Question 1

There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2006: The option writer:

Accepted Answer

A) Has the requirement to sell 100 shares of GM for $85 a share on or before the third Friday of October 2006 if the option holder wants to exercise the option. 
B) Has the option to sell 100 shares of GM for $85 a share on or before the third Friday of October 2006. 
C) Can cancel the option before the third Friday of October 2006. 
D) Does not have to post margin while the option holder does. 
A) Has the requirement to sell 100 shares of GM for $85 a share on or before the third Friday of October 2006 if the option holder wants to exercise the option. 
B) Has the option to sell 100 shares of GM for $85 a share on or before the third Friday of October 2006. 
C) Can cancel the option before the third Friday of October 2006. 
D) Does not have to post margin while the option holder does.

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.

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

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 5

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 6

If the current closing price of the stock of XYZ, Inc.is $87.50 and the July expiration call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of the option? What is the time value of the option?

Accepted Answer

The intrinsic value of a call option is

Question 7

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 8

Considering interest-rate swaps, the swap rate is:

Accepted Answer

A) The benchmark rate plus a premium. 
B) The rate being offered on U.S.Treasury securities of similar maturities. 
C) Another name for the swap spread. 
D) A measure of overall risk in the economy. 
A) The benchmark rate plus a premium. 
B) The rate being offered on U.S.Treasury securities of similar maturities. 
C) Another name for the swap spread. 
D) A measure of overall risk in the economy.

Question 9

One argument why farmers in poor countries remain poor is:

Accepted Answer

A) They know very little about farming techniques needed for the crop they are growing. 
B) They are poor assessors of the risks they face. 
C) Risk taking is a deterrent to growth. 
D) Poor farmers in many countries lack access to commodity futures markets. 
A) They know very little about farming techniques needed for the crop they are growing. 
B) They are poor assessors of the risks they face. 
C) Risk taking is a deterrent to growth. 
D) Poor farmers in many countries lack access to commodity futures markets.

Question 10

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 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

Derivatives are financial instruments that:

Accepted Answer

A) Present high levels of risk and should only be used by the wealthy. 
B) When used correctly can actually lower risk. 
C) Should only be used by people seeking high returns from low risk. 
D) Represents the outright purchase of a bond. 
A) Present high levels of risk and should only be used by the wealthy. 
B) When used correctly can actually lower risk. 
C) Should only be used by people seeking high returns from low risk. 
D) Represents the outright purchase of a bond.

Question 13

The intrinsic value of an 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 difference between the price of the underlying asset and the strike price of the option. 
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 difference between the price of the underlying asset and the strike price of the option. 
D) Will be negative if the time value of the option is negative.

Question 14

Considering a call option, if the price of the underlying asset decreases:

Accepted Answer

A) The intrinsic value of the option decreases. 
B) The intrinsic value of the option increases. 
C) The strike price decreases. 
D) The value of the option increases. 
A) The intrinsic value of the option decreases. 
B) The intrinsic value of the option increases. 
C) The strike price decreases. 
D) The value of the option increases.

Question 15

Assume we have a stock currently worth $100.We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $100.If the stock can rise or fall by $5 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of the option?

Accepted Answer

A) $10 
B) $5 
C) $0 
D) None of the above answers is correct. 
A) $10 
B) $5 
C) $0 
D) None of the above answers is correct.

Question 16

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 17

Considering a put option, an increase in the strike price:

Accepted Answer

A) Causes the intrinsic value of the option to decrease. 
B) Causes the intrinsic value of the option to increase. 
C) Causes the value of the option to decrease. 
D) Makes the option worthless. 
A) Causes the intrinsic value of the option to decrease. 
B) Causes the intrinsic value of the option to increase. 
C) Causes the value of the option to decrease. 
D) Makes the option worthless.

Question 18

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 19

A futures contract are enhanced forward contract with some important differences.Explain.
A futures contract is a forward contract that has been standardized and which is sold through an organized exchange.Forward contracts generally are private agreements between two parties and as a result are customized and therefore difficult to sell.

Accepted Answer

The high level of standardization of fut

Question 20

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 buy and sell 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 buy and sell financial instruments to benefit from temporary price differences.

Exam 9: Derivatives: Futures, Options, and Swaps

There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2006: The option writer:

The primary risk in swaps is that:

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

At expiration, the value of an option:

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

If the current closing price of the stock of XYZ, Inc.is $87.50 and the July expiration call options with a strike price of $80 are selling for $9.45, what is the intrinsic value of the option? What is the time value of the option?

The intrinsic value of an option:

Considering interest-rate swaps, the swap rate is:

One argument why farmers in poor countries remain poor is:

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

In a derivative transaction:

Derivatives are financial instruments that:

The intrinsic value of an option:

Considering a call option, if the price of the underlying asset decreases:

Interest-rate swaps are:

Considering a put option, an increase in the strike price:

The strike price of an option is:

An arbitrageur is someone who:

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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