Question 1

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 2

Marking to market is a process that:

Accepted Answer

A) Involves a transfer of risk. 
B) Ensures that the buyers and sellers receive what the contract promises. 
C) Always requires the sellers of contracts to transfer funds to the buyers of contracts. 
D) Buyers and sellers can request for an additional fee when the contract is created. 
A) Involves a transfer of risk. 
B) Ensures that the buyers and sellers receive what the contract promises. 
C) Always requires the sellers of contracts to transfer funds to the buyers of contracts. 
D) Buyers and sellers can request for an additional fee when the contract is created.

Question 3

The purpose of derivatives is to:

Accepted Answer

A) Increase the risk so the return is larger. 
B) Eliminate risk for both parties in the transaction. 
C) Postpone the risk for both parties in the transaction. 
D) Transfer the risk from one person to another. 
A) Increase the risk so the return is larger. 
B) Eliminate risk for both parties in the transaction. 
C) Postpone the risk for both parties in the transaction. 
D) Transfer the risk from one person to another.

Question 4

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 5

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 6

Which of the following would tend to decrease the size of the time value of the option?

Accepted Answer

A) The price volatility of the underlying asset is high. 
B) The time to expiration of the contract is far away. 
C) The interest rate on U.S.Treasury bonds increases. 
D) The time to expiration of the options contract is near. 
A) The price volatility of the underlying asset is high. 
B) The time to expiration of the contract is far away. 
C) The interest rate on U.S.Treasury bonds increases. 
D) The time to expiration of the options contract is near.

Question 7

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 8

Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.

Accepted Answer

Let's say an investor believes that inte

Question 9

The seller of a put option is transferring the risk:

Accepted Answer

A) Of a price decrease of the stock to the buyer of the option. 
B) Of a price increase of the stock to the buyer of the option. 
C) This statement is incorrect since options do not transfer risk. 
D) This statement is incorrect since only sellers of call options are transferring risk. 
A) Of a price decrease of the stock to the buyer of the option. 
B) Of a price increase of the stock to the buyer of the option. 
C) This statement is incorrect since options do not transfer risk. 
D) This statement is incorrect since only sellers of call options are transferring risk.

Question 10

An individual who speculates by selling a put option wants to:

Accepted Answer

A) Bet that the market price of the underlying asset will not fall. 
B) Bet that the market price of the underlying asset will not rise. 
C) Bet that the option expires worthless. 
D) Buy the underlying asset in the future. 
A) Bet that the market price of the underlying asset will not fall. 
B) Bet that the market price of the underlying asset will not rise. 
C) Bet that the option expires worthless. 
D) Buy the underlying asset in the future.

Question 11

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

Question 12

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 13

One key difference between options contracts and futures contracts is:

Accepted Answer

A) In a futures contract, one part has more rights than the other. 
B) With an options contract both parties have equal rights. 
C) In an options contract, the rights belong to one party. 
D) In a futures contract all rights are held by just one party. 
A) In a futures contract, one part has more rights than the other. 
B) With an options contract both parties have equal rights. 
C) In an options contract, the rights belong to one party. 
D) In a futures contract all rights are held by just one party.

Question 14

The value of a derivative is determined by:

Accepted Answer

A) The Federal Reserve. 
B) SEC regulation. 
C) The value of the underlying asset. 
D) The risk-free rate. 
A) The Federal Reserve. 
B) SEC regulation. 
C) The value of the underlying asset. 
D) The risk-free rate.

Question 15

A U.S.Treasury bond dealer who sells a futures contract for U.S.Treasury bonds is:

Accepted Answer

A) Taking on additional risk in hopes of getting a larger return. 
B) Ensuring the sales price of the bond through hedging. 
C) Not likely to find a buyer for this transaction. 
D) Should see the value of the futures contract increase as bond prices rise. 
A) Taking on additional risk in hopes of getting a larger return. 
B) Ensuring the sales price of the bond through hedging. 
C) Not likely to find a buyer for this transaction. 
D) Should see the value of the futures contract increase as bond prices rise.

Question 16

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 17

Identify four factors that will cause the value of call options to increase.

Accepted Answer

Call options will increase in value if t

Question 18

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

A stock that has no volatility in its pr

Question 19

One key difference between swaps and option contracts is:

Accepted Answer

A) Swaps are derivative agreements and options are not. 
B) Swaps do not involve any risk and options do. 
C) Options transfer risk, swaps create risk. 
D) Options trade on organized exchanges and swaps do not. 
A) Swaps are derivative agreements and options are not. 
B) Swaps do not involve any risk and options do. 
C) Options transfer risk, swaps create risk. 
D) Options trade on organized exchanges and swaps do not.

Question 20

The option holder is:

Accepted Answer

A) The seller of an option. 
B) Another name for the clearinghouse used in futures contracts. 
C) The buyer of an option. 
D) The person who initiates the option. 
A) The seller of an option. 
B) Another name for the clearinghouse used in futures contracts. 
C) The buyer of an option. 
D) The person who initiates the option.

Exam 9: Derivatives: Futures, Options, and Swaps

Futures markets and derivatives contribute to economic growth by:

Marking to market is a process that:

The purpose of derivatives is to:

The time value of the option should:

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

Which of the following would tend to decrease the size of the time value of the option?

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.

Explain why for speculation, the purchase of an option may be more attractive than a futures contract or the outright purchase of the underlying asset.

The seller of a put option is transferring the risk:

An individual who speculates by selling a put option wants to:

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

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:

One key difference between options contracts and futures contracts is:

The value of a derivative is determined by:

A U.S.Treasury bond dealer who sells a futures contract for U.S.Treasury bonds is:

Identify four factors that will cause the value of call options to increase.

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

One key difference between swaps and option contracts is:

The option holder is:

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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