Exam 11: Derivatives Markets

Suppose a stock is priced at $100 currently. You are bullish on the stock and are considering buying May calls with an exercise price of $95 and $105 respectively. The call with an exercise price $95 is priced at $8.50 and the 105 call is quoted at $2.75.What should you consider in deciding which to purchase if you do not plan on exercising prior to maturity? What are the breakeven stock prices for the two calls?

(Essay)

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Question 21

Most forward market contracts are settled before delivery.

(True/False)

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Question 22

At least one of two counterparties in a forward contract must be a speculator.

(True/False)

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Question 23

In general, writing calls is riskier than buying puts.

(True/False)

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Question 24

The open interest is the number of outstanding contracts that have not been offset.

(True/False)

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Question 25

Futures markets involve more standardized contracts compared to forward markets.

(True/False)

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Question 26

Explain how a bank that has made fixed rate mortgages funded by deposits could use futures or options to hedge against the possibility that interest rates will rise.

(Essay)

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Question 27

A non-standardized agreement that is negotiated between a buyer and seller to exchange an asset for cash at some future date, with the price set today is called a future agreement.

(True/False)

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Question 28

A hedger who is contracted to buy a commodity in the future may wish to reduce their price risk by buying futures contracts on the commodity.

(True/False)

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Question 29

Futures contracts eliminate risk to all participants.

(True/False)

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Question 30

A bank has made mortgages funded with 1 year certificates of deposit. To reduce its interest rate risk the bank could enter into a swap to pay a fixed rate of interest and receive a variable rate of interest.

(True/False)

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Question 31

If a stock's price is $56 per share a call option with a $60 exercise price will cost less than an equivalent maturity put option with the same exercise price.

(True/False)

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Question 32

A pension fund manager can protect his/her recent price gains by buying stock index futures contracts.

(True/False)

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Question 33

Cross-hedgers involve more basis risk than direct hedges.

(True/False)

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Question 34

Portfolio insurance with stock index futures is used to eliminate unsystematic risk from stock portfolios.

(True/False)

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Question 35

What role does the SEC have in regulating options markets? How does it differ from the role of the CFTC?

(Essay)

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Question 36

The Chicago Board Options Exchange is the primary regulator of options contracts.

(True/False)

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Question 37

Writing calls can generate potentially unlimited losses.

(True/False)

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Question 38

Showing 21 - 38 of 38

Most forward market contracts are settled before delivery.

At least one of two counterparties in a forward contract must be a speculator.

In general, writing calls is riskier than buying puts.

The open interest is the number of outstanding contracts that have not been offset.

Futures markets involve more standardized contracts compared to forward markets.

Explain how a bank that has made fixed rate mortgages funded by deposits could use futures or options to hedge against the possibility that interest rates will rise.

A non-standardized agreement that is negotiated between a buyer and seller to exchange an asset for cash at some future date, with the price set today is called a future agreement.

A hedger who is contracted to buy a commodity in the future may wish to reduce their price risk by buying futures contracts on the commodity.

Futures contracts eliminate risk to all participants.

A bank has made mortgages funded with 1 year certificates of deposit. To reduce its interest rate risk the bank could enter into a swap to pay a fixed rate of interest and receive a variable rate of interest.

If a stock's price is $56 per share a call option with a $60 exercise price will cost less than an equivalent maturity put option with the same exercise price.

A pension fund manager can protect his/her recent price gains by buying stock index futures contracts.

Cross-hedgers involve more basis risk than direct hedges.

Portfolio insurance with stock index futures is used to eliminate unsystematic risk from stock portfolios.

What role does the SEC have in regulating options markets? How does it differ from the role of the CFTC?

The Chicago Board Options Exchange is the primary regulator of options contracts.

Writing calls can generate potentially unlimited losses.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Risk Management in Financial Institutions

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