Question 1

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.

Question 2

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 3

Which of the following statements regarding futures is true?

Accepted Answer

A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading. 
B) trading in financial futures involves more transactions than trading in commodity futures. 
C) futures trading is allowed only for financial assets. 
D) futures trading is allowed only for commodities. 
A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading. 
B) trading in financial futures involves more transactions than trading in commodity futures. 
C) futures trading is allowed only for financial assets. 
D) futures trading is allowed only for commodities.

Question 4

In recent decades,

Accepted Answer

A) trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures. 
B) trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures. 
C) trading in agricultural and commodities futures was discontinued. 
D) trading in financial futures was discontinued. 
A) trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures. 
B) trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures. 
C) trading in agricultural and commodities futures was discontinued. 
D) trading in financial futures was discontinued.

Question 5

In comparing futures contracts with options contracts, we can say that

Accepted Answer

A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract, the buyer and seller have symmetric rights. 
C) in both futures and options contracts, the buyer and seller have symmetric rights. 
D) in both futures and options contracts, the buyer and seller have asymmetric rights. 
A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract, the buyer and seller have symmetric rights. 
C) in both futures and options contracts, the buyer and seller have symmetric rights. 
D) in both futures and options contracts, the buyer and seller have asymmetric rights.

Question 6

The buyer of a futures contract

Accepted Answer

A) assumes the short position. 
B) has the obligation to deliver the underlying financial instrument at the specified date. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date. 
A) assumes the short position. 
B) has the obligation to deliver the underlying financial instrument at the specified date. 
C) has the obligation to receive the underlying financial instrument at the specified future date. 
D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Question 7

Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act?

Accepted Answer

A) Swaps must be traded through a clearinghouse. 
B) The value of swap contracts are limited to no more than $8 billion. 
C) Dealers are required to deposit a fraction of the value of the contract with the clearinghouse. 
D) Data on trades must be publicly available. 
A) Swaps must be traded through a clearinghouse. 
B) The value of swap contracts are limited to no more than $8 billion. 
C) Dealers are required to deposit a fraction of the value of the contract with the clearinghouse. 
D) Data on trades must be publicly available.

Question 8

The primary difference between an American and European option is:

Accepted Answer

A) American options must be exercised on the expiration date 
B) European options must be exercised on the expiration date 
C) American options may be exercised at any point up until the expiration date 
D) European options may be exercised at any point up until the expiration date 
A) American options must be exercised on the expiration date 
B) European options must be exercised on the expiration date 
C) American options may be exercised at any point up until the expiration date 
D) European options may be exercised at any point up until the expiration date

Question 9

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 10

As the time of delivery in a futures contract gets closer

Accepted Answer

A) the futures price gets closer to the spot price. 
B) the futures price generally rises further above the spot price. 
C) the futures price generally falls further below the spot price. 
D) the futures and spot prices remain the same as they were when the contract was first created. 
A) the futures price gets closer to the spot price. 
B) the futures price generally rises further above the spot price. 
C) the futures price generally falls further below the spot price. 
D) the futures and spot prices remain the same as they were when the contract was first created.

Question 11

Which of the following financial futures contracts are traded in the United States?

Accepted Answer

A) Interest rates 
B) Stock indexes 
C) Currencies 
D) All of the above 
A) Interest rates 
B) Stock indexes 
C) Currencies 
D) All of the above

Question 12

Options traded on exchanges are known as:

Accepted Answer

A) listed options 
B) exchange traded options 
C) call options 
D) put options 
A) listed options 
B) exchange traded options 
C) call options 
D) put options

Question 13

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is

Accepted Answer

A) $25. 
B) $75. 
C) $100. 
D) not possible to determine in the absence of information on values of the share price of Acme Widget between now and the expiration date of the call. 
A) $25. 
B) $75. 
C) $100. 
D) not possible to determine in the absence of information on values of the share price of Acme Widget between now and the expiration date of the call.

Question 14

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

Accepted Answer

A) swaption. 
B) swap option. 
C) forward swaps. 
D) plain vanilla. 
A) swaption. 
B) swap option. 
C) forward swaps. 
D) plain vanilla.

Question 15

How can a bond investor hedge against a possible bear market in bonds?

Accepted Answer

A) sell futures contracts on Treasury notes 
B) buy futures contracts on Treasury notes 
C) going long in the spot market 
D) going short in the spot market 
A) sell futures contracts on Treasury notes 
B) buy futures contracts on Treasury notes 
C) going long in the spot market 
D) going short in the spot market

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

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

Which of the following statements regarding futures is true?

In recent decades,

In comparing futures contracts with options contracts, we can say that

The buyer of a futures contract

Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act?

The primary difference between an American and European option is:

AIG almost went bankrupt in 2008 because

As the time of delivery in a futures contract gets closer

Which of the following financial futures contracts are traded in the United States?

Options traded on exchanges are known as:

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

How can a bond investor hedge against a possible bear market in bonds?

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

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

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

Which of the following statements regarding futures is true?

In recent decades,

In comparing futures contracts with options contracts, we can say that

The buyer of a futures contract

Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act?

The primary difference between an American and European option is:

AIG almost went bankrupt in 2008 because

As the time of delivery in a futures contract gets closer

Which of the following financial futures contracts are traded in the United States?

Options traded on exchanges are known as:

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

How can a bond investor hedge against a possible bear market in bonds?

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