Deck 14: Financial Derivatives

Question 1

By taking the short position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________.

A)sell;$100,000;$115,000.
B)sell;$115,000;$100,000.
C)buy;$100,000;$115,000.
D)buy;$115,000;$100,000.

Answer 1

sell;$100,000;$115,000.

Question 2

By taking the short position on a futures contract of $100,000 at a price of 96 you are agreeing to ________ a ________ face value security for ________.

A)sell;$100,000;$96,000.
B)sell;$96,000;$100,000.
C)buy;$100,000;$96,000.
D)buy;$96,000;$100,000.

Answer 2

sell;$100,000;$96,000.

Question 3

A contract that requires the investor to sell securities on a future date is called a

A)short contract.
B)long contract.
C)hedge.
D)micro hedge.

Answer 3

short contract.

Question 4

A short contract requires that the investor

A)sell securities in the future.
B)buy securities in the future.
C)hedge in the future.
D)close out his position in the future.

Question 5

Parties who have bought a futures contract and thereby agreed to ________ (take delivery of)the bonds are said to have taken a ________ position.

A)sell;short
B)buy;short
C)sell;long
D)buy;long

Question 6

Parties who have sold a futures contract and thereby agreed to ________ (deliver)the bonds are said to have taken a ________ position.

A)sell;short
B)buy;short
C)sell;long
D)buy;long

Question 7

Which of the following is not a financial derivative?

A)stock
B)futures
C)options
D)forward contracts

Question 8

Hedging risk for a long position is accomplished by

A)taking another long position.
B)taking a short position.
C)taking additional long and short positions in equal amounts.
D)taking a neutral position.

Question 9

The payoffs for financial derivatives are linked to

A)securities that will be issued in the future.
B)the volatility of interest rates.
C)previously issued securities.
D)government regulations specifying allowable rates of return.

Question 10

To say that the forward market lacks liquidity means that

A)forward contracts usually result in losses.
B)forward contracts cannot be turned into cash.
C)it may be difficult to make the transaction.
D)forward contracts cannot be sold for cash.

Question 11

Suppose you are currently in the long position of a long-term bond.In this case,to hedge against a capital loss,you would enter into a ________ contract to ________ a long-term bond in the future.

A)interest-rate forward;sell
B)interest-rate forward;buy
C)exchange-rate forward;buy
D)exchange-rate forward;sell

Question 12

The advantage of forward contracts over future contracts is that they

A)are standardized.
B)have lower default risk.
C)are more liquid.
D)are more flexible

Question 13

Forward contracts are of limited usefulness to financial institutions because

A)of default risk.
B)it is impossible to hedge risk.
C)they are relatively inflexible.
D)of interest-rate risk.

Question 14

A long contract requires that the investor

A)sell securities in the future.
B)buy securities in the future.
C)hedge in the future.
D)close out his position in the future.

Question 15

When interest rates fall,a bank that perfectly hedges its portfolio of Treasury securities in the futures market

A)suffers a loss.
B)experiences a gain.
C)has no change in its income.
D)may either gain,lose or see no change in its income.

Question 16

By hedging a portfolio,a bank manager

A)reduces interest-rate risk.
B)increases reinvestment risk.
C)increases exchange-rate risk.
D)increases the probability of gains.

Question 17

Hedging risk for a short position is accomplished by

A)taking a long position.
B)taking another short position.
C)taking additional long and short positions in equal amounts.
D)taking a neutral position.

Question 18

A person who agrees to buy an asset at a future date is going

A)long.
B)short.
C)back.
D)ahead.

Question 19

Futures contracts are regularly traded on the

A)Chicago Board of Trade.
B)New York Stock Exchange.
C)American Stock Exchange.
D)Chicago Board of Options Exchange.

Question 20

A contract that requires the investor to buy securities on a future date is called a

A)short contract.
B)long contract.
C)hedge.
D)cross.

Question 21

On the expiration date of a futures contract,the price of the contract converges to the

A)purchase price of the contract.
B)average price over the life of the contract.
C)price of the underlying asset.
D)average of the purchase price and the price of the underlying asset.

Question 22

When a financial institution hedges the interest-rate risk for a specific asset,the hedge is called a

A)macro hedge.
B)micro hedge.
C)cross hedge.
D)futures hedge.

Question 23

By taking the long position on a futures contract of $100,000 at a price of 96 you are agreeing to ________ a ________ face value security for ________.

A)sell;$100,000;$96,000.
B)sell;$96,000;$100,000.
C)buy;$100,000;$96,000.
D)buy;$96,000;$100,000.

Question 24

If you sell twenty-five $100,000 futures contracts to hedge holdings of a Treasury security,the value of the Treasury securities you are holding is

A)$250,000.
B)$1,000,000.
C)$2,500,000.
D)$5,000,000.

Question 25

When the financial institution is hedging interest-rate risk on its overall portfolio,then the hedge is a

A)macro hedge.
B)micro hedge.
C)cross hedge.
D)futures hedge.

Question 26

Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk.If interest rates fall

A)the increase in the value of the securities equals the decrease in the value of the futures contracts.
B)the decrease in the value of the securities equals the increase in the value of the futures contracts.
C)both the securities and the futures contracts decrease in value.
D)both the securities and the futures contracts increase in value.

Question 27

To hedge the interest rate risk on $4 million of Treasury bonds with $100,000 futures contracts,you would need to purchase

A)4 contracts.
B)20 contracts.
C)25 contracts.
D)40 contracts.

Question 28

If you sold a short contract on financial futures you hope interest rates

A)rise.
B)fall.
C)are stable.
D)fluctuate.

Question 29

Futures differ from forwards because they are

A)used to hedge portfolios.
B)used to hedge individual securities.
C)used in both financial and foreign exchange markets.
D)a standardized contract.

Question 30

If you sell a $100,000 interest-rate futures contract for 105,and the price of the Treasury securities on the expiration date is 108,your ________ is ________.

A)profit;$3000
B)loss;$3000
C)profit;$8000
D)loss;$8000

Question 31

If you sell a $100,000 interest-rate futures contract for 110,and the price of the Treasury securities on the expiration date is 106,your ________ is ________.

A)profit;$4000
B)loss;$4000
C)profit;$6000
D)loss;$6000

Question 32

If you purchase a $100,000 interest-rate futures contract for 110,and the price of the Treasury securities on the expiration date is 106,your ________ is ________.

A)profit;$4000
B)loss;$4000
C)profit;$6000
D)loss;$6000

Question 33

If you bought a long contract on financial futures you hope that interest rates

A)rise.
B)fall.
C)are stable.
D)fluctuate.

Question 34

If you bought a long futures contract you hope that bond prices

A)rise.
B)fall.
C)are stable.
D)fluctuate.

Question 35

Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk.If interest rates rise

A)the increase in the value of the securities equals the decrease in the value of the futures contracts.
B)the decrease in the value of the securities equals the increase in the value of the futures contracts.
C)both the securities and the futures contracts decrease in value.
D)both the securities and the futures contracts increase in value.

Question 36

If you sold a short futures contract you will hope that bond prices

A)rise.
B)fall.
C)are stable.
D)fluctuate.

Question 37

If you purchase a $100,000 interest-rate futures contract for 105,and the price of the Treasury securities on the expiration date is 108,your ________ is ________.

A)profit;$3000
B)loss;$3000
C)profit;$8000
D)loss;$8000

Question 38

The number of futures contracts outstanding is called

A)turnover.
B)volume.
C)float.
D)open interest.

Question 39

Elimination of riskless profit opportunities in the futures market is

A)hedging.
B)arbitrage.
C)speculation.
D)underwriting.

Question 40

By taking the long position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________.

A)sell;$100,000;$115,000.
B)sell;$115,000;$100,000.
C)buy;$100,000;$115,000.
D)buy;$115,000;$100,000.

Question 41

The price specified on an option at which the holder can buy or sell the underlying asset is called the

A)premium.
B)call.
C)strike price.
D)put.

Question 42

A put option gives the owner the

A)right to sell the underlying security.
B)obligation to sell the underlying security.
C)right to buy the underlying security.
D)obligation to buy the underlying security.

Question 43

A call option gives the owner the

A)right to sell the underlying security.
B)obligation to sell the underlying security.
C)right to buy the underlying security.
D)obligation to buy the underlying security.

Question 44

An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a

A)call option.
B)put option.
C)American option.
D)European option.

Question 45

An option that can only be exercised at maturity is called

A)a swap.
B)a stock option.
C)an European option.
D)an American option.

Question 46

A put option gives the seller the

A)right to sell the underlying security.
B)obligation to sell the underlying security.
C)right to buy the underlying security.
D)obligation to buy the underlying security.

Question 47

The amount paid for an option is the

A)strike price.
B)premium.
C)discount.
D)yield.

Question 48

Options are contracts that give the purchasers the

A)option to buy or sell an underlying asset.
B)obligation to buy or sell an underlying asset.
C)right to hold an underlying asset.
D)right to switch payment streams.

Question 49

An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a

A)call option.
B)put option.
C)American option.
D)European option.

Question 50

Options on individual stocks are referred to as

A)stock options.
B)futures options.
C)American options.
D)individual options.

Question 51

Explain the margin requirement for financial futures and how marking to market affects the margin account.

Question 52

An option that can be exercised at any time up to maturity is called

A)a swap.
B)a stock option.
C)an European option.
D)an American option.

Question 53

An option allowing the holder to buy an asset in the future is a

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

Question 54

The seller of an option has the

A)right to buy or sell the underlying asset.
B)obligation to buy or sell the underlying asset.
C)ability to reduce transaction risk.
D)right to exchange one payment stream for another.

Question 55

Options on futures contracts are referred to as

A)stock options.
B)futures options.
C)American options.
D)individual options.

Question 56

The seller of an option has the ________ to buy or sell the underlying asset while the purchaser of an option has the ________ to buy or sell the asset.

A)obligation;right
B)right;obligation
C)obligation;obligation
D)right;right

Question 57

A call option gives the seller the

A)right to sell the underlying security.
B)obligation to sell the underlying security.
C)right to buy the underlying security.
D)obligation to buy the underlying security.

Question 58

If a firm is due to be paid in euros in two months,to hedge against exchange-rate risk the firm should ________ foreign exchange futures ________.

A)sell;short
B)buy;long
C)sell;long
D)buy;short

Question 59

If a firm must pay for goods it has ordered with foreign currency,it can hedge its foreign exchange-rate risk by ________ foreign exchange futures ________.

A)selling;short
B)buying;long
C)buying;short
D)selling;long

Question 60

What is arbitrage? Explain why arbitrage drives the contract price of futures to the price of the underlying asset on the expiration date,for prices above and below the asset price.

Question 61

All other things held constant,premiums on call options will increase when the

A)exercise price falls.
B)volatility of the underlying asset falls.
C)term to maturity decreases.
D)futures price increases.

Question 62

A tool for managing interest-rate risk that requires exchange of payment streams is a

A)futures contract.
B)forward contract.
C)swap.
D)micro hedge.

Question 63

If,for a $1000 premium,you buy a $100,000 put option on bond futures with a strike price of 114,and at the expiration date the price is 110,your ________ is ________.

A)profit;$4000
B)loss;$4000
C)profit;$3000
D)loss;$3000

Question 64

The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is

A)controlled while preserving the possibility of gains.
B)controlled,while removing the possibility of losses.
C)not controlled,but the possibility of gains is preserved.
D)not controlled,but the possibility of gains is lost.

Question 65

If you buy a call option on Treasury futures at 115,and at expiration the market price is 110,the ________ will ________ exercised.

A)call;be
B)put;be
C)call;not be
D)put;not be

Question 66

If you buy a put option on treasury futures at 110,and at expiration the market price is 115,the ________ will ________ exercised.

A)call;be
B)put;be
C)call;not be
D)put;not be

Question 67

Show graphically and explain the profits and losses of buying futures relative to buying call options.

Question 68

All other things held constant,premiums on options will increase when the

A)exercise price increases.
B)volatility of the underlying asset increases.
C)term to maturity decreases.
D)futures price increases.

Question 69

If,for a $1000 premium,you buy a $100,000 call option on bond futures with a strike price of 110,and at the expiration date the price is 114,your ________ is ________.

A)profit;$4000
B)loss;$4000
C)profit;$3000
D)loss;$3000

Question 70

If you buy a put option on Treasury futures at 115,and at expiration the market price is 110,the ________ will ________ exercised.

A)call;be
B)put;be
C)call;not be
D)put;not be

Question 71

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise,he could ________ options on financial futures.

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

Question 72

If,for a $1000 premium,you buy a $100,000 call option on bond futures with a strike price of 114,and at the expiration date the price is 110,your ________ is ________.

A)profit;$1000
B)loss;$1000
C)profit;$3000
D)loss;$3000

Question 73

A swap that involves the exchange of one set of interest payments for another set of interest payments is called

A)an interest rate swap.
B)a currency swap.
C)a swaption.
D)an international swap.

Question 74

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a

A)hedge.
B)call option.
C)put option.
D)swap.

Question 75

An option allowing the owner to sell an asset at a future date is a

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

Question 76

If,for a $1000 premium,you buy a $100,000 put option on bond futures with a strike price of 110,and at the expiration date the price is 114,your ________ is ________.

A)profit;$1000
B)loss;$1000
C)profit;$3000
D)loss;$3000

Question 77

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is

A)an interest-rate swap.
B)a currency swap.
C)a swaption.
D)an international swap.

Question 78

Hedging by buying an option

A)limits gains.
B)limits losses.
C)limits gains and losses.
D)has no limit on option premiums.

Question 79

If you buy a call option on Treasury futures at 110,and at expiration the market price is 115,the ________ will ________ exercised.

A)call;be
B)put;be
C)call;not be
D)put;not be

Question 80

A firm that sells goods to foreign countries on a regular basis can avoid exchange-rate risk by

A)buying stock options.
B)selling puts on financial futures.
C)using a foreign exchange swap.
D)buying swaptions.