Question 1

All of the following are steps involved in basic currency swaps EXCEPT

Accepted Answer

A) counterparties exchange the net interest at the end of the swap. 
B) the parties exchange principals in two currencies. 
C) the parties exchange periodic interest payments over the life of the agreement. 
D) the parties exchange the principal amount at the end of the agreement. 
A) counterparties exchange the net interest at the end of the swap. 
B) the parties exchange principals in two currencies. 
C) the parties exchange periodic interest payments over the life of the agreement. 
D) the parties exchange the principal amount at the end of the agreement.

Question 2

In a call options contract, the

Accepted Answer

A) seller has the obligation to deliver the instrument at a specified time. 
B) buyer has the obligation to receive the instrument at a specified time. 
C) seller may choose whether or not to deliver the instrument at a specified time. 
D) buyer will choose to exercise his option only if the value of the underlying security falls. 
A) seller has the obligation to deliver the instrument at a specified time. 
B) buyer has the obligation to receive the instrument at a specified time. 
C) seller may choose whether or not to deliver the instrument at a specified time. 
D) buyer will choose to exercise his option only if the value of the underlying security falls.

Question 3

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 without eliminating the chance to profit from a decline in the cost of funds by

Accepted Answer

A) buying futures contracts on Treasury bills. 
B) selling futures contracts on Treasury bills. 
C) buying put options on Treasury bills. 
D) buying call options on Treasury bills. 
A) buying futures contracts on Treasury bills. 
B) selling futures contracts on Treasury bills. 
C) buying put options on Treasury bills. 
D) buying call options on Treasury bills.

Question 4

One difference between futures and options contracts is

Accepted Answer

A) funds change hands daily in the case of options but not with futures. 
B) funds change hands daily in the case of futures, but not with options. 
C) in the case of futures funds only change hands when they are exercised. 
D) futures are designed to reduce risk while options are not. 
A) funds change hands daily in the case of options but not with futures. 
B) funds change hands daily in the case of futures, but not with options. 
C) in the case of futures funds only change hands when they are exercised. 
D) futures are designed to reduce risk while options are not.

Question 5

One benefit of a swap compared to futures and options is that they

Accepted Answer

A) promote liquidity. 
B) reduce the risk for both the buyer and seller. 
C) can be better tailored to meet the needs of market participants. 
D) can involve financial instruments and not just commodities. 
A) promote liquidity. 
B) reduce the risk for both the buyer and seller. 
C) can be better tailored to meet the needs of market participants. 
D) can involve financial instruments and not just commodities.

Question 6

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 7

The buyer of a futures contract

Accepted Answer

A) assumes the short position. 
B) assumes the long position. 
C) may not sell the contract without the permission of the original seller. 
D) has the obligation to deliver the underlying financial instrument at the specified future date. 
A) assumes the short position. 
B) assumes the long position. 
C) may not sell the contract without the permission of the original seller. 
D) has the obligation to deliver the underlying financial instrument at the specified future date.

Question 8

Describe two useful purposes served by speculators in derivatives markets.

Accepted Answer

First, hedgers are able to transfer risk

Question 9

Speculators in derivatives markets

Accepted Answer

A) reduce the efficiency of these markets. 
B) are acting contrary to U.S. securities laws. 
C) accept risk transferred to them by hedgers. 
D) reduce the liquidity of these markets. 
A) reduce the efficiency of these markets. 
B) are acting contrary to U.S. securities laws. 
C) accept risk transferred to them by hedgers. 
D) reduce the liquidity of these markets.

Question 10

Standardization of derivative contracts

Accepted Answer

A) increases their liquidity. 
B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity. 
C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset. 
D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC. 
A) increases their liquidity. 
B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity. 
C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset. 
D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC.

Question 11

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 12

In derivative markets, trade takes place in

Accepted Answer

A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B) assets whose rates of returns must be derived from information published in financial tables. 
C) assets that derive their value from underlying assets. 
D) assets which are not allowed to be traded on organized exchanges. 
A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B) assets whose rates of returns must be derived from information published in financial tables. 
C) assets that derive their value from underlying assets. 
D) assets which are not allowed to be traded on organized exchanges.

Question 13

The counterparty of someone buying a futures contract on the Chicago Board of Trade is::

Accepted Answer

A) Chicago Board of Trade 
B) hedger 
C) speculator 
D) trader 
A) Chicago Board of Trade 
B) hedger 
C) speculator 
D) trader

Question 14

The terms of futures contracts traded in the United States are

Accepted Answer

A) standardized as to amount or value, but not as to settlement dates. 
B) standardized as to settlement dates, but not as to amount or value. 
C) not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. 
D) standardized as to amount or value and as to settlement dates. 
A) standardized as to amount or value, but not as to settlement dates. 
B) standardized as to settlement dates, but not as to amount or value. 
C) not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. 
D) standardized as to amount or value and as to settlement dates.

Question 15

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 16

In an options contract, another name for the strike price is the

Accepted Answer

A) market price. 
B) exercise price. 
C) equilibrium price. 
D) fixed price. 
A) market price. 
B) exercise price. 
C) equilibrium price. 
D) fixed price.

Question 17

A stock option is said to be "out of the money" if:

Accepted Answer

A) the strike price equals the exercise price. 
B) stock price equals the strike price. 
C) strike price exceeds the stock price. 
D) stock price exceeds the strike price. 
A) the strike price equals the exercise price. 
B) stock price equals the strike price. 
C) strike price exceeds the stock price. 
D) stock price exceeds the strike price.

Question 18

Marking to market involves

Accepted Answer

A) changing the futures price to the spot price each day. 
B) engaging in arbitrage so as to reduce the risk involved with futures contracts. 
C) crediting or debiting the margin account based on the net change in the value of the futures contract. 
D) updating the futures price after the market closes each day. 
A) changing the futures price to the spot price each day. 
B) engaging in arbitrage so as to reduce the risk involved with futures contracts. 
C) crediting or debiting the margin account based on the net change in the value of the futures contract. 
D) updating the futures price after the market closes each day.

Question 19

Forward transactions

Accepted Answer

A) provide substantial liquidity. 
B) entail small information costs. 
C) provide risk sharing. 
D) provide reduced tax payments. 
A) provide substantial liquidity. 
B) entail small information costs. 
C) provide risk sharing. 
D) provide reduced tax payments.

Question 20

If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that

Accepted Answer

A) Treasury bond prices will be higher in the future. 
B) Treasury bond yields will be higher in the future. 
C) Treasury bond yields will be lower in the future. 
D) futures prices will rise again at the end of the period. 
A) Treasury bond prices will be higher in the future. 
B) Treasury bond yields will be higher in the future. 
C) Treasury bond yields will be lower in the future. 
D) futures prices will rise again at the end of the period.

All of the following are steps involved in basic currency swaps EXCEPT

In a call options contract, the

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 without eliminating the chance to profit from a decline in the cost of funds by

One difference between futures and options contracts is

One benefit of a swap compared to futures and options is that they

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

The buyer of a futures contract

Describe two useful purposes served by speculators in derivatives markets.

Speculators in derivatives markets

Standardization of derivative contracts

Forward transactions

In derivative markets, trade takes place in

The counterparty of someone buying a futures contract on the Chicago Board of Trade is::

The terms of futures contracts traded in the United States are

The period over which a call or put option exists is

In an options contract, another name for the strike price is the

A stock option is said to be "out of the money" if:

Marking to market involves

Forward transactions

If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that

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

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Exam 7: Derivatives and Derivative Markets

All of the following are steps involved in basic currency swaps EXCEPT

In a call options contract, the

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 without eliminating the chance to profit from a decline in the cost of funds by

One difference between futures and options contracts is

One benefit of a swap compared to futures and options is that they

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

The buyer of a futures contract

Describe two useful purposes served by speculators in derivatives markets.

Speculators in derivatives markets

Standardization of derivative contracts

Forward transactions

In derivative markets, trade takes place in

The counterparty of someone buying a futures contract on the Chicago Board of Trade is::

The terms of futures contracts traded in the United States are

The period over which a call or put option exists is

In an options contract, another name for the strike price is the

A stock option is said to be "out of the money" if:

Marking to market involves

Forward transactions

If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that

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