Question 1

Fluctuations in the price of the underlying security or commodity during the life of forward transactions

Accepted Answer

A) have no effect on the contracting parties. 
B) are disallowed under current government regulations. 
C) confer capital gains and losses on the contracting parties. 
D) will occur during times of extreme economic instability. 
A) have no effect on the contracting parties. 
B) are disallowed under current government regulations. 
C) confer capital gains and losses on the contracting parties. 
D) will occur during times of extreme economic instability. C

Question 2

Clearinghouses help to reduce default risk by

Accepted Answer

A) being the intermediary in trades for buyers and sellers. 
B) margin requirements. 
C) marking to market. 
D) all of the above. 
A) being the intermediary in trades for buyers and sellers. 
B) margin requirements. 
C) marking to market. 
D) all of the above. D

Question 3

Forward contracts are often illiquid because

Accepted Answer

A) any capital gains on them are heavily taxed, making investors reluctant to sell them. 
B) government regulation has not provided for a secondary market in them. 
C) they generally contain terms specific to the particular buyer and seller. 
D) the brokerage fees involved in buying and selling them are very high. 
A) any capital gains on them are heavily taxed, making investors reluctant to sell them. 
B) government regulation has not provided for a secondary market in them. 
C) they generally contain terms specific to the particular buyer and seller. 
D) the brokerage fees involved in buying and selling them are very high. C

Question 4

Forward transactions would be useful to

Accepted Answer

A) a government wanting to know the size of its future debt. 
B) a household wanting to reduce its future tax liability. 
C) a business wanting to know the cost of its funds on future loans. 
D) a business wanting to expand its operations in overseas markets. 
A) a government wanting to know the size of its future debt. 
B) a household wanting to reduce its future tax liability. 
C) a business wanting to know the cost of its funds on future loans. 
D) a business wanting to expand its operations in overseas markets.

Question 5

Speculators are primarily interested in

Accepted Answer

A) betting on anticipated changes in prices. 
B) reducing their exposure to the risk of price fluctuations. 
C) increasing market liquidity. 
D) reducing the spread between bid and ask prices on bonds. 
A) betting on anticipated changes in prices. 
B) reducing their exposure to the risk of price fluctuations. 
C) increasing market liquidity. 
D) reducing the spread between bid and ask prices on bonds.

Question 6

Futures trading practices in the United States are regulated by

Accepted Answer

A) the Chicago Board of Trade. 
B) the Chicago Mercantile Exchange. 
C) the Commodities Futures Trading Commission. 
D) the Board of Futures Trading. 
A) the Chicago Board of Trade. 
B) the Chicago Mercantile Exchange. 
C) the Commodities Futures Trading Commission. 
D) the Board of Futures Trading.

Question 7

Swaps differ from futures and options in all of the following ways EXCEPT:

Accepted Answer

A) Intended to reduce the risk faced by participants 
B) More flexibility 
C) More privacy 
D) Less regulation 
A) Intended to reduce the risk faced by participants 
B) More flexibility 
C) More privacy 
D) Less regulation

Question 8

The choice between futures and options

Accepted Answer

A) depends on whether the underlying instrument is a debt instrument or an equity. 
B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide. 
A) depends on whether the underlying instrument is a debt instrument or an equity. 
B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide.

Question 9

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise without eliminating the chance to profit from a decline in the cost of funds by

Accepted Answer

A) buying futures contracts on Treasury bills. 
B) selling futures contracts on Treasury bills. 
C) buying put options on Treasury bills. 
D) buying call options on Treasury bills. 
A) buying futures contracts on Treasury bills. 
B) selling futures contracts on Treasury bills. 
C) buying put options on Treasury bills. 
D) buying call options on Treasury bills.

Question 10

If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

Accepted Answer

A) lost money on your long position. 
B) gained money on your long position. 
C) lost money on your short position. 
D) gained money on your short position. 
A) lost money on your long position. 
B) gained money on your long position. 
C) lost money on your short position. 
D) gained money on your short position.

Question 11

Forward transactions

Accepted Answer

A) provide little risk sharing. 
B) are very liquid. 
C) have information problems. 
D) are widely used by sellers of commodities, but rarely used by buyers of commodities. 
A) provide little risk sharing. 
B) are very liquid. 
C) have information problems. 
D) are widely used by sellers of commodities, but rarely used by buyers of commodities.

Question 12

A stock option is said to be "out of the money" if:

Accepted Answer

A) the strike price equals the exercise price 
B) stock price equals the strike price 
C) strike price exceeds the stock price 
D) stock price exceeds the strike price 
A) the strike price equals the exercise price 
B) stock price equals the strike price 
C) strike price exceeds the stock price 
D) stock price exceeds the strike price

Question 13

A call option is said to be in the money if

Accepted Answer

A) it is written on a Treasury bill or other money-market asset. 
B) it has increased in price since it was first written. 
C) the price of the underlying asset is currently greater than the strike price. 
D) the price of the underlying asset is currently greater than the strike price plus the option premium. 
A) it is written on a Treasury bill or other money-market asset. 
B) it has increased in price since it was first written. 
C) the price of the underlying asset is currently greater than the strike price. 
D) the price of the underlying asset is currently greater than the strike price plus the option premium.

Question 14

The buyer of a futures contract

Accepted Answer

A) assumes the short position. 
B) has the obligation to deliver the underlying financial instrument at the specified date. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date. 
A) assumes the short position. 
B) has the obligation to deliver the underlying financial instrument at the specified date. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Question 15

The most important derivative instruments are

Accepted Answer

A) futures and options contracts. 
B) common stocks. 
C) corporate bonds. 
D) government bonds. 
A) futures and options contracts. 
B) common stocks. 
C) corporate bonds. 
D) government bonds.

Question 16

Using forward transactions allows

Accepted Answer

A) holders of common stock to lock in future dividend payments. 
B) the federal government to stabilize fluctuations in tax receipts. 
C) corporations to reduce problems arising from future fluctuations in their dividend payments. 
D) both buyers and sellers to reduce risks associated with price fluctuations. 
A) holders of common stock to lock in future dividend payments. 
B) the federal government to stabilize fluctuations in tax receipts. 
C) corporations to reduce problems arising from future fluctuations in their dividend payments. 
D) both buyers and sellers to reduce risks associated with price fluctuations.

Question 17

In derivative markets, trade takes place in

Accepted Answer

A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B) assets whose rates of returns must be derived from information published in financial tables. 
C) assets that derive their value from underlying assets. 
D) assets which are not allowed to be traded on organized exchanges. 
A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B) assets whose rates of returns must be derived from information published in financial tables. 
C) assets that derive their value from underlying assets. 
D) assets which are not allowed to be traded on organized exchanges.

Question 18

Index arbitrage refers to

Accepted Answer

A) simultaneous trading in stock index futures and the underlying stocks. 
B) selling futures contracts and buying options contracts on the same stock. 
C) buying futures contracts and selling options contracts on the same stock. 
D) selling futures contracts on stocks and buying equivalent futures contracts on bonds. 
A) simultaneous trading in stock index futures and the underlying stocks. 
B) selling futures contracts and buying options contracts on the same stock. 
C) buying futures contracts and selling options contracts on the same stock. 
D) selling futures contracts on stocks and buying equivalent futures contracts on bonds.

Question 19

The futures price

Accepted Answer

A) is established each year by act of Congress. 
B) is established each month by the Chairman of the Chicago Board of Trade. 
C) is specified in each futures contract. 
D) is set by supply and demand in the futures market. 
A) is established each year by act of Congress. 
B) is established each month by the Chairman of the Chicago Board of Trade. 
C) is specified in each futures contract. 
D) is set by supply and demand in the futures market.

Question 20

If the orange crop turns out to be unusually small,

Accepted Answer

A) orange growers will likely gain and orange juice sellers will likely lose. 
B) orange growers will likely lose and orange juice sellers will likely gain. 
C) both orange growers and orange juice sellers will likely lose. 
D) both orange growers and orange juice sellers will likely gain. 
A) orange growers will likely gain and orange juice sellers will likely lose. 
B) orange growers will likely lose and orange juice sellers will likely gain. 
C) both orange growers and orange juice sellers will likely lose. 
D) both orange growers and orange juice sellers will likely gain.

Exam 9: Derivative Securities and Derivative Markets

Fluctuations in the price of the underlying security or commodity during the life of forward transactions

Clearinghouses help to reduce default risk by

Forward contracts are often illiquid because

Forward transactions would be useful to

Speculators are primarily interested in

Futures trading practices in the United States are regulated by

Swaps differ from futures and options in all of the following ways EXCEPT:

The choice between futures and options

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise without eliminating the chance to profit from a decline in the cost of funds by

If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

Forward transactions

A stock option is said to be "out of the money" if:

A call option is said to be in the money if

The buyer of a futures contract

The most important derivative instruments are

Using forward transactions allows

In derivative markets, trade takes place in

Index arbitrage refers to

The futures price

If the orange crop turns out to be unusually small,

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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