Question 1

A clearinghouse backs the buyer's and seller's position in a forward contract.

Accepted Answer

A) True 
 B)False  False

Question 2

A negotiated non-standardized agreement between a buyer and seller (with no third-party involvement)to exchange an asset for cash at some future date with the price set today is called a forward agreement.

Accepted Answer

A) True 
 B)False  True

Question 3

A stock is priced at $27. An American call option on this stock with a $25 strike must be worth at least how much?
 Numerically show why.

Accepted Answer

It must be worth at least $2 per share or $200 per contract. Suppose the premium is instead only $1 (per share). You could buy the call for $1 and sell the stock short simultaneously at $27,exercise the call immediately,and buy the stock for $25. Your "all in" cost of the stock (per share)is $25 + $1 = $26,and you sell the stock for $27,a $1 gain that involves no risk and no investment (although you will have to post margin on the short sale). As everyone does this,the option's price will rise until the option premium is at least equal to the difference between the stock price and the exercise price.

Question 4

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans,the bank could
I. enter into a swap to pay fixed and receive variable.
II. enter into a swap to pay variable and receive fixed.
III. buy an interest rate floor.
IV. buy an interest rate cap.

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only

Question 5

An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes. However,he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?

Accepted Answer

A) $700 
B) -$800 
C) -$400 
D) -$200 
E) -$100 
A) $700 
B) -$800 
C) -$400 
D) -$200 
E) -$100

Question 6

Of the following,the most recent derivative security innovations are

Accepted Answer

A) foreign currency futures. 
B) interest rate futures. 
C) stock index futures. 
D) stock options. 
E) credit derivatives. 
A) foreign currency futures. 
B) interest rate futures. 
C) stock index futures. 
D) stock options. 
E) credit derivatives.

Question 7

In a futures contract,if funds in the margin account fall below the maintenance margin requirement,a margin call is issued.

Accepted Answer

A) True 
 B)False

Question 8

New futures contracts must be approved by

Accepted Answer

A) the CFTC. 
B) the SEC. 
C) the Warren Commission. 
D) the NYSE. 
E) the Federal Reserve. 
A) the CFTC. 
B) the SEC. 
C) the Warren Commission. 
D) the NYSE. 
E) the Federal Reserve.

Question 9

Buying a call at the money call option and writing a put at the money put option are two ways to make money when prices rise. When would each be the preferable strategy?

Accepted Answer

If spot prices rise by a lot,then buying

Question 10

A U.S. firm has a European subsidiary that earns euros. The subsidiary has borrowed dollars at a floating rate of interest. What kind of risk does the subsidiary have?
 What kind of swap could be used to limit the subsidiary's risk?
 Be specific.

Accepted Answer

The subsidiary (sub for short)faces both

Question 11

Measured by the amount outstanding,the largest type of derivative market in the world is the

Accepted Answer

A) futures market. 
B) forward market. 
C) swap market. 
D) options market. 
E) credit forward market. 
A) futures market. 
B) forward market. 
C) swap market. 
D) options market. 
E) credit forward market.

Question 12

You have taken a stock option position and,if the stock's price drops,you will get a level gain no matter how far prices fall,but you could go bankrupt if the stock's price rises. You have________________________________.

Accepted Answer

A) bought a call option. 
B) bought a put option. 
C) written a call option. 
D) written a put option. 
E) written a straddle. 
A) bought a call option. 
B) bought a put option. 
C) written a call option. 
D) written a put option. 
E) written a straddle.

Question 13

A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a

Accepted Answer

A) floor broker. 
B) day trader. 
C) position trader. 
D) specialist. 
E) hedger. 
A) floor broker. 
B) day trader. 
C) position trader. 
D) specialist. 
E) hedger.

Question 14

By convention,a swap buyer on an interest rate swap agrees to

Accepted Answer

A) periodically pay a fixed rate of interest and receive a floating rate of interest. 
B) periodically pay a floating rate of interest and receive a fixed rate of interest. 
C) swap both principal and interest at contract maturity. 
D) back both sides of the swap agreement. 
E) act as the dealer in the swap agreement. 
A) periodically pay a fixed rate of interest and receive a floating rate of interest. 
B) periodically pay a floating rate of interest and receive a fixed rate of interest. 
C) swap both principal and interest at contract maturity. 
D) back both sides of the swap agreement. 
E) act as the dealer in the swap agreement.

Question 15

A bank with short-term floating-rate assets funded by long-term fixed-rate liabilities could hedge this risk by
I. buying a T-bond futures contract.
II. buying options on a T-bond futures contract.
III. entering into a swap agreement to pay a fixed rate and receive a variable rate.
IV. entering into a swap agreement to pay a variable rate and receive a fixed rate.

Accepted Answer

A) I and III only 
B) I,II,and IV only 
C) II and IV only 
D) III only 
E) IV only 
A) I and III only 
B) I,II,and IV only 
C) II and IV only 
D) III only 
E) IV only

Question 16

An increase in which of the following would increase the price of a call option on common stock,ceteris paribus?
I. Stock price
II. Stock price volatility
III. Interest rates
IV. Exercise price

Accepted Answer

A) II only 
B) II and IV only 
C) I,II,and III only 
D) I,III,and IV only 
E) I,II,III,and IV 
A) II only 
B) II and IV only 
C) I,II,and III only 
D) I,III,and IV only 
E) I,II,III,and IV

Question 17

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.

Accepted Answer

A) True 
 B)False

Question 18

An interest rate floor is designed to protect an institution from
I. falling interest rates.
II. falling bond prices.
III. increased credit risk on loans.
IV. swap counterparty credit risk.

Accepted Answer

A) I and IV 
B) II and III 
C) I and III 
D) II and IV 
E) I only 
A) I and IV 
B) II and III 
C) I and III 
D) II and IV 
E) I only

Question 19

The purchaser of a T-bond futures contract priced at 101-16 at the time of sale agrees to deliver $100,000 face value Treasury bonds in exchange for receiving $101,500 at contract maturity.

Accepted Answer

A) True 
 B)False

Question 20

A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.

Accepted Answer

A) True 
 B)False

Exam 10: Derivative Securities Markets

A clearinghouse backs the buyer's and seller's position in a forward contract.

A negotiated non-standardized agreement between a buyer and seller (with no third-party involvement)to exchange an asset for cash at some future date with the price set today is called a forward agreement.

A stock is priced at $27. An American call option on this stock with a $25 strike must be worth at least how much? Numerically show why.

Of the following,the most recent derivative security innovations are

In a futures contract,if funds in the margin account fall below the maintenance margin requirement,a margin call is issued.

New futures contracts must be approved by

Buying a call at the money call option and writing a put at the money put option are two ways to make money when prices rise. When would each be the preferable strategy?

A U.S. firm has a European subsidiary that earns euros. The subsidiary has borrowed dollars at a floating rate of interest. What kind of risk does the subsidiary have? What kind of swap could be used to limit the subsidiary's risk? Be specific.

Measured by the amount outstanding,the largest type of derivative market in the world is the

You have taken a stock option position and,if the stock's price drops,you will get a level gain no matter how far prices fall,but you could go bankrupt if the stock's price rises. You have________________________________.

A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a

By convention,a swap buyer on an interest rate swap agrees to

An increase in which of the following would increase the price of a call option on common stock,ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.

An interest rate floor is designed to protect an institution from I. falling interest rates. II. falling bond prices. III. increased credit risk on loans. IV. swap counterparty credit risk.

The purchaser of a T-bond futures contract priced at 101-16 at the time of sale agrees to deliver $100,000 face value Treasury bonds in exchange for receiving $101,500 at contract maturity.

A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters