) can buy or sell, it is their option. 
D) can buy the asset but only after the date specified.

Exam 9: Derivatives: Futures, Options, and Swaps

What would be the value of an option on a stock that sells at a fixed price with a standard deviation of zero? Explain.

If a futures contract for U.S.Treasury bonds decreases by "17" in the financial page listings, the price of the contract decreased by:

The intrinsic value of a call option:

An arbitrageur is someone who:

As an option approaches its expiration date, the value of the option approaches:

On the settlement date of a futures contract:

Explain how the clearing corporation reduces the risk it faces in the futures market through the use of margin accounts and marking-to-market.

The user of a commodity who is trying to insure against the price of the commodity rising would:

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

The intrinsic value of an option:

The time value of the option should:

With a futures contract:

An option's value will never be less than zero because:

Considering a put option; if the price of the underlying asset increases:

If market participants believe next year's corn crop is likely to be unusually large:

Comparing an option to a futures contract it would be correct to say:

At expiration, the time value of an option:

A wheat farmer who must purchase his inputs now but will sell his wheat at a market price at a future date:

With a call option, the option holder:

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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