Question 1

A put 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 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 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 4

If you buy in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795,you have a ________ of $________.

Accepted Answer

A)  loss; 1250 
B)  loss; 5 
C)  profit; 1250 
D)  profit; 5 
A)  loss; 1250 
B)  loss; 5 
C)  profit; 1250 
D)  profit; 5

Question 5

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

Question 6

If you buy in April a stock index future contract on the S&P 500 index at the price of 1200 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1000,you have a ________ of $________.

Accepted Answer

A)  loss; 50000 
B)  loss; 200 
C)  profit; 50000 
D)  profit; 200 
A)  loss; 50000 
B)  loss; 200 
C)  profit; 50000 
D)  profit; 200

Question 7

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 8

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 9

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)  $86,956 for $100,000 face value bonds 
D)  $86,956 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)  $86,956 for $100,000 face value bonds 
D)  $86,956 for $115,000 face value bonds

Question 10

The advantage of forward contracts over futures contracts is that forward contracts ________.

Accepted Answer

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

Question 11

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 12

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 13

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 14

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 15

Financial derivatives include ________.

Accepted Answer

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

Question 16

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________.

Accepted Answer

A)  cross hedge 
B)  cross call option 
C)  cross put option 
D)  swap 
A)  cross hedge 
B)  cross call option 
C)  cross put option 
D)  swap

Question 17

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 117,you will ________ the option and potentially 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 18

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 19

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 20

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

Exam 14: Risk Management With Financial Derivatives

A put option gives the owner ________.

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 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 buy in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795,you have a ________ of $________.

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

If you buy in April a stock index future contract on the S&P 500 index at the price of 1200 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1000,you have a ________ of $________.

Options on individual stocks are referred to as ________.

A short position requires that the investor ________.

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

The advantage of forward contracts over futures contracts is that forward contracts ________.

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 ________.

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)________.

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.

Financial derivatives include ________.

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________.

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

Futures markets have grown rapidly because futures ________.

A call option gives the owner ________.

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

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

The ISLM Model

Filters

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 buy in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795,you have a of $.

If you buy in April a stock index future contract on the S&P 500 index at the price of 1200 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1000,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 117,you will the option and potentially make a profit of $.