Question 1

In the futures market, the difference between the price of the futures and the underlying asset is eliminated by

Accepted Answer

A)  speculators. 
B)  hedgers. 
C)  arbitrageurs. 
D)  longs. 
A)  speculators. 
B)  hedgers. 
C)  arbitrageurs. 
D)  longs.

Question 2

The clearing corporation associated with the Chicago Board of Trade consists of

Accepted Answer

A)  government regulatory bodies. 
B)  major commercial banks. 
C)  members of the exchange. 
D)  major corporations. 
A)  government regulatory bodies. 
B)  major commercial banks. 
C)  members of the exchange. 
D)  major corporations.

Question 3

Which of the following is a derivative financial asset?

Accepted Answer

A)  A mortgage 
B)  Commercial paper 
C)  A Treasury bill 
D)  A financial futures contract 
A)  A mortgage 
B)  Commercial paper 
C)  A Treasury bill 
D)  A financial futures contract

Question 4

Assume that the price of a futures contract is higher than the price of the underlying security during the delivery period. Arbitrageurs would

Accepted Answer

A)  buy the futures, simultaneously sell the underlying asset, and pocket the price difference. 
B)  sell the futures, simultaneously buy the underlying asset, and pocket the price difference. 
C)  sell the futures, simultaneously sell the underlying asset, and pocket the price difference. 
D)  buy the futures, simultaneously buy the underlying asset, and pocket the price difference. 
A)  buy the futures, simultaneously sell the underlying asset, and pocket the price difference. 
B)  sell the futures, simultaneously buy the underlying asset, and pocket the price difference. 
C)  sell the futures, simultaneously sell the underlying asset, and pocket the price difference. 
D)  buy the futures, simultaneously buy the underlying asset, and pocket the price difference.

Question 5

A swap contract __________ be resold, which is particularly important for the __________ in swaps.

Accepted Answer

A)  can; speculator 
B)  can; hedger 
C)  cannot; speculator 
D)  cannot; hedger 
A)  can; speculator 
B)  can; hedger 
C)  cannot; speculator 
D)  cannot; hedger

Question 6

During the delivery period,

Accepted Answer

A)  the futures price exceeds the price in the cash market. 
B)  the price in the cash market exceeds the futures price. 
C)  the futures price and the price in the cash market are equal. 
D)  there is no discernible relationship between the futures price and the price in the cash market. 
A)  the futures price exceeds the price in the cash market. 
B)  the price in the cash market exceeds the futures price. 
C)  the futures price and the price in the cash market are equal. 
D)  there is no discernible relationship between the futures price and the price in the cash market.

Question 7

The __________ the price of the underlying stock, the __________ the call option premium will be.

Accepted Answer

A)  higher; lower 
B)  lower; higher 
C)  lower; lower 
D)  None of the above. 
A)  higher; lower 
B)  lower; higher 
C)  lower; lower 
D)  None of the above.

Question 8

Rather than accept delivery, most traders in futures markets choose

Accepted Answer

A)  to make margin payments. 
B)  settlement by offset. 
C)  to mark-to-market. 
D)  to make arbitrage payments. 
A)  to make margin payments. 
B)  settlement by offset. 
C)  to mark-to-market. 
D)  to make arbitrage payments.

Question 9

The price of a Treasury bond futures contract is set

Accepted Answer

A)  by the federal government. 
B)  by the Chicago Board of Trade. 
C)  by the Federal Reserve. 
D)  as a result of bidding and offering by market participants. 
A)  by the federal government. 
B)  by the Chicago Board of Trade. 
C)  by the Federal Reserve. 
D)  as a result of bidding and offering by market participants.

Question 10

The buyer of a put option on Boeing with a strike price of $75 and an expiration date in November 2003 has the

Accepted Answer

A)  right to buy 100 shares of Boeing at $75 on or before November 1999. 
B)  right to sell 100 shares of Boeing at $75 on or before November 1999. 
C)  right to buy 100 shares of Boeing at $75 on or after November 1999. 
D)  right to sell 100 shares of Boeing at $75 on or after November 1999. 
A)  right to buy 100 shares of Boeing at $75 on or before November 1999. 
B)  right to sell 100 shares of Boeing at $75 on or before November 1999. 
C)  right to buy 100 shares of Boeing at $75 on or after November 1999. 
D)  right to sell 100 shares of Boeing at $75 on or after November 1999.

Question 11

Which of the following pieces of information on individual stocks cannot be found in the options section of the financial news?

Accepted Answer

A)  The closing price of the stock 
B)  Open interest 
C)  Option trading volume 
D)  Bid price 
A)  The closing price of the stock 
B)  Open interest 
C)  Option trading volume 
D)  Bid price

Question 12

Which of the following futures contracts would not have an interest rate component?

Accepted Answer

A)  Treasury bonds 
B)  Treasury notes 
C)  Municipal Bond Index 
D)  Standard and Poor's 500 Stock Index 
A)  Treasury bonds 
B)  Treasury notes 
C)  Municipal Bond Index 
D)  Standard and Poor's 500 Stock Index

Question 13

The value of the put option rises when the underlying asset

Accepted Answer

A)  experiences price increases. 
B)  experiences price declines. 
C)  experiences reduced volatility. 
D)  has a relatively short maturity. 
A)  experiences price increases. 
B)  experiences price declines. 
C)  experiences reduced volatility. 
D)  has a relatively short maturity.

Question 14

Financial institutions use futures contracts as a means of

Accepted Answer

A)  risk management. 
B)  expanding capital. 
C)  minimizing taxes. 
D)  increasing assets. 
A)  risk management. 
B)  expanding capital. 
C)  minimizing taxes. 
D)  increasing assets.

Question 15

In order to reduce market risk associated with bonds held in inventory, a dealer can

Accepted Answer

A)  take a long position in bond futures. 
B)  take a short position in bond futures. 
C)  purchase bonds at the mark-to-market settlement price. 
D)  use settlement by offset procedures. 
A)  take a long position in bond futures. 
B)  take a short position in bond futures. 
C)  purchase bonds at the mark-to-market settlement price. 
D)  use settlement by offset procedures.

Question 16

The fixed rate in a swap contract is

Accepted Answer

A)  a certain short rate in the market when the contract is signed. 
B)  a certain long rate in the market when the contract is signed. 
C)  negotiated by the parties in the contract. 
D)  the difference between stated long and short rates when the contract is signed. 
A)  a certain short rate in the market when the contract is signed. 
B)  a certain long rate in the market when the contract is signed. 
C)  negotiated by the parties in the contract. 
D)  the difference between stated long and short rates when the contract is signed.

Question 17

A(n)__________ is a standardized agreement that calls for the delivery of a specific underlying commodity or security at some future date at a currently agreed-upon price.

Accepted Answer

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

Question 18

Options on individual stocks are not listed on the

Accepted Answer

A)  New York Stock Exchange. 
B)  American Stock Exchange. 
C)  Nasdaq. 
D)  Pacific Stock Exchange. 
A)  New York Stock Exchange. 
B)  American Stock Exchange. 
C)  Nasdaq. 
D)  Pacific Stock Exchange.

Question 19

__________ buy or sell futures contracts to reduce their exposure to the risk of future price movements in the underlying asset.

Accepted Answer

A)  Hedgers 
B)  Speculators 
C)  Arbitrageurs 
D)  None of the above. 
A)  Hedgers 
B)  Speculators 
C)  Arbitrageurs 
D)  None of the above.

Question 20

Traders in futures markets settle gains and losses each day.

Accepted Answer

A)  by making margin payments. 
B)  by using settlement-by-offset. 
C)  in a process called mark-to-market settlement. 
D)  by making arbitrage payments. 
A)  by making margin payments. 
B)  by using settlement-by-offset. 
C)  in a process called mark-to-market settlement. 
D)  by making arbitrage payments.

Exam 9: Demystifying Derivatives

In the futures market, the difference between the price of the futures and the underlying asset is eliminated by

The clearing corporation associated with the Chicago Board of Trade consists of

Which of the following is a derivative financial asset?

Assume that the price of a futures contract is higher than the price of the underlying security during the delivery period. Arbitrageurs would

A swap contract __________ be resold, which is particularly important for the __________ in swaps.

During the delivery period,

The __________ the price of the underlying stock, the __________ the call option premium will be.

Rather than accept delivery, most traders in futures markets choose

The price of a Treasury bond futures contract is set

The buyer of a put option on Boeing with a strike price of $75 and an expiration date in November 2003 has the

Which of the following pieces of information on individual stocks cannot be found in the options section of the financial news?

Which of the following futures contracts would not have an interest rate component?

The value of the put option rises when the underlying asset

Financial institutions use futures contracts as a means of

In order to reduce market risk associated with bonds held in inventory, a dealer can

The fixed rate in a swap contract is

A(n)__________ is a standardized agreement that calls for the delivery of a specific underlying commodity or security at some future date at a currently agreed-upon price.

Options on individual stocks are not listed on the

__________ buy or sell futures contracts to reduce their exposure to the risk of future price movements in the underlying asset.

Traders in futures markets settle gains and losses each day.

Introducing Money, Banking, and Financial Markets

The Role of Money in the Macroeconomy

Financial Instruments, Markets, and Institutions

Interest Rate Measurement and Behavior

The Term and Risk Structure of Interest Rates

The Structure and Performance of Securities Markets

The Pricing of Risky Financial Assets

Money and Capital Markets

Understanding Foreign Exchange

The Nature of Financial Intermediation

Depository Financial Institutions

Nondepository Financial Institutions

Understanding Financial Contracts

The Regulation of Markets and Institutions

Financial System Design

Who's in Charge Here?

Bank Reserves and the Money Supply

The Instruments of Central Bankin

Understanding Movements in Bank Reserves

Monetary Policy Strategy

The Classical Foundations

The Keynesian Framework

The ISLM World

Money and Economic Stability in the ISLM World

An Aggregate Supply and Demand Perspective on Money and Economic Stability

Rational Expectations: Theory and Policy Implications

Empirical Evidence on the Effectiveness of Monetary Policy

Tying It All Together

Filters

A swap contract be resold, which is particularly important for the in swaps.

The the price of the underlying stock, the the call option premium will be.