Question 1

Explain the terms hedge, long position and short position in the context of managing financial institutions' risk.

Accepted Answer

Hedging is the act of engaging in a fina

Question 2

Where are financial futures traded? Describe that market.

Accepted Answer

Financial futures contracts are traded o

Question 3

As compared to a default on the notional principle, a default on a swap ________.

Accepted Answer

A)  is more costly 
B)  is about as costly 
C)  is less costly 
D)  may cost more or less than default on the notional principle 
A)  is more costly 
B)  is about as costly 
C)  is less costly 
D)  may cost more or less than default on the notional principle

Question 4

If you sell 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 5

By buying a long $100,000 futures contract for 115, you agree to pay ________.

Accepted Answer

A)  $100,000 for $115,000 face value bonds 
B)  $115,000 for $100,000 face value bonds 
C)  $86956 for $100,000 face value bonds 
D)  $86956 for $115,000 face value bonds 
A)  $100,000 for $115,000 face value bonds 
B)  $115,000 for $100,000 face value bonds 
C)  $86956 for $100,000 face value bonds 
D)  $86956 for $115,000 face value bonds

Question 6

if you buy an option to buy Canada futures at 110, and at expiration the market price is 115, ________.

Accepted Answer

A)  the call will be exercised 
B)  the put will be exercised 
C)  the call will not be exercised 
D)  the put will not be exercised 
A)  the call will be exercised 
B)  the put will be exercised 
C)  the call will not be exercised 
D)  the put will not be exercised

Question 7

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

Accepted Answer

The value of a call option at expiration

Question 8

If you buy in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

Accepted Answer

A)  loss; 5000 
B)  loss; 5 
C)  profit; 5000 
D)  profit; 5 
A)  loss; 5000 
B)  loss; 5 
C)  profit; 5000 
D)  profit; 5

Question 9

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

Accepted Answer

A)  premium 
B)  interest rate 
C)  exercise price 
D)  call 
A)  premium 
B)  interest rate 
C)  exercise price 
D)  call

Question 10

If you sold a short futures contract, you will hope that bond prices ________.

Accepted Answer

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

Question 11

If you sell 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

Question 12

If you buy 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 13

Use an appropriate graph to show the profits and losses for the buyer of a call option and the buyer of a futures contract, when the price of the future and the exercise price of the option is 115 and the premium is equal to $2000.

Accepted Answer

Students should use a graph si

Question 14

An increase in the exercise price, all other things held constant, will ________ the premium on call options.

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 15

Futures markets have grown rapidly because futures ________.

Accepted Answer

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

Question 16

If you sell in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

Accepted Answer

A)  loss; 5000 
B)  loss; 5 
C)  profit; 5000 
D)  profit; 5 
A)  loss; 5000 
B)  loss; 5 
C)  profit; 5000 
D)  profit; 5

Question 17

All other things held constant, premiums on put options will increase when the ________.

Accepted Answer

A)  exercise price falls 
B)  volatility of the underlying asset falls 
C)  term to maturity increases 
D)  term to maturity decreases 
A)  exercise price falls 
B)  volatility of the underlying asset falls 
C)  term to maturity increases 
D)  term to maturity decreases

Question 18

An option that can be exercised only at 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 19

________ derivatives offer payoffs on previously issued securities, but ones that bear credit risk.

Accepted Answer

A)  Credit 
B)  Bond 
C)  Note 
D)  Stock 
A)  Credit 
B)  Bond 
C)  Note 
D)  Stock

Question 20

By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________.

Accepted Answer

A)  $100,000 face value securities for $104,167 
B)  $96000 face value securities for $100,000 
C)  $100,000 face value securities for $96000 
D)  100,000 face value securities for $100,000 
A)  $100,000 face value securities for $104,167 
B)  $96000 face value securities for $100,000 
C)  $100,000 face value securities for $96000 
D)  100,000 face value securities for $100,000

Exam 13: Risk Management With Financial Derivatives

Explain the terms hedge, long position and short position in the context of managing financial institutions' risk.

Where are financial futures traded? Describe that market.

As compared to a default on the notional principle, a default on a swap ________.

If you sell 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 $________.

By buying a long $100,000 futures contract for 115, you agree to pay ________.

if you buy an option to buy Canada futures at 110, and at expiration the market price is 115, ________.

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

If you buy in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

If you sold a short futures contract, you will hope that bond prices ________.

If you sell 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 $________.

If you buy 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 $________.

Use an appropriate graph to show the profits and losses for the buyer of a call option and the buyer of a futures contract, when the price of the future and the exercise price of the option is 115 and the premium is equal to $2000.

An increase in the exercise price, all other things held constant, will ________ the premium on call options.

Futures markets have grown rapidly because futures ________.

If you sell in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

All other things held constant, premiums on put options will increase when the ________.

An option that can be exercised only at maturity is called a(n) ________.

________ derivatives offer payoffs on previously issued securities, but ones that bear credit risk.

By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________.

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 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 $.

If you buy in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a of $.

If you sell 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 $.

If you buy 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 sell in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a of $.