Question 1

Financial futures contracts on stock indexes are referred to as interest rate futures.

Accepted Answer

A) True 
 B)False  True

Question 2

Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affectedif interest rates increase. To partially hedge its position, it could ____ futures contracts.

Accepted Answer

A)  adversely; purchase 
B)  favorably; sell 
C)  favorably; purchase 
D)  adversely; sell 
A)  adversely; purchase 
B)  favorably; sell 
C)  favorably; purchase 
D)  adversely; sell C

Question 3

If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.

Accepted Answer

A)  more; decrease 
B)  more; rise 
C)  fewer; rise 
D)  none of the above 
A)  more; decrease 
B)  more; rise 
C)  fewer; rise 
D)  none of the above B

Question 4

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be

Accepted Answer

A)  equal to the prevailing stock prices. 
B)  below the prevailing stock prices. 
C)  above the prevailing stock prices. 
D)  negative. 
A)  equal to the prevailing stock prices. 
B)  below the prevailing stock prices. 
C)  above the prevailing stock prices. 
D)  negative.

Question 5

If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.

Accepted Answer

A)  increase; selling 
B)  increase; buying 
C)  decrease, selling 
D)  decrease; purchasing a call option on 
A)  increase; selling 
B)  increase; buying 
C)  decrease, selling 
D)  decrease; purchasing a call option on

Question 6

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

Accepted Answer

A)  Market 
B)  Liquidity 
C)  Credit 
D)  Basis 
E)  None of the above 
A)  Market 
B)  Liquidity 
C)  Credit 
D)  Basis 
E)  None of the above

Question 7

____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.

Accepted Answer

A)  Hedgers 
B)  Day traders 
C)  Position traders 
D)  None of the above 
A)  Hedgers 
B)  Day traders 
C)  Position traders 
D)  None of the above

Question 8

The prices of stock index futures

Accepted Answer

A)  are always the same as the prices of the stocks representing the index. 
B)  are always a little above the prices of the stocks representing the index. 
C)  are always a little below the prices of the stocks representing the index. 
D)  none of the above 
A)  are always the same as the prices of the stocks representing the index. 
B)  are always a little above the prices of the stocks representing the index. 
C)  are always a little below the prices of the stocks representing the index. 
D)  none of the above

Question 9

Brokers commonly require margin deposits from their customers above those required by the exchanges.

Accepted Answer

A) True 
 B)False

Question 10

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.

Accepted Answer

A)  purchasing; Treasury bonds 
B)  purchasing; the S&P 500 Index 
C)  purchasing; the Municipal Bond Index 
D)  selling; the Municipal Bond Index 
A)  purchasing; Treasury bonds 
B)  purchasing; the S&P 500 Index 
C)  purchasing; the Municipal Bond Index 
D)  selling; the Municipal Bond Index

Question 11

Which of the following statements is incorrect?

Accepted Answer

A)  Circuit breakers are trading restrictions imposed on specific stocks or stock indexes. 
B)  Circuit breakers guarantee that prices will turn upward. 
C)  Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces. 
D)  Circuit breakers may allow investors to determine whether circulating rumors are true. 
A)  Circuit breakers are trading restrictions imposed on specific stocks or stock indexes. 
B)  Circuit breakers guarantee that prices will turn upward. 
C)  Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces. 
D)  Circuit breakers may allow investors to determine whether circulating rumors are true.

Question 12

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.

Accepted Answer

A)  Dynamic asset allocation 
B)  Cross-hedging 
C)  Index arbitrage 
D)  Net hedging 
A)  Dynamic asset allocation 
B)  Cross-hedging 
C)  Index arbitrage 
D)  Net hedging

Question 13

Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.

Accepted Answer

A) True 
 B)False

Question 14

__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firmdesires.

Accepted Answer

A)  Credit risk 
B)  Control risk 
C)  Operational risk 
D)  Management risk 
A)  Credit risk 
B)  Control risk 
C)  Operational risk 
D)  Management risk

Question 15

Which of the following is not a type of risk associated with futures contracts?

Accepted Answer

A)  basis risk 
B)  liquidity risk 
C)  market risk 
D)  postpayment risk 
A)  basis risk 
B)  liquidity risk 
C)  market risk 
D)  postpayment risk

Question 16

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

Accepted Answer

A)  liquidates its stocks whenever it expects a market downturn. 
B)  maintains a constant buy position in stock index futures. 
C)  maintains a constant sell position in stock index futures. 
D)  none of the above 
A)  liquidates its stocks whenever it expects a market downturn. 
B)  maintains a constant buy position in stock index futures. 
C)  maintains a constant sell position in stock index futures. 
D)  none of the above

Question 17

Trading restrictions imposed on specific stocks or stock indexes are referred to as

Accepted Answer

A)  index busters. 
B)  index options. 
C)  circuit breakers. 
D)  protective covenants. 
A)  index busters. 
B)  index options. 
C)  circuit breakers. 
D)  protective covenants.

Question 18

Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time.

Accepted Answer

A) True 
 B)False

Question 19

A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date.

Accepted Answer

A) True 
 B)False

Question 20

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____, and theposition in futures contracts will result in a ____.

Accepted Answer

A)  increase; gain 
B)  increase; loss 
C)  decrease; gain 
D)  decrease; loss 
A)  increase; gain 
B)  increase; loss 
C)  decrease; gain 
D)  decrease; loss

Exam 13: Financial Futures Markets

Financial futures contracts on stock indexes are referred to as interest rate futures.

Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affectedif interest rates increase. To partially hedge its position, it could ____ futures contracts.

If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be

If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.

The prices of stock index futures

Brokers commonly require margin deposits from their customers above those required by the exchanges.

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.

Which of the following statements is incorrect?

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.

Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.

__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firmdesires.

Which of the following is not a type of risk associated with futures contracts?

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

Trading restrictions imposed on specific stocks or stock indexes are referred to as

Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time.

A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date.

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____, and theposition in futures contracts will result in a ____.

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance Operations

Pension Fund Operations

Filters

Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be affectedif interest rates increase. To partially hedge its position, it could futures contracts.

If there are traders with buy offers than sell offers for a particular contract, the futures price will until this imbalance is removed.

If speculators believe interest rates will , they would consider a T-bill futures contract today.

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by futures contracts on .

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will , and theposition in futures contracts will result in a .