Question 1

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

Accepted Answer

By making markets less transpa

Question 2

We have a futures contract for the purchase of 10,000 bushels of wheat at $3.00 per bushel.If the price of wheat were to increase to $3.50, explain what happens to the parties involved in the contract in terms of marking to market.Be sure to identify who is long and short and specifically how much is transferred.

Accepted Answer

The buyer of the contract, the long posi

Question 3

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 4

Explain the difference between American and European options.

Accepted Answer

American options can be exercised on any

Question 5

A call option described as at the money would find:

Accepted Answer

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

Question 6

The U.S.Government debt managers use interest-rate swaps primarily because:

Accepted Answer

A) The U.S.Government runs large deficits. 
B) The debt managers prefer to issue long-term bonds because they are cheaper to issue but prefer short-term variable rate obligations to match revenues. 
C) The debt managers find it difficult to borrow from traditional debt markets. 
D) They are required by law to keep the cost of borrowing to a minimum. 
A) The U.S.Government runs large deficits. 
B) The debt managers prefer to issue long-term bonds because they are cheaper to issue but prefer short-term variable rate obligations to match revenues. 
C) The debt managers find it difficult to borrow from traditional debt markets. 
D) They are required by law to keep the cost of borrowing to a minimum.

Question 7

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 8

There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel.If 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

If the option holder is the individual with the options, why is anyone an option writer?

Accepted Answer

Option writers really fall into two cate

Question 10

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 11

The main difference between European and American options is:

Accepted Answer

A) Holders of European options have more options than holders of American options. 
B) American option holders have more options than European option holders. 
C) European option holders can exercise the option prior to expiration. 
D) European options cannot be resold. 
A) Holders of European options have more options than holders of American options. 
B) American option holders have more options than European option holders. 
C) European option holders can exercise the option prior to expiration. 
D) European options cannot be resold.

Question 12

Assume we have a stock currently worth $50.We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $50.If the stock can rise or fall by $10 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) $5 
B) $10 
C) $50 
D) $40 
A) $5 
B) $10 
C) $50 
D) $40

Question 13

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.

Question 14

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 15

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 16

The clearing corporation's main role in the futures market is to:

Accepted Answer

A) Set the market price of the contract. 
B) Act as the counterparty to both sides of the transaction, thereby guaranteeing payment. 
C) Provide the underlying assets so the contracts can be created. 
D) All of the above. 
A) Set the market price of the contract. 
B) Act as the counterparty to both sides of the transaction, thereby guaranteeing payment. 
C) Provide the underlying assets so the contracts can be created. 
D) All of the above.

Question 17

Which of the following statements is true?

Accepted Answer

A) Call options can be sold prior to expiration but put options cannot. 
B) Put options can be sold prior to expiration but call options cannot. 
C) No option can be sold prior to expiration. 
D) Both American and European options can be sold prior to expiration. 
A) Call options can be sold prior to expiration but put options cannot. 
B) Put options can be sold prior to expiration but call options cannot. 
C) No option can be sold prior to expiration. 
D) Both American and European options can be sold prior to expiration.

Question 18

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

Accepted Answer

A) Benefit from decreases in the price of the underlying asset. 
B) Agree to make delivery of a commodity or financial instrument at a future date. 
C) Benefit from increases in the price of the underlying asset. 
D) Accept the greater share of the risk. 
A) Benefit from decreases in the price of the underlying asset. 
B) Agree to make delivery of a commodity or financial instrument at a future date. 
C) Benefit from increases in the price of the underlying asset. 
D) Accept the greater share of the risk.

Question 19

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.

Question 20

How did CDS contribute to the financial crisis of 2007-2009?

Accepted Answer

In three important ways: (1) fostering u

Exam 9: Derivatives: Futures, Options, and Swaps

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

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:

Explain the difference between American and European options.

A call option described as at the money would find:

The U.S.Government debt managers use interest-rate swaps primarily because:

A key use of interest-rate swaps is to:

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

If the option holder is the individual with the options, why is anyone an option writer?

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

The main difference between European and American options is:

The option writer is:

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

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.

The clearing corporation's main role in the futures market is to:

Which of the following statements is true?

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

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

How did CDS contribute to the financial crisis of 2007-2009?

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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