Question 1

What are options? What are their differences from futures contracts?

Accepted Answer

Options are contracts that give the purchaser the option, or right, to buy or sell the underlying asset at a specified price, called the exercise price or strike price, within a specific time period called the term to expiration. The seller, sometimes called the writer, of the option is obligated to buy or sell the asset to the purchaser if the owner of the option exercises the right to sell or buy. Because the right to buy or sell an asset at a specified price has value, the owner of an option is willing to pay an amount for it called premium. There are two types of option contracts: American options can be exercised at any time up to the expiration date of the contract, and European options can be exercised only on the expiration date.

Question 2

What is the value of a put option at expiration? Use an appropriate graph to show the profit and loses of the buyer and seller of a put option.

Accepted Answer

The value of a put option at expiration, or intrinsic value is given by: P = max (X - S, 0). The net profit for the buyer is equal to P - β. Students must use a graph similar to Figure 13-2 on page 326 of the text to explain the profit and loses of the buyer and the seller of a put option.

Question 3

If you buy in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

Accepted Answer

A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20 
A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20 C

Question 4

Futures contracts are regularly traded on the ________.

Accepted Answer

A)  Montreal Exchange 
B)  Toronto Stock Exchange 
C)  American Stock Exchange 
D)  Chicago Board of Options Exchange 
A)  Montreal Exchange 
B)  Toronto Stock Exchange 
C)  American Stock Exchange 
D)  Chicago Board of Options Exchange

Question 5

If you buy a European call option on Canada bonds with a strike price of 120 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option and potentially make a profit of $________.

Accepted Answer

A)  not exercise; 3000 
B)  not exercise; 3 
C)  exercise; 3000 
D)  exercise; 3 
A)  not exercise; 3000 
B)  not exercise; 3 
C)  exercise; 3000 
D)  exercise; 3

Question 6

An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.

Accepted Answer

A)  increase 
B)  decrease 
C)  increase or decrease 
D)  Not enough information is given. 
A)  increase 
B)  decrease 
C)  increase or decrease 
D)  Not enough information is given.

Question 7

An option that gives the owner the tight to sell a financial instrument at the exercise price within a specified period of time is a(n) ________.

Accepted Answer

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

Question 8

Options are contracts that give the purchasers the ________.

Accepted Answer

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

Question 9

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

Accepted Answer

A)  selling foreign exchange futures short 
B)  buying foreign exchange futures long 
C)  staying out of the exchange futures market 
D)  selling foreign exchange forward contracts short 
A)  selling foreign exchange futures short 
B)  buying foreign exchange futures long 
C)  staying out of the exchange futures market 
D)  selling foreign exchange forward contracts short

Question 10

If you sell in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

Accepted Answer

A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20 
A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20

Question 11

Credit options are contracts where the purchaser gains the right to receive profits that are tied to ________.

Accepted Answer

A)  the obligation to buy or sell an underlying asset 
B)  the price of an underlying security or to an interest rate 
C)  the right to hold an underlying asset 
D)  the right to switch payment streams 
A)  the obligation to buy or sell an underlying asset 
B)  the price of an underlying security or to an interest rate 
C)  the right to hold an underlying asset 
D)  the right to switch payment streams

Question 12

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

Accepted Answer

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

Question 13

Which credit derivative is a combination of a bond and a credit option?

Accepted Answer

A)  A bond-linked note 
B)  A linked note 
C)  A credit-linked note 
D)  None of the above 
A)  A bond-linked note 
B)  A linked note 
C)  A credit-linked note 
D)  None of the above

Question 14

The advantage of forward contracts over futures contracts is that forward contracts ________.

Accepted Answer

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

Question 15

If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option in order to make a profit of $________.

Accepted Answer

A)  not exercise; 7000 
B)  not exercise; 7 
C)  exercise; 7000 
D)  exercise; 7 
A)  not exercise; 7000 
B)  not exercise; 7 
C)  exercise; 7000 
D)  exercise; 7

Question 16

If a bank has a gap of -$10 million, it can reduce its interest rate risk by ________.

Accepted Answer

A)  paying a fixed rate on $10 million and receiving a floating rate on $10 million 
B)  paying a floating rate on $10 million and receiving a fixed rate on $10 million 
C)  selling $20 million fixed rate assets 
D)  buying $20 million fixed rate assets 
A)  paying a fixed rate on $10 million and receiving a floating rate on $10 million 
B)  paying a floating rate on $10 million and receiving a fixed rate on $10 million 
C)  selling $20 million fixed rate assets 
D)  buying $20 million fixed rate assets

Question 17

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 ________.

Accepted Answer

A)  buy put options on financial futures 
B)  buy call options on financial futures 
C)  sell put options on financial futures 
D)  sell call options on financial futures 
A)  buy put options on financial futures 
B)  buy call options on financial futures 
C)  sell put options on financial futures 
D)  sell call options on financial futures

Question 18

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(n) ________.

Accepted Answer

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

Question 19

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 ________.

Accepted Answer

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

Question 20

If you buy in February a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 105, you have a ________ of $________.

Accepted Answer

A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20 
A)  loss; 20000 
B)  loss; 20 
C)  profit; 20000 
D)  profit; 20

Exam 13: Risk Management With Financial Derivatives

What are options? What are their differences from futures contracts?

What is the value of a put option at expiration? Use an appropriate graph to show the profit and loses of the buyer and seller of a put option.

If you buy in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

Futures contracts are regularly traded on the ________.

If you buy a European call option on Canada bonds with a strike price of 120 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option and potentially make a profit of $________.

An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.

An option that gives the owner the tight to sell a financial instrument at the exercise price within a specified period of time is a(n) ________.

Options are contracts that give the purchasers the ________.

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

If you sell in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

Credit options are contracts where the purchaser gains the right to receive profits that are tied to ________.

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

Which credit derivative is a combination of a bond and a credit option?

The advantage of forward contracts over futures contracts is that forward contracts ________.

If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option in order to make a profit of $________.

If a bank has a gap of -$10 million, it can reduce its interest rate risk by ________.

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 ________.

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(n) ________.

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 ________.

If you buy in February a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 105, you have a ________ of $________.

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Banking and the Management of Financial Institutions

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory, Inflation, and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

Filters

If you buy in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a of $.

If you buy a European call option on Canada bonds with a strike price of 120 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will the option and potentially make a profit of $.

If you sell in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a of $.

If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will the option in order to make a profit of $.

If you buy in February a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 105, you have a of $.