Question 1

A speculator who believes strongly that interest rates will rise would be likely to

Accepted Answer

A) buy futures contracts on Treasury bills. 
B) sell futures contracts on Treasury bills. 
C) buy Treasury bonds in the spot market. 
D) increase now the amount of money which he lends. 
A) buy futures contracts on Treasury bills. 
B) sell futures contracts on Treasury bills. 
C) buy Treasury bonds in the spot market. 
D) increase now the amount of money which he lends.

Question 2

The initial deposit required by a buyer or seller of a futures contract is known as

Accepted Answer

A) credit. 
B) margin requirement. 
C) debit. 
D) marking. 
A) credit. 
B) margin requirement. 
C) debit. 
D) marking.

Question 3

An advantage of a swap over futures and options is that

Accepted Answer

A) they can be written for long periods. 
B) they are more liquid. 
C) they carry less default risk. 
D) there is no need to assess the creditworthiness of participants. 
A) they can be written for long periods. 
B) they are more liquid. 
C) they carry less default risk. 
D) there is no need to assess the creditworthiness of participants.

Question 4

Spot transactions

Accepted Answer

A) involve immediate settlement. 
B) may only take place in face-to-face trading. 
C) take place on-the-spot, rather than on an organized exchange. 
D) are relatively unimportant in financial markets. 
A) involve immediate settlement. 
B) may only take place in face-to-face trading. 
C) take place on-the-spot, rather than on an organized exchange. 
D) are relatively unimportant in financial markets.

Question 5

Orange County lost a great deal of money during 1994 because

Accepted Answer

A) its treasurer refused to buy any derivatives for the county's financial portfolio. 
B) short-term interest rates rose when the county's treasurer had expected them to fall. 
C) short-term interest rates fell when the county's treasurer had expected them to fall. 
D) a short fall in tax revenue forced the county to default on its bonds. 
A) its treasurer refused to buy any derivatives for the county's financial portfolio. 
B) short-term interest rates rose when the county's treasurer had expected them to fall. 
C) short-term interest rates fell when the county's treasurer had expected them to fall. 
D) a short fall in tax revenue forced the county to default on its bonds.

Question 6

The seller of a futures contract

Accepted Answer

A) assumes the short position. 
B) assumes the long position. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) is expecting the price of the underlying financial instrument to rise. 
A) assumes the short position. 
B) assumes the long position. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) is expecting the price of the underlying financial instrument to rise.

Question 7

Basis risk refers to the risk

Accepted Answer

A) associated with anticipated price movements. 
B) associated with unanticipated price movements. 
C) of default on the futures contract. 
D) from a change in the spread between the rate on the hedged instrument and the rate on the instrument actually traded. 
A) associated with anticipated price movements. 
B) associated with unanticipated price movements. 
C) of default on the futures contract. 
D) from a change in the spread between the rate on the hedged instrument and the rate on the instrument actually traded.

Question 8

If market participants believe that the wheat crop is likely to be unusually small,

Accepted Answer

A) the spot price of wheat is likely to be above the futures price of wheat. 
B) the spot price of wheat is likely to be below the futures price of wheat. 
C) it will not be possible to find a seller of a futures contract in wheat. 
D) it will not be possible to find a buyer of a futures contract in wheat. 
A) the spot price of wheat is likely to be above the futures price of wheat. 
B) the spot price of wheat is likely to be below the futures price of wheat. 
C) it will not be possible to find a seller of a futures contract in wheat. 
D) it will not be possible to find a buyer of a futures contract in wheat.

Question 9

Suppose you purchase a call option to buy IBM common stock at $35 per share in September. The current price of IBM is 37 and the option premium is 4. What is the intrinsic value of the option? As the expiration date on the option approaches, what will happen to the size of the option premium?

Accepted Answer

The intrinsic value of the option is the

Question 10

Marking to market refers to

Accepted Answer

A) the determination of the prices of options contracts by the interaction of demand and supply. 
B) the determination of the prices of futures contracts by the interaction of demand and supply. 
C) the settlement of gains and losses on futures contracts each day. 
D) the settlement of gains and losses on forward contracts each day. 
A) the determination of the prices of options contracts by the interaction of demand and supply. 
B) the determination of the prices of futures contracts by the interaction of demand and supply. 
C) the settlement of gains and losses on futures contracts each day. 
D) the settlement of gains and losses on forward contracts each day.

Question 11

Forward transactions

Accepted Answer

A) allow savers and borrowers to conduct a transaction now and settle in the future. 
B) allow savers and borrowers to postpone a transaction from now to the future. 
C) always involve increased risk compared with spot transactions. 
D) may not be conducted on organized exchanges. 
A) allow savers and borrowers to conduct a transaction now and settle in the future. 
B) allow savers and borrowers to postpone a transaction from now to the future. 
C) always involve increased risk compared with spot transactions. 
D) may not be conducted on organized exchanges.

Question 12

The seller 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 13

Standardization of derivative contracts

Accepted Answer

A) increases their liquidity. 
B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity. 
C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset. 
D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC. 
A) increases their liquidity. 
B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity. 
C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset. 
D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC.

Question 14

Which of the following factors would tend to increase the size of the premium on an options contract?

Accepted Answer

A) The option is near its expiration date. 
B) The current default-risk-free interest rate is high. 
C) The price volatility of the underlying asset is low. 
D) The option is far away from its expiration date. 
A) The option is near its expiration date. 
B) The current default-risk-free interest rate is high. 
C) The price volatility of the underlying asset is low. 
D) The option is far away from its expiration date.

Question 15

The futures price

Accepted Answer

A) reflects traders' expectations of the spot price on the day of delivery. 
B) is always above the spot price on the day of delivery. 
C) is always below the spot price on the day of delivery. 
D) is always equal to the spot price at every point in time. 
A) reflects traders' expectations of the spot price on the day of delivery. 
B) is always above the spot price on the day of delivery. 
C) is always below the spot price on the day of delivery. 
D) is always equal to the spot price at every point in time.

Question 16

All of the following are roles of a clearinghouse EXCEPT

Accepted Answer

A) instituting margin requirements on futures contracts. 
B) marking to market at the end of each day. 
C) eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D) reducing the default risk involving forward contracts. 
A) instituting margin requirements on futures contracts. 
B) marking to market at the end of each day. 
C) eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D) reducing the default risk involving forward contracts.

Question 17

An options contract

Accepted Answer

A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. 
B) is another name for a futures contract. 
C) may be written for debt instruments, but not equities. 
D) may be written for equities, but not for debt instruments. 
A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. 
B) is another name for a futures contract. 
C) may be written for debt instruments, but not equities. 
D) may be written for equities, but not for debt instruments.

Question 18

One difference between futures and options contracts is

Accepted Answer

A) funds change hands daily in the case of options but not with futures. 
B) funds change hands daily in the case of futures, but not with options. 
C) in the case of futures funds only change hands when they are exercised. 
D) futures are designed to reduce risk while options are not. 
A) funds change hands daily in the case of options but not with futures. 
B) funds change hands daily in the case of futures, but not with options. 
C) in the case of futures funds only change hands when they are exercised. 
D) futures are designed to reduce risk while options are not.

Question 19

A futures contract is

Accepted Answer

A) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date at a currently agreed-upon price. 
B) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date, with the price to be negotiated at the time of delivery. 
C) an agreement that specifies the delivery of a commodity or financial instrument at a currently agreed-upon price, with date of delivery to be negotiated subsequently. 
D) an agreement that specifies the delivery of a commodity or financial instrument, with the price and date of delivery to be negotiated subsequently. 
A) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date at a currently agreed-upon price. 
B) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date, with the price to be negotiated at the time of delivery. 
C) an agreement that specifies the delivery of a commodity or financial instrument at a currently agreed-upon price, with date of delivery to be negotiated subsequently. 
D) an agreement that specifies the delivery of a commodity or financial instrument, with the price and date of delivery to be negotiated subsequently.

Question 20

An option buyer

Accepted Answer

A) has a greater insurance benefit than the purchaser of a futures contract. 
B) bears the risk of unfavorable price movements. 
C) is purchasing a naked option if he or she does not also own the underlying asset. 
D) generally will incur a lower cost than will the purchaser of a futures contract. 
A) has a greater insurance benefit than the purchaser of a futures contract. 
B) bears the risk of unfavorable price movements. 
C) is purchasing a naked option if he or she does not also own the underlying asset. 
D) generally will incur a lower cost than will the purchaser of a futures contract.

Exam 9: Derivative Securities and Derivative Markets

A speculator who believes strongly that interest rates will rise would be likely to

The initial deposit required by a buyer or seller of a futures contract is known as

An advantage of a swap over futures and options is that

Spot transactions

Orange County lost a great deal of money during 1994 because

The seller of a futures contract

Basis risk refers to the risk

If market participants believe that the wheat crop is likely to be unusually small,

Suppose you purchase a call option to buy IBM common stock at $35 per share in September. The current price of IBM is 37 and the option premium is 4. What is the intrinsic value of the option? As the expiration date on the option approaches, what will happen to the size of the option premium?

Marking to market refers to

Forward transactions

The seller of a futures contract

Standardization of derivative contracts

Which of the following factors would tend to increase the size of the premium on an options contract?

The futures price

All of the following are roles of a clearinghouse EXCEPT

An options contract

One difference between futures and options contracts is

A futures contract is

An option buyer

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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