Deck 4: Contract

Question 1

You are a hedge fund and you enter a contract which involves 3 players: You, the American Bank and WePro Ltd. The American Bank lends $1,000 to WePro and they want you to share the risk in case WePro fails to pay back. If you give the American Bank $1,000, you will get a fixed monthly payment worth 10% of $1,000 for the duration of the contract-as long as WePro doesn't default. However, if WePro defaults on its debt, you will have to pay $1,000 to the American Bank and the contract is terminated. What type of contract is this?

A)Credit default swap.
B)Long-term loan.
C)Hedging.
D)Insurance.

Answer 1

Credit default swap.

Question 2

A forward contract is an agreement between two parties to buy or sell an asset at a pre-agreed future point in time at a pre-agreed price. What of the following statements is true?

A)A futures contract is more unpredictable than a forward contract.
B)A futures contract is standardized while each forward contract is unique.
C)A futures contract is a forward contract that is traded on an exchange.
D)A futures contract almost has no risk of default, while a forward contract has some risk of default involved.
E)All correct.

Answer 2

All correct.

Question 3

You want to commit to purchasing oil at the price 30 days from now. What is this type of deal?

A)A futures contract.
B)A call option.
C)A put option.
D)A forward.

Answer 3

A futures contract.

Question 4

Suppose you are interested in buying 100 shares of WePro Ltd. and the current price of its stock is $30. You are thinking to buy these shares at $32 from the stock exchange market. In case the market price is above $32, you buy the shares at $32 and you agree to pay the stock exchange market $2 for each share, or $200 in total. If the market price is below $32, then you will not buy the shares. Whether or not you continue the deal, the stock exchange keeps $200 as the risk premium and to make it a fair deal. What is this type of deal?

A)A futures contract.
B)A call option.
C)An over-the-counter contract.
D)A forward contract.

Question 5

When stocks are traded via a dealer network as opposed to on a centralized exchange, what is the deal called?

A)A futures contract.
B)A swap contract.
C)An option contract.
D)An over-the-counter contract.

Question 6

You have a loan on a fixed annual interest rate of 7% over five years. Tom has a similar loan, over the same period, but on a floating interest rate. You and Tom are thinking to take over each other's obligations, so that you pay the floating interest rate and Tom pays the fixed rate. What kind of deal is this?

A)An option.
B)A forward contract.
C)A swap contract.
D)A futures contract.

Question 7

What do an option, a swap, a forward, and an OTC have in common?

A)They are all derivatives.
B)They are traded in the same market.
C)They have the same value.
D)They have nothing in common.
E) All of the above.