Question 1

A swap that involves the exchange of one set of interest payments for another set of interest payments is called 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 2

By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver ________.

Accepted Answer

A)  $100,000 face value securities for $115,000 
B)  $115,000 face value securities for $110,000 
C)  $100,000 face value securities for $100,000 
D)  $115,000 face value securities for $115,000 
A)  $100,000 face value securities for $115,000 
B)  $115,000 face value securities for $110,000 
C)  $100,000 face value securities for $100,000 
D)  $115,000 face value securities for $115,000

Question 3

Futures differ from forwards because they are ________.

Accepted Answer

A)  used to hedge portfolios 
B)  used to hedge individual securities 
C)  used in both financial and foreign exchange markets 
D)  standardized contracts 
A)  used to hedge portfolios 
B)  used to hedge individual securities 
C)  used in both financial and foreign exchange markets 
D)  standardized contracts

Question 4

If you sell in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

Accepted Answer

A)  loss; 15000 
B)  loss; 15 
C)  profit; 15000 
D)  profit; 15 
A)  loss; 15000 
B)  loss; 15 
C)  profit; 15000 
D)  profit; 15

Question 5

A long 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 6

A put 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 7

If you buy an option to sell 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 8

Explain using an example the statement that "at the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered."

Accepted Answer

Consider what happens on the expiration

Question 9

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 103, you will ________ the option and potentially 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 10

Futures differ from forwards because they are ________.

Accepted Answer

A)  used to hedge portfolios 
B)  used to hedge individual securities 
C)  used in both financial and foreign exchange markets 
D)  traded on an exchange 
A)  used to hedge portfolios 
B)  used to hedge individual securities 
C)  used in both financial and foreign exchange markets 
D)  traded on an exchange

Question 11

The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

Accepted Answer

A)  obligation; right 
B)  right; obligation 
C)  obligation; obligation 
D)  right; right 
A)  obligation; right 
B)  right; obligation 
C)  obligation; obligation 
D)  right; right

Question 12

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)  call 
C)  strike price 
D)  put 
A)  premium 
B)  call 
C)  strike price 
D)  put

Question 13

The disadvantage of swaps is that ________.

Accepted Answer

A)  they lack liquidity 
B)  it is easy to arrange for a counterparty 
C)  they do not have default risk 
D)  they are costly 
A)  they lack liquidity 
B)  it is easy to arrange for a counterparty 
C)  they do not have default risk 
D)  they are costly

Question 14

The main disadvantage of futures contracts as compared to options on futures contracts is that futures ________.

Accepted Answer

A)  remove the possibility of gains 
B)  increase the transactions cost 
C)  are not as effective a hedge 
D)  do not remove the possibility of losses 
A)  remove the possibility of gains 
B)  increase the transactions cost 
C)  are not as effective a hedge 
D)  do not remove the possibility of losses

Question 15

A call option gives the owner ________.

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 16

Which of the following features of futures contracts were not designed to increase liquidity?

Accepted Answer

A)  Standardized contracts 
B)  Traded up until maturity 
C)  Not tied to one specific type of bond 
D)  Marked to market daily 
A)  Standardized contracts 
B)  Traded up until maturity 
C)  Not tied to one specific type of bond 
D)  Marked to market daily

Question 17

If you buy in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

Accepted Answer

A)  loss; 15000 
B)  loss; 15 
C)  profit; 15000 
D)  profit; 15 
A)  loss; 15000 
B)  loss; 15 
C)  profit; 15000 
D)  profit; 15

Question 18

When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a ________.

Accepted Answer

A)  macro hedge 
B)  micro hedge 
C)  cross hedge 
D)  futures hedge 
A)  macro hedge 
B)  micro hedge 
C)  cross hedge 
D)  futures hedge

Question 19

If you sold a short contract on financial futures, you hope interest rates ________.

Accepted Answer

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

Question 20

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

Accepted Answer

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

Exam 13: Risk Management With Financial Derivatives

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

By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver ________.

Futures differ from forwards because they are ________.

If you sell in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

A long position requires that the investor ________.

A put option gives the seller ________.

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

Explain using an example the statement that "at the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered."

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 103, you will ________ the option and potentially make a profit of $________.

Futures differ from forwards because they are ________.

The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

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

The disadvantage of swaps is that ________.

The main disadvantage of futures contracts as compared to options on futures contracts is that futures ________.

A call option gives the owner ________.

Which of the following features of futures contracts were not designed to increase liquidity?

If you buy in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a ________.

If you sold a short contract on financial futures, you hope interest rates ________.

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

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 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, 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 103, you will the option and potentially make a profit of $.

The seller of an option has the to buy or sell the underlying asset, while the purchaser of an option has the to buy or sell the asset.

If you buy in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a of $.