Question 1

How do exchanges seek to reduce default risk in the futures market?

Accepted Answer

Exchanges require both the buyer and sel

Question 2

Marking to market refers to

Accepted Answer

A)  the determination of the prices of options contracts by the interaction of demand and supply. 
B)  the determination of the prices of futures contracts by the interaction of demand and supply. 
C)  the settlement of gains and losses on futures contracts each day. 
D)  the settlement of gains and losses on forward contracts each day. 
A)  the determination of the prices of options contracts by the interaction of demand and supply. 
B)  the determination of the prices of futures contracts by the interaction of demand and supply. 
C)  the settlement of gains and losses on futures contracts each day. 
D)  the settlement of gains and losses on forward contracts each day.

Question 3

Forward transactions

Accepted Answer

A)  provide little risk sharing. 
B)  are very liquid. 
C)  have information problems. 
D)  are widely used by sellers of commodities, but rarely used by buyers of commodities. 
A)  provide little risk sharing. 
B)  are very liquid. 
C)  have information problems. 
D)  are widely used by sellers of commodities, but rarely used by buyers of commodities.

Question 4

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by

Accepted Answer

A)  buying futures contracts on Treasury bills. 
B)  selling futures contracts on Treasury bills. 
C)  buying call options on Treasury bills. 
D)  increasing the amount of money which it lends. 
A)  buying futures contracts on Treasury bills. 
B)  selling futures contracts on Treasury bills. 
C)  buying call options on Treasury bills. 
D)  increasing the amount of money which it lends.

Question 5

The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

Accepted Answer

A)  speculators. 
B)  hedgers. 
C)  rocket scientists. 
D)  market makers. 
A)  speculators. 
B)  hedgers. 
C)  rocket scientists. 
D)  market makers.

Question 6

Explain how each of the following might make use of the futures market:
(a)A lender who is worried that its cost of funds might rise during the term of a loan it has made.
(b)A speculator who believes strongly that interest rates will rise.

Accepted Answer

(a)The lender could hedge the

Question 7

Futures trading practices in the United States are regulated by

Accepted Answer

A)  the Chicago Board of Trade. 
B)  the Chicago Mercantile Exchange. 
C)  the Commodities Futures Trading Commission. 
D)  the Board of Futures Trading. 
A)  the Chicago Board of Trade. 
B)  the Chicago Mercantile Exchange. 
C)  the Commodities Futures Trading Commission. 
D)  the Board of Futures Trading.

Question 8

The most important derivative instruments are

Accepted Answer

A)  futures, options, and swaps. 
B)  common and preferred stocks. 
C)  corporate bonds. 
D)  government bonds. 
A)  futures, options, and swaps. 
B)  common and preferred stocks. 
C)  corporate bonds. 
D)  government bonds.

Question 9

A put option is said to be "in the money" if

Accepted Answer

A)  it is written on a Treasury bill or other money-market asset. 
B)  it has increased in price since it was first written. 
C)  the price of the underlying asset is currently less than the strike price. 
D)  the price of the underlying asset is currently less than the strike price plus the option premium. 
A)  it is written on a Treasury bill or other money-market asset. 
B)  it has increased in price since it was first written. 
C)  the price of the underlying asset is currently less than the strike price. 
D)  the price of the underlying asset is currently less than the strike price plus the option premium.

Question 10

In what ways do futures contracts differ from forward contracts?

Accepted Answer

Futures contracts are traded on exchange

Question 11

In a put options contract,the

Accepted Answer

A)  seller has the obligation to receive the instrument at a specified time. 
B)  buyer has the obligation to deliver the instrument at a specified time. 
C)  buyer has the obligation to receive the instrument at a specified time. 
D)  seller has the obligation to deliver the instrument at a specified time. 
A)  seller has the obligation to receive the instrument at a specified time. 
B)  buyer has the obligation to deliver the instrument at a specified time. 
C)  buyer has the obligation to receive the instrument at a specified time. 
D)  seller has the obligation to deliver the instrument at a specified time.

Question 12

Why are forward contracts typically illiquid?

Accepted Answer

Because forward contracts usually contai

Question 13

As an option nears its expiration date,the size of the premium approaches

Accepted Answer

A)  zero. 
B)  infinity. 
C)  its intrinsic value. 
D)  an amount which varies, depending on prevailing market interest rates on the expiration date. 
A)  zero. 
B)  infinity. 
C)  its intrinsic value. 
D)  an amount which varies, depending on prevailing market interest rates on the expiration date.

Question 14

Profits from speculation arise because of

Accepted Answer

A)  the spread between the bid and ask prices on bonds. 
B)  the illiquidity of markets for derivative instruments. 
C)  the high information costs in markets for derivative instruments. 
D)  disagreements among traders about future prices of a commodity or financial instrument. 
A)  the spread between the bid and ask prices on bonds. 
B)  the illiquidity of markets for derivative instruments. 
C)  the high information costs in markets for derivative instruments. 
D)  disagreements among traders about future prices of a commodity or financial instrument.

Question 15

Which of the following statements is NOT true of the VIX?

Accepted Answer

A)  It is calculated based on prices of call and put options of the S&P 500. 
B)  Investors who want to hedge against stock market volatility can sell VIX options. 
C)  A VIX of 10 indicates investors expect the S&P 500 to fluctuate by 10% at an annual rate over the next 30 days. 
D)  The VIX is a measure of fear in the stock market. 
A)  It is calculated based on prices of call and put options of the S&P 500. 
B)  Investors who want to hedge against stock market volatility can sell VIX options. 
C)  A VIX of 10 indicates investors expect the S&P 500 to fluctuate by 10% at an annual rate over the next 30 days. 
D)  The VIX is a measure of fear in the stock market.

Question 16

The period over which a call or put option exists is

Accepted Answer

A)  determined by its delivery date. 
B)  determined by its expiration date. 
C)  determined by whether the contract is written for a commodity or for a financial instrument. 
D)  indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it. 
A)  determined by its delivery date. 
B)  determined by its expiration date. 
C)  determined by whether the contract is written for a commodity or for a financial instrument. 
D)  indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it.

Question 17

AIG almost went bankrupt in 2008 because

Accepted Answer

A)  the value of the securities underlying its credit default swaps declined significantly. 
B)  it lacked the collateral required by buyers of its credit default swaps. 
C)  prices of securities underlying their credit default swaps were hard to determine since they were no longer actively traded. 
D)  all of the above. 
A)  the value of the securities underlying its credit default swaps declined significantly. 
B)  it lacked the collateral required by buyers of its credit default swaps. 
C)  prices of securities underlying their credit default swaps were hard to determine since they were no longer actively traded. 
D)  all of the above.

Question 18

The intrinsic value of an option

Accepted Answer

A)  is equal to the option premium. 
B)  is the amount the option actually is worth if it is immediately exercised. 
C)  is the amount the option is expected to be worth on its expiration date. 
D)  is impossible to determine in the absence of information on the future prices of the underlying asset. 
A)  is equal to the option premium. 
B)  is the amount the option actually is worth if it is immediately exercised. 
C)  is the amount the option is expected to be worth on its expiration date. 
D)  is impossible to determine in the absence of information on the future prices of the underlying asset.

Question 19

What are the information costs associated with forward contracts?

Accepted Answer

As a result of counterparty ri

Question 20

A key reason that firms and financial institutions might participate in an interest rate swap is

Accepted Answer

A)  to transfer interest rate risk to parties that are more willing to bear it. 
B)  the low information costs of swaps compared with other derivative contracts. 
C)  the greater liquidity of swaps compared with other derivative contracts. 
D)  the favorable tax implications of swaps compared with other derivative contracts. 
A)  to transfer interest rate risk to parties that are more willing to bear it. 
B)  the low information costs of swaps compared with other derivative contracts. 
C)  the greater liquidity of swaps compared with other derivative contracts. 
D)  the favorable tax implications of swaps compared with other derivative contracts.

How do exchanges seek to reduce default risk in the futures market?

Marking to market refers to

Forward transactions

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by

The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

Explain how each of the following might make use of the futures market: (a)A lender who is worried that its cost of funds might rise during the term of a loan it has made. (b)A speculator who believes strongly that interest rates will rise.

Futures trading practices in the United States are regulated by

The most important derivative instruments are

A put option is said to be "in the money" if

In what ways do futures contracts differ from forward contracts?

In a put options contract,the

Why are forward contracts typically illiquid?

As an option nears its expiration date,the size of the premium approaches

Profits from speculation arise because of

Which of the following statements is NOT true of the VIX?

The period over which a call or put option exists is

AIG almost went bankrupt in 2008 because

The intrinsic value of an option

What are the information costs associated with forward contracts?

A key reason that firms and financial institutions might participate in an interest rate swap is

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

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Exam 7: Derivatives and Derivative Markets

How do exchanges seek to reduce default risk in the futures market?

Marking to market refers to

Forward transactions

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by

The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

Explain how each of the following might make use of the futures market: (a)A lender who is worried that its cost of funds might rise during the term of a loan it has made. (b)A speculator who believes strongly that interest rates will rise.

Futures trading practices in the United States are regulated by

The most important derivative instruments are

A put option is said to be "in the money" if

In what ways do futures contracts differ from forward contracts?

In a put options contract,the

Why are forward contracts typically illiquid?

As an option nears its expiration date,the size of the premium approaches

Profits from speculation arise because of

Which of the following statements is NOT true of the VIX?

The period over which a call or put option exists is

AIG almost went bankrupt in 2008 because

The intrinsic value of an option

What are the information costs associated with forward contracts?

A key reason that firms and financial institutions might participate in an interest rate swap is

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Beyond Commercial Banks: Shadow Banks and Nonbank Financial Institutions

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I- the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters