Question 1

Which of the following is NOT a way that hedgers can benefit by participating in financial futures markets?

Accepted Answer

A) They can reduce their tax liabilities. 
B) They can reduce their exposure to price fluctuations. 
C) They can access liquid markets. 
D) They can reduce their information costs by using organized exchanges. 
A) They can reduce their tax liabilities. 
B) They can reduce their exposure to price fluctuations. 
C) They can access liquid markets. 
D) They can reduce their information costs by using organized exchanges.

Question 2

Marking to market involves

Accepted Answer

A) changing the futures price to the spot price each day. 
B) engaging in arbitrage so as to reduce the risk involved with futures contracts. 
C) crediting or debitting the margin account based on the net change in the value of the futures contract. 
D) updating the futures price after the market closes each day. 
A) changing the futures price to the spot price each day. 
B) engaging in arbitrage so as to reduce the risk involved with futures contracts. 
C) crediting or debitting the margin account based on the net change in the value of the futures contract. 
D) updating the futures price after the market closes each day.

Question 3

In a put options contract, the

Accepted Answer

A) seller has the obligation to receive the instrument at a specified time. 
B) buyer has the obligation to deliver the instrument at a specified time. 
C) buyer has the obligation to receive the instrument at a specified time. 
D) seller has the obligation to deliver the instrument at a specified time. 
A) seller has the obligation to receive the instrument at a specified time. 
B) buyer has the obligation to deliver the instrument at a specified time. 
C) buyer has the obligation to receive the instrument at a specified time. 
D) seller has the obligation to deliver the instrument at a specified time.

Question 4

Forward transactions

Accepted Answer

A) provide substantial liquidity. 
B) entail small information costs. 
C) provide risk sharing. 
D) provide reduced tax payments. 
A) provide substantial liquidity. 
B) entail small information costs. 
C) provide risk sharing. 
D) provide reduced tax payments.

Question 5

If a wheat crop turns out to be unusually large,

Accepted Answer

A) farmers will likely gain and millers will likely lose. 
B) millers will likely gain and farmers will likely lose. 
C) both farmers and millers will likely lose. 
D) both farmers and millers will likely gain. 
A) farmers will likely gain and millers will likely lose. 
B) millers will likely gain and farmers will likely lose. 
C) both farmers and millers will likely lose. 
D) both farmers and millers will likely gain.

Question 6

Hedgers 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 7

In comparing futures contracts with options contracts, we can say that

Accepted Answer

A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract ,the buyer and seller have symmetric rights. 
C) in both futures and options contracts, the buyer and seller have symmetric rights. 
D) in both futures and options contracts, the buyer and seller have asymmetric rights. 
A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract ,the buyer and seller have symmetric rights. 
C) in both futures and options contracts, the buyer and seller have symmetric rights. 
D) in both futures and options contracts, the buyer and seller have asymmetric rights.

Question 8

Currently,

Accepted Answer

A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading. 
B) trading in financial futures involves more transactions than trading in commodity futures. 
C) futures trading is allowed only for financial assets. 
D) futures trading is allowed only for commodities. 
A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading. 
B) trading in financial futures involves more transactions than trading in commodity futures. 
C) futures trading is allowed only for financial assets. 
D) futures trading is allowed only for commodities.

Question 9

Futures trading has traditionally been dominated by

Accepted Answer

A) the New York Stock Exchange. 
B) the Chicago Board of Trade and the Chicago Mercantile Exchange. 
C) the London Stock Exchange. 
D) the Omaha Grain Exchange. 
A) the New York Stock Exchange. 
B) the Chicago Board of Trade and the Chicago Mercantile Exchange. 
C) the London Stock Exchange. 
D) the Omaha Grain Exchange.

Question 10

The intrinsic value of an option

Accepted Answer

A) is equal to the option premium. 
B) is the amount the option actually is worth if it is immediately exercised. 
C) is the amount the option is expected to be worth on its expiration date. 
D) is impossible to determine in the absence of information on the future prices of the underlying asset. 
A) is equal to the option premium. 
B) is the amount the option actually is worth if it is immediately exercised. 
C) is the amount the option is expected to be worth on its expiration date. 
D) is impossible to determine in the absence of information on the future prices of the underlying asset.

Question 11

The buyer of a futures contract

Accepted Answer

A) assumes the short position. 
B) assumes the long position. 
C) may not sell the contract without the permission of the original seller. 
D) has the obligation to deliver the underlying financial instrument at the specified future date. 
A) assumes the short position. 
B) assumes the long position. 
C) may not sell the contract without the permission of the original seller. 
D) has the obligation to deliver the underlying financial instrument at the specified future date.

Question 12

Savers and borrowers began to make greater use of derivative markets during the 1980s because of the

Accepted Answer

A) increased volatility of interest rates. 
B) fall in marginal income tax rates. 
C) decline in inflation rates. 
D) decline in unemployment rates. 
A) increased volatility of interest rates. 
B) fall in marginal income tax rates. 
C) decline in inflation rates. 
D) decline in unemployment rates.

Question 13

A key reason that firms and financial institutions might participate in an interest rate swap is

Accepted Answer

A) to transfer interest rate risk to parties that are more willing to bear it. 
B) the low information costs of swaps compared with other derivative contracts. 
C) the greater liquidity of swaps compared with other derivative contracts. 
D) the favorable tax implications of swaps compared with other derivative contracts. 
A) to transfer interest rate risk to parties that are more willing to bear it. 
B) the low information costs of swaps compared with other derivative contracts. 
C) the greater liquidity of swaps compared with other derivative contracts. 
D) the favorable tax implications of swaps compared with other derivative contracts.

Question 14

Forward contracts

Accepted Answer

A) are highly liquid. 
B) entail small information costs. 
C) provide little risk sharing. 
D) are subject to default risk. 
A) are highly liquid. 
B) entail small information costs. 
C) provide little risk sharing. 
D) are subject to default risk.

Question 15

Suppose that the futures index for the S&P 500 for delivery one year from now is selling for $960,000, whereas the stocks are selling for $900,000. If the one-year Treasury bill rate is 5%, is it possible to use index arbitrage to make a profit?

Accepted Answer

Index arbitrage will yield a profit unde

Question 16

The futures hedge

Accepted Answer

A) eliminates all risk from price movements. 
B) is most valuable for protecting against anticipated price changes. 
C) is most valuable for protecting against unanticipated price changes. 
D) is most valuable for protecting against price increases. 
A) eliminates all risk from price movements. 
B) is most valuable for protecting against anticipated price changes. 
C) is most valuable for protecting against unanticipated price changes. 
D) is most valuable for protecting against price increases.

Question 17

Explain how each of the following might make use of the futures market.
(a) A lender who is worried that its cost of funds might rise during the term of a loan it has made
(b) A speculator who believes strongly that interest rates will rise

Accepted Answer

(a) The lender could hedge the

Question 18

The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

Accepted Answer

A) speculators. 
B) hedgers. 
C) rocket scientists. 
D) market makers. 
A) speculators. 
B) hedgers. 
C) rocket scientists. 
D) market makers.

Question 19

Which of the following financial futures contracts are traded in the United States?

Accepted Answer

A) Interest rates 
B) Stock indexes 
C) Currencies 
D) All of the above 
A) Interest rates 
B) Stock indexes 
C) Currencies 
D) All of the above

Question 20

Forward transactions originated in the market for

Accepted Answer

A) common stock. 
B) corporate bonds. 
C) government bonds. 
D) agricultural and other commodities. 
A) common stock. 
B) corporate bonds. 
C) government bonds. 
D) agricultural and other commodities.

Exam 9: Derivative Securities and Derivative Markets

Which of the following is NOT a way that hedgers can benefit by participating in financial futures markets?

Marking to market involves

In a put options contract, the

Forward transactions

If a wheat crop turns out to be unusually large,

Hedgers are primarily interested in

In comparing futures contracts with options contracts, we can say that

Currently,

Futures trading has traditionally been dominated by

The intrinsic value of an option

The buyer of a futures contract

Savers and borrowers began to make greater use of derivative markets during the 1980s because of the

A key reason that firms and financial institutions might participate in an interest rate swap is

Forward contracts

Suppose that the futures index for the S&P 500 for delivery one year from now is selling for $960,000, whereas the stocks are selling for $900,000. If the one-year Treasury bill rate is 5%, is it possible to use index arbitrage to make a profit?

The futures hedge

Explain how each of the following might make use of the futures market. (a) A lender who is worried that its cost of funds might rise during the term of a loan it has made (b) A speculator who believes strongly that interest rates will rise

The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

Which of the following financial futures contracts are traded in the United States?

Forward transactions originated in the market for

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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