Question 1

All of the following describe the market for credit default swaps on mortgage-backed securities in the mid-2000s EXCEPT

Accepted Answer

A) an increasing number of buyers were speculators. 
B) AIG apparently underestimated the risk involved with mortgage-backed securities. 
C) the volume of credit default swaps was too low making it difficult to assess their value. 
D) payments by buyers were too low relative to risk. 
A) an increasing number of buyers were speculators. 
B) AIG apparently underestimated the risk involved with mortgage-backed securities. 
C) the volume of credit default swaps was too low making it difficult to assess their value. 
D) payments by buyers were too low relative to risk. C

Question 2

If insurance is available on an activity:

Accepted Answer

A) more of that activity will occur 
B) less of that activity will occur 
C) investors will be less likely to hedge 
D) it increases the risk of engaging in that activity 
A) more of that activity will occur 
B) less of that activity will occur 
C) investors will be less likely to hedge 
D) it increases the risk of engaging in that activity A

Question 3

Why are forward contracts typically illiquid?

Accepted Answer

Because forward contracts usually contain terms specific to the particular buyer and seller involved in a transaction, selling the contract is difficult because a buyer would have to accept the same terms.

Question 4

Suppose you are a manager for a company that produces grape jelly. Which of the following is the best way for you to reduce your risk?

Accepted Answer

A) acquire a derivative that increases in value if grape prices increase 
B) acquire a derivative that increases in value if grape jelly prices increase 
C) sell a derivative that increases in value if grape prices increase 
D) sell a derivative that increases in value if grape jelly prices increase 
A) acquire a derivative that increases in value if grape prices increase 
B) acquire a derivative that increases in value if grape jelly prices increase 
C) sell a derivative that increases in value if grape prices increase 
D) sell a derivative that increases in value if grape jelly prices increase

Question 5

An order from an exchange for a seller to add enough funds to meet the minimum balance in a margin account is called:

Accepted Answer

A) maintenance margin 
B) margin option 
C) margin call 
D) margin put 
A) maintenance margin 
B) margin option 
C) margin call 
D) margin put

Question 6

A speculator who believes strongly that interest rates will rise would be likely to

Accepted Answer

A) buy futures contracts on Treasury bills. 
B) sell futures contracts on Treasury bills. 
C) buy Treasury bonds in the spot market. 
D) increase now the amount of money which he lends. 
A) buy futures contracts on Treasury bills. 
B) sell futures contracts on Treasury bills. 
C) buy Treasury bonds in the spot market. 
D) increase now the amount of money which he lends.

Question 7

When you borrow stock from a broker and sell it now with plans to buy it back after it drops in price, you are engaging in a

Accepted Answer

A) margin call 
B) European option 
C) American option 
D) short sale 
A) margin call 
B) European option 
C) American option 
D) short sale

Question 8

The choice between futures and options

Accepted Answer

A) depends on whether the underlying instrument is a debt instrument or an equity. 
B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide. 
A) depends on whether the underlying instrument is a debt instrument or an equity. 
B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. 
C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. 
D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide.

Question 9

An options contract

Accepted Answer

A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. 
B) is another name for a futures contract. 
C) may be written for debt instruments, but not equities. 
D) may be written for equities, but not for debt instruments. 
A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. 
B) is another name for a futures contract. 
C) may be written for debt instruments, but not equities. 
D) may be written for equities, but not for debt instruments.

Question 10

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 11

Which of the following accurately describes possible positions taken by hedgers?

Accepted Answer

A) may take a short position in the futures market to offset a long position in the spot market 
B) may take a short position in the spot market to offset a long position in the futures market 
C) may take a long position in the spot market to offset a short position in the futures market 
D) may take a long position in the futures market to offset a long position in the spot market 
A) may take a short position in the futures market to offset a long position in the spot market 
B) may take a short position in the spot market to offset a long position in the futures market 
C) may take a long position in the spot market to offset a short position in the futures market 
D) may take a long position in the futures market to offset a long position in the spot market

Question 12

All of the following are roles of a exchange EXCEPT

Accepted Answer

A) instituting margin requirements on futures contracts. 
B) marking to market at the end of each day. 
C) eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D) reducing the default risk involving forward contracts. 
A) instituting margin requirements on futures contracts. 
B) marking to market at the end of each day. 
C) eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D) reducing the default risk involving forward contracts.

Question 13

If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

Accepted Answer

A) lost money on your long position. 
B) gained money on your long position. 
C) lost money on your short position. 
D) gained money on your short position. 
A) lost money on your long position. 
B) gained money on your long position. 
C) lost money on your short position. 
D) gained money on your short position.

Question 14

Why must the spot price equal the futures price on the settlement date?

Accepted Answer

If there were differ

Question 15

What are the information costs associated with forward contracts?

Accepted Answer

As a result of counterparty ri

Question 16

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 17

How does hedging affect the flow of funds in the financial system?

Accepted Answer

A) It reduces it since it is a sign that investors do not like risk. 
B) It reduces it because it increases risk by encouraging speculation. 
C) It increases it because it reduces risk thus encouraging more people to make financial investments. 
D) It increases it by encouraging more speculation. 
A) It reduces it since it is a sign that investors do not like risk. 
B) It reduces it because it increases risk by encouraging speculation. 
C) It increases it because it reduces risk thus encouraging more people to make financial investments. 
D) It increases it by encouraging more speculation.

Question 18

Forward contracts are often illiquid because

Accepted Answer

A) any capital gains on them are heavily taxed, making investors reluctant to sell them. 
B) government regulation has not provided for a secondary market in them. 
C) they generally contain terms specific to the particular buyer and seller. 
D) the brokerage fees involved in buying and selling them are very high. 
A) any capital gains on them are heavily taxed, making investors reluctant to sell them. 
B) government regulation has not provided for a secondary market in them. 
C) they generally contain terms specific to the particular buyer and seller. 
D) the brokerage fees involved in buying and selling them are very high.

Question 19

Which of the following is NOT a result of the ability of investors to hedge?

Accepted Answer

A) increased access to funds by firms and households 
B) investors are more willing to invest 
C) increased risk aversion 
D) slower economic growth 
A) increased access to funds by firms and households 
B) investors are more willing to invest 
C) increased risk aversion 
D) slower economic growth

Question 20

Forward transactions

Accepted Answer

A) allow savers and borrowers to conduct a transaction now and settle in the future. 
B) allow savers and borrowers to postpone a transaction from now to the future. 
C) always involve increased risk compared with spot transactions. 
D) may not be conducted on organized exchanges. 
A) allow savers and borrowers to conduct a transaction now and settle in the future. 
B) allow savers and borrowers to postpone a transaction from now to the future. 
C) always involve increased risk compared with spot transactions. 
D) may not be conducted on organized exchanges.

All of the following describe the market for credit default swaps on mortgage-backed securities in the mid-2000s EXCEPT

If insurance is available on an activity:

Why are forward contracts typically illiquid?

Suppose you are a manager for a company that produces grape jelly. Which of the following is the best way for you to reduce your risk?

An order from an exchange for a seller to add enough funds to meet the minimum balance in a margin account is called:

A speculator who believes strongly that interest rates will rise would be likely to

When you borrow stock from a broker and sell it now with plans to buy it back after it drops in price, you are engaging in a

The choice between futures and options

An options contract

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

Which of the following accurately describes possible positions taken by hedgers?

All of the following are roles of a exchange EXCEPT

If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

Why must the spot price equal the futures price on the settlement date?

What are the information costs associated with forward contracts?

Profits from speculation arise because of

How does hedging affect the flow of funds in the financial system?

Forward contracts are often illiquid because

Which of the following is NOT a result of the ability of investors to hedge?

Forward transactions

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

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

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

Exam 7: Derivatives and Derivative Markets

All of the following describe the market for credit default swaps on mortgage-backed securities in the mid-2000s EXCEPT

If insurance is available on an activity:

Why are forward contracts typically illiquid?

Suppose you are a manager for a company that produces grape jelly. Which of the following is the best way for you to reduce your risk?

An order from an exchange for a seller to add enough funds to meet the minimum balance in a margin account is called:

A speculator who believes strongly that interest rates will rise would be likely to

When you borrow stock from a broker and sell it now with plans to buy it back after it drops in price, you are engaging in a

The choice between futures and options

An options contract

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

Which of the following accurately describes possible positions taken by hedgers?

All of the following are roles of a exchange EXCEPT

If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

Why must the spot price equal the futures price on the settlement date?

What are the information costs associated with forward contracts?

Profits from speculation arise because of

How does hedging affect the flow of funds in the financial system?

Forward contracts are often illiquid because

Which of the following is NOT a result of the ability of investors to hedge?

Forward transactions

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

Investment Banks, Mutual Funds, Hedge Funds, and the Shadow Banking System

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