Question 1

A contract that requires the investor to buy securities on a future date is called a ________.

Accepted Answer

A)  short position 
B)  long position 
C)  hedge 
D)  cross 
A)  short position 
B)  long position 
C)  hedge 
D)  cross

Question 2

If Second Bank has more rate-sensitive assets than rate sensitive liabilities, it can reduce interest rate risk with a swap which requires Second Bank to ________.

Accepted Answer

A)  pay a fixed rate while receiving a floating rate 
B)  receive a fixed rate while paying a floating rate 
C)  both receive and pay a fixed rate 
D)  both receive and pay a floating rate 
A)  pay a fixed rate while receiving a floating rate 
B)  receive a fixed rate while paying a floating rate 
C)  both receive and pay a fixed rate 
D)  both receive and pay a floating rate

Question 3

If you sell in March 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 135, you have a ________ of $________.

Accepted Answer

A)  loss; 10000 
B)  loss; 10 
C)  profit; 10000 
D)  profit; 10 
A)  loss; 10000 
B)  loss; 10 
C)  profit; 10000 
D)  profit; 10

Question 4

The main advantage of using options on futures contracts rather than the futures contracts themselves is that ________.

Accepted Answer

A)  interest rate risk is controlled while preserving the possibility of gains 
B)  interest rate risk is controlled, while removing the possibility of losses 
C)  interest rate risk is not controlled, but the possibility of gains is preserved 
D)  interest rate risk is not controlled, but the possibility of gains is lost 
A)  interest rate risk is controlled while preserving the possibility of gains 
B)  interest rate risk is controlled, while removing the possibility of losses 
C)  interest rate risk is not controlled, but the possibility of gains is preserved 
D)  interest rate risk is not controlled, but the possibility of gains is lost

Question 5

An option that can be exercised at any time up to maturity is called a(n) ________.

Accepted Answer

A)  swap 
B)  stock option 
C)  European option 
D)  American option 
A)  swap 
B)  stock option 
C)  European option 
D)  American option

Question 6

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 123, you will ________ the option in order to 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 7

Financial derivatives include ________.

Accepted Answer

A)  stocks 
B)  bonds 
C)  futures 
D)  foreign exchange 
A)  stocks 
B)  bonds 
C)  futures 
D)  foreign exchange

Question 8

One advantage of using swaps to eliminate interest-rate risk is that swaps ________.

Accepted Answer

A)  are less costly than futures 
B)  are less costly than rearranging balance sheets 
C)  are more liquid than futures 
D)  have better accounting treatment than options 
A)  are less costly than futures 
B)  are less costly than rearranging balance sheets 
C)  are more liquid than futures 
D)  have better accounting treatment than options

Question 9

Options on individual stocks are referred to as ________.

Accepted Answer

A)  stock options 
B)  futures options 
C)  American options 
D)  individual options 
A)  stock options 
B)  futures options 
C)  American options 
D)  individual options

Question 10

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n) ________.

Accepted Answer

A)  interest rate swap 
B)  currency swap 
C)  swaption 
D)  national swap 
A)  interest rate swap 
B)  currency swap 
C)  swaption 
D)  national swap

Question 11

If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will ________ the option and potentially make a profit of $________.

Accepted Answer

A)  not exercise; 5000 
B)  not exercise; 5 
C)  exercise; 5000 
D)  exercise; 5 
A)  not exercise; 5000 
B)  not exercise; 5 
C)  exercise; 5000 
D)  exercise; 5

Question 12

Intermediaries are active in the swap markets because ________.

Accepted Answer

A)  they increase liquidity 
B)  they increase default risk 
C)  they increase search cost 
D)  they do not need counterparties 
A)  they increase liquidity 
B)  they increase default risk 
C)  they increase search cost 
D)  they do not need counterparties

Question 13

The seller of an option has the ________.

Accepted Answer

A)  right to buy or sell the underlying asset 
B)  the obligation to buy or sell the underlying asset 
C)  ability to reduce transaction risk 
D)  right to exchange one payment stream for another 
A)  right to buy or sell the underlying asset 
B)  the obligation to buy or sell the underlying asset 
C)  ability to reduce transaction risk 
D)  right to exchange one payment stream for another

Question 14

The number of contracts outstanding in a particular financial future is the ________.

Accepted Answer

A)  demand coefficient 
B)  open interest 
C)  index level 
D)  outstanding balance 
A)  demand coefficient 
B)  open interest 
C)  index level 
D)  outstanding balance

Question 15

A short position requires that the investor ________.

Accepted Answer

A)  sell securities in the future 
B)  buy securities in the future 
C)  hedge in the future 
D)  close out his position in the future 
A)  sell securities in the future 
B)  buy securities in the future 
C)  hedge in the future 
D)  close out his position in the future

Question 16

A call option gives the seller ________.

Accepted Answer

A)  the right to sell the underlying security 
B)  the obligation to sell the underlying security 
C)  the right to buy the underlying security 
D)  the obligation to buy the underlying security 
A)  the right to sell the underlying security 
B)  the obligation to sell the underlying security 
C)  the right to buy the underlying security 
D)  the obligation to buy the underlying security

Question 17

A contract that requires the investor to sell securities on a future date is called a ________.

Accepted Answer

A)  short position 
B)  long position 
C)  hedge 
D)  micro hedge 
A)  short position 
B)  long position 
C)  hedge 
D)  micro hedge

Question 18

If you buy in March a bond future contract for 97 that matures on June 30 of the same year, and at the maturity date the same future sells for 93, you have a ________ of $________.

Accepted Answer

A)  loss; 4000 
B)  loss; 4 
C)  profit; 4000 
D)  profit; 4 
A)  loss; 4000 
B)  loss; 4 
C)  profit; 4000 
D)  profit; 4

Question 19

Forward contracts do not suffer from the problem of ________.

Accepted Answer

A)  a lack of liquidity 
B)  a lack of flexibility 
C)  the difficulty of finding a counterparty 
D)  default risk 
A)  a lack of liquidity 
B)  a lack of flexibility 
C)  the difficulty of finding a counterparty 
D)  default risk

Question 20

The elimination of riskless profit opportunities in the futures market is referred to as ________.

Accepted Answer

A)  speculation 
B)  hedging 
C)  arbitrage 
D)  open interest 
A)  speculation 
B)  hedging 
C)  arbitrage 
D)  open interest

Exam 13: Risk Management With Financial Derivatives

A contract that requires the investor to buy securities on a future date is called a ________.

If Second Bank has more rate-sensitive assets than rate sensitive liabilities, it can reduce interest rate risk with a swap which requires Second Bank to ________.

If you sell in March 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 135, you have a ________ of $________.

The main advantage of using options on futures contracts rather than the futures contracts themselves is that ________.

An option that can be exercised at any time up to maturity is called a(n) ________.

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 123, you will ________ the option in order to make a profit of $________.

Financial derivatives include ________.

One advantage of using swaps to eliminate interest-rate risk is that swaps ________.

Options on individual stocks are referred to as ________.

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n) ________.

If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will ________ the option and potentially make a profit of $________.

Intermediaries are active in the swap markets because ________.

The seller of an option has the ________.

The number of contracts outstanding in a particular financial future is the ________.

A short position requires that the investor ________.

A call option gives the seller ________.

A contract that requires the investor to sell securities on a future date is called a ________.

If you buy in March a bond future contract for 97 that matures on June 30 of the same year, and at the maturity date the same future sells for 93, you have a ________ of $________.

Forward contracts do not suffer from the problem of ________.

The elimination of riskless profit opportunities in the futures market is referred to as ________.

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 sell in March 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 135, 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 123, you will the option in order to make a profit of $.

If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will the option and potentially make a profit of $.

If you buy in March a bond future contract for 97 that matures on June 30 of the same year, and at the maturity date the same future sells for 93, you have a of $.