Deck 17: Forward, Futures, and Options Agreements

Question 1

Financial forward transactions are primarily used to deal with

A)risks created by price fluctuations in foreign exchange markets.
B)risks created by price fluctuations in domestic exchange markets.
C)the lack of risks in exchange markets.
D)risks created by price fluctuations in domestic and foreign exchange markets.

Answer 1

A

Question 2

Financial forward agreements are most widely used to hedge

A)liquidity risk.
B)interest rate risk.
C)credit risk.
D)exchange rate risk.

Answer 2

D

Question 3

__________ give the buyer the right, but not the obligation, to buy or sell a futures contract up to the expiration date on the contract at a strike price set today.

A)Forward transactions
B)Financial futures
C)Futures contracts
D)Options on futures

Answer 3

D

Question 4

The spot rate is the exchange rate for foreign currency

A)equilibrium between the short and long exchange rates.
B)for immediate delivery.
C)for delivery in less than one year.
D)for delivery in one year or more.

Question 5

What is the most common type of financial forward agreement?

A)forward agreements in foreign currencies
B)forward agreements in domestic goods
C)forward agreements in federal funds
D)forward agreements in both domestic goods and foreign currency

Question 6

A forward rate

A)gravitates toward the expected future exchange rate for a particular currency.
B)diverges away from the expected future exchange rate for a particular currency.
C)is affected by inflation and interest rate differentials between two countries.
D)Both a and c are correct.

Question 7

For a bank to make a profit from foreign exchange forward agreements, the difference between the asked price and the bid price must be

A)zero.
B)positive.
C)negative.
D)less than the rate of interest.

Question 8

The purpose of a forward agreement is

A)to reduce the uncertainty of future exchange rates.
B)to reduce the possibility of being worse off.
C)give up an opportunity of one party to gain over another.
D)All of the above are correct.

Question 9

A disadvantage of forward agreements is that

A)there is a possibility that one party to the agreement may default.
B)sellers are prevented from hedging.
C)buyers are prevented from hedging.
D)sellers are prevented from speculating.

Question 10

__________ are standardized contracts between two parties to trade financial assets at a future date and in which the terms including the price of the transaction are determined today.

A)Transactions
B)Futures contracts
C)Options
D)Swaps

Question 11

Futures contracts are standardized contracts between two parties to trade financial assets at a future date and in which the terms including the price of the transaction are determined _____

A)today.
B)in the future.
C)by mutual consent.
D)only in equilibrium.

Question 12

Someone who makes a riskless profit by buying in one market and reselling in another market is called a/an__________

A)arbitrageur.
B)clearinghouse.
C)program trader.
D)market maker.

Question 13

__________ give the buyer the right, but not the obligation, to sell a standardized contract of a financial asset at a strike price determined today up to the expiration date on the contract.

A)Put options
B)Call options
C)Options
D)Options on futures

Question 14

__________ are standardized contracts that give the buyer the right, but not the obligation, to buy or sell an asset in the future at a price determined today up to the expiration date on the contract.

A)Put options
B)Call options
C)Options
D)Options on futures

Question 15

Options are standardized contracts that give the buyer the _____, but not the ______, to buy or sell an asset in the future at a price determined today up to the expiration date on the contract.

A)right, obligation
B)obligation, right
C)highest price, lowest price
D)Both b and c are correct.

Question 16

__________ are contracts that give the buyer or seller the right and obligation to purchase or sell a multiple of the value of a stock index at some specific date in the future at a price determined today.

A)Financial futures
B)Forward contracts
C)Stock index futures
D)Options on futures

Question 17

The __________ is the part of the exchange which takes on the responsibility of enforcing the contract after an agreement is struck.

A)trading floor
B)pit
C)clearinghouse
D)performance bond

Question 18

The amount that brokers must collect from their customers before they make any futures purchases or sales of future contracts is called

A)the strike price.
B)an option premium.
C)the performance bond.
D)the margin requirement.

Question 19

The amount paid by the buyer of an option to compensate the seller for accepting the risk of a loss with no possibility of a gain is called

A)the strike price.
B)an option premium.
C)a risk premium.
D)a margin requirement.

Question 20

The bond required by the exchange of both the buyer and seller of a futures agreement to ensure that both parties abide by the agreement is called

A)the performance bond.
B)an option bond.
C)a risk premium.
D)a margin requirement.

Question 21

Which of the following statements best describes the relationship between options and futures?

A)Futures limit both gains and losses, while options limit losses without limiting gains.
B)Options limit both gains and losses, while futures limit losses without limiting gains.
C)Futures contracts may be purchased on options contracts, but options cannot be bought on futures contracts.
D)Buyers of futures contracts must pay a futures premium, whereas buyers of options do not have to pay a premium.

Question 22

Which of the following is a disadvantage of a forward transaction?

A)Sellers are prevented from hedging.
B)They have high transactions costs.
C)There is a possibility of one party defaulting.
D)Both b and c are disadvantages.

Question 23

Futures markets can be used to hedge which of the following?

A)interest rate risk
B)exchange rate risk
C)the risks that stock prices may change
D)All of the above are correct.

Question 24

Futures markets can be used to hedge all of the following except

A)interest rate risk.
B)exchange rate risk.
C)the risks that stock prices may change.
D)exchanges that have already occurred.

Question 25

For a given options contract, the options premium will be larger

A)the higher the strike price relative to the spot price for call options.
B)the closer the expiration date.
C)the higher the strike price relative to the spot price for put options.
D)the lower the strike price relative to the spot price for put options.

Question 26

For a given options contract, the options premium will be smaller

A)the lower the strike price relative to the spot price for call options.
B)the farther away the expiration date.
C)the lower the strike price relative to the spot price for put options.
D)the higher the strike price relative to the spot price for put options.

Question 27

If Michael needs to buy a financial asset in the future, which of the following should he do to hedge the risk of a price increase?

A)buy a call option
B)sell a call option
C)buy a put option
D)sell a put option

Question 28

If Carolyn plans to sell a financial security in the future, which of the following should she do to hedge the risk of a price decrease?

A)buy a call option
B)sell a call option
C)buy a put option
D)sell a put option

Question 29

What is the reason an investor might choose futures, which limit both gains and losses, over options, which limit only losses?

A)Options are cheaper than futures.
B)Futures are cheaper than options.
C)Futures are more volatile than options.
D)Futures are far more numerous than options.

Question 30

The term used for reducing risk in financial futures is which of the following?

A)hedging
B)convergence
C)counter risk
D)arbitragers

Question 31

The term used for reducing risk in financial futures is which of the following?

A)balancing
B)renegotiating
C)interpreting
D)hedging

Question 32

A spot price is the price for which of the following?

A)prior delivery
B)immediate delivery
C)future delivery
D)partial delivery

Question 33

Futures contracts were developed to

A)increase the market share of commercial banks.
B)reduce the risk of future price changes.
C)prevent convergence.
D)None of the above

Question 34

Futures markets were first developed for which market(s)?

A)agriculture and commodity
B)financial futures and options
C)foreign exchange
D)stock markets

Question 35

Which of the following is false?

A)Agriculture futures predate financial futures.
B)Futures agreements confer rights but no obligations.
C)Futures agreements confer rights and obligations.
D)Options confer rights but no obligations.

Question 36

The responsibility of the clearinghouse is to

A)bid up transactions.
B)provide an area where buyers and sellers of futures can meet.
C)enforce futures contracts.
D)arrange trades only.

Question 37

For an arbitrageur, carrying costs consist of which of the following?

A)interest costs for the use of the funds to purchase securities less the interest earned on the securities
B)the performance bond
C)convergence fees
D)the margin requirements plus the performance bond

Question 38

The October 1987 crash was triggered by which of the following?

A)program trading
B)stop orders
C)falling futures prices
D)All of the above are correct.

Question 39

Which of the following preceded the October 1987 crash?

A)program trading
B)stop orders
C)falling futures prices
D)All of the above are correct.

Question 40

The strike price is which of the following?

A)the agreed-upon price in a futures contract
B)the agreed-upon price in an options contract
C)the agreed-upon price of bonds
D)the agreed-upon price of stocks

Question 41

Put options give the buyer which of the following?

A)The right and obligation to sell a standardized contract of a financial asset or a futures agreement at a strike price set today.
B)The right but not the obligation to sell a standardized contract of a financial asset or a futures agreement at the strike price set today up to the expiration date on the contract.
C)The right to buy a standardized contract of a financial asset at a strike price set today.
D)None of the above is correct.

Question 42

Call options give the buyer which of the following?

A)the obligation to sell a financial asset at a strike price set today.
B)the right to sell a financial asset at a strike price set today.
C)the obligation to buy a financial asset at a strike price set today.
D)the right but not the obligation to buy a financial asset at a strike price set today up to the expiration date on the contract.

Question 43

After purchasing a call option, the buyer will exercise the option only if

A)the price of the financial asset is less than the strike price.
B)the price of the financial asset is equal to the strike price.
C)the price of the financial asset is greater than the strike price.
D)the price of the financial asset is initially less than the strike price in the long run.

Question 44

Futures markets can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief?

A)You could sell T-bills into the spot market now.
B)You could sell a futures contract on T-bills.
C)You could buy a futures contract on T-bills.
D)You could buy T-bills on the spot market in June.

Question 45

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.

A)You could sell a put option
B)You could buy a put option.
C)You could buy a call option.
D)You could sell a call option.

Question 46

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much lower by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.

A)You could sell a put option
B)You could buy a put option.
C)You could buy a call option.
D)You could sell a call option.

Question 47

If I am to be receiving a large quantity of Japanese yen in 6 months, to hedge the risk that the exchange rate will change and eliminate my profit in dollars, I should

A)sell a futures contract in yen.
B)buy a futures contract in yen.
C)buy a T-bill futures contract.
D)only agree to accept dollars in the future.

Question 48

The option premium is determined by which of the following?

A)the volatility of the price of the financial instrument
B)the difference between the strike and the spot price
C)the length of time until the expiration date on the option
D)All of the above are correct.

Question 49

What is likely to happen if the futures price for Treasury bonds to be delivered in three months is above the spot price plus the carrying costs?

A)An arbitrageur will buy Treasury bonds in the spot market and sell a futures agreement.
B)An arbitrageur could sell Treasury bonds in the spot market while buying a futures agreement.
C)An arbitrageur could purchase Treasury bonds in the spot market while buying a futures agreement.
D)An arbitrageur could sell Treasury bonds in the spot market while selling a futures agreement.

Question 50

Standardized contracts between two parties to trade financial assets at a future date and in which the terms (including the price) of the transaction are determined today are referred to as financial

A)forward contracts.
B)futures contracts.
C)options.
D)swaps.

Question 51

__________ are non-standardized transactions in which the terms, including price, are completed today for a transaction that will occur in the future.

A)Forward transactions
B)Financial futures
C)Futures contracts
D)Options on futures

Question 52

Non-standardized contracts between two parties to trade assets at a future date and in which the terms (including the price) of the transaction are determined today are usually referred to as

A)forward contracts.
B)futures contracts.
C)options.
D)swaps.

Question 53

Which of the following is true with regards to financial forward agreements?

A)Financial forward agreements trade standardized quantities of financial instruments on specified dates in the future.
B)Financial forward agreements can be used to hedge risk but not to speculate.
C)Financial forward agreements in foreign exchange are arranged by large banks as a natural outgrowth of their foreign exchange operations.
D)Financial forward agreements that hedge interest rate risks entail little costs because offsetting partners are easy to find.

Question 54

The __________ is the part of the exchange which takes on the responsibility of enforcing the contract after an agreement is struck.

A)trading floor
B)pit
C)clearinghouse
D)performance bond

Question 55

The __________ is the part of the exchange where authorized brokers gather to buy and sell for their customers.

A)options wing
B)pit
C)clearinghouse
D)performance bond

Question 56

__________ occurs when the futures price is bid up or down to the spot price plus carrying costs as the expiration date draws close.

A)Convergence
B)Hedging
C)Strike pricing
D)Program trading

Question 57

Standardized agreements between two parties to trade financial assets on a future date in which the terms, including the price, are set today are called which of the following?

A)financial forward contracts
B)swaps
C)option contracts
D)financial futures contracts

Question 58

A disadvantage of forward contracts is that

A)there is a possibility that one party to the agreement may default.
B)sellers are prevented from hedging.
C)buyers are prevented from hedging.
D)sellers are prevented from speculating.

Question 59

Which of the following choices is not associated with financial futures?

A)the pit
B)premiums
C)the clearinghouse
D)arbitrageurs

Question 60

Which of the following choices is associated with financial futures?

A)the pit
B)arbitrageurs
C)the clearinghouse
D)All of the above are correct.

Question 61

Which of the following best describes the relationship between options and futures?

A)Options limit gains and losses while futures limit only losses.
B)Futures limit gains and losses while options limit only losses.
C)Buyers of futures must pay a premium in addition to a small brokerage fee while buyers of options do not pay a premium.
D)Options are much cheaper than futures.

Question 62

Standardized contracts that give the buyer the right but not the obligation to buy financial assets in the future at a price set today are which of the following?

A)financial forward agreements
B)financial option agreements
C)financial futures agreements
D)financial swaps

Question 63

Which of the following groups are most likely to purchase foreign exchange futures?

A)households
B)small businesses
C)importers and exporters
D)small domestic banks

Question 64

The name of the expression used for completing terms today for a transaction that will occur on a scheduled later date is which of the following?

A)anticipated outcome
B)amortization
C)present value determinant
D)forward transactions

Question 65

What is not considered a problem with forward transactions?

A)the difficulty in finding partners
B)default by one of the parties
C)convergence
D)one party reneges on the agreement

Question 66

Which of the following is not included in financial futures trading?

A)government securities
B)gold
C)eurodollars
D)foreign currencies

Question 67

A performance bond

A)is used to pay for futures agreements.
B)insures that both the buyer and seller of a future agreement abide by the agreement.
C)regulates futures agreements.
D)is paid for only by the buyer.

Question 68

A margin requirement is the amount brokers must collect from which of the following?

A)the clearinghouse
B)all customers before a futures transaction can be executed
C)the pit
D)the seller of the futures agreement

Question 69

The growth rate of financial markets in the past 30 years can best be described as which of the following?

A)declining
B)remaining the same
C)increasing slightly
D)increasing tremendously

Question 70

The principal reason for financial futures markets is which of the following?

A)to increase government intervention
B)to reduce the risks associated with increased price volatility
C)to lower currency prices
D)to increase risks so higher returns can be earned

Question 71

The relationship between futures and spot prices is which of the following?

A)direct
B)indirect
C)negative
D)variable

Question 72

Individuals who seek a riskless profit by buying in one market and reselling in another are called which of the following?

A)strategic activists
B)automatic stabilizers
C)arbitrageurs
D)investment heads

Question 73

A stock market index measures price changes of which of the following?

A)a market basket of various consumer products
B)a market basket of various products consumed by producers
C)a market basket of stocks that are included in the index
D)a market basket of stocks that are not included in the index

Question 74

The largest percentage decline in the Dow Jones Industrial average occurred when?

A)October 19, 1929
B)October 28, 1929
C)October 19, 1987
D)October 28, 1967

Question 75

Stop orders are orders to

A)automatically buy if the stock price falls to a certain price.
B)automatically sell if the stock price falls to a certain price.
C)automatically sell if bond interest rates fall.
D)automatically buy if bond interest rates fall.

Question 76

Futures agreements are standardized with regards to all of the following except the

A)price of the contract.
B)quantity.
C)delivery dates.
D)underlying financial instrument of the contract.

Question 77

Financial futures and options can be used to manage the risk of an adverse change in

A)Financial prices.
B)interest rates.
C)exchange rates.
D)All of the above are correct

Question 78

A bank buys foreign currency at the ____________ price and sells foreign currency at the _______________ price.

A)futures, option
B)asked, sale
C)bid, asked
D)spot, forward

Question 79

For any given options contract, the option premium will be larger

A)the lower the strike price relative to the spot price for put options.
B)the higher the strike price relative to the spot price for put options.
C)the closer the expiration date.
D)the higher the strike price relative to the spot price for call options.

Question 80

Why would any firm or individual hedge risk with futures, which limit both losses and gains, when they could use options which only limit losses?

A)Because with options, parties have both rights and obligations
B)Because options cost very little
C)Because futures cost very little
D)Because with futures, one party only has rights while the other only has obligations