Question 1

Forward contracts are marked to market daily.

Accepted Answer

A) True 
 B)False

Question 2

The swap market's primary direct government regulator is (the)

Accepted Answer

A) SEC. 
B) CFTC. 
C) NYSE. 
D) WTO. 
E) Nobody. 
A) SEC. 
B) CFTC. 
C) NYSE. 
D) WTO. 
E) Nobody.

Question 3

Using the Black-Scholes model,explain what happens to the value of a call as S,T,and σ2 change. Why is the relationship between risk and price different for options than for other securities?

Accepted Answer

. As S increases,C (the call premium)inc

Question 4

Which of the following is true?

Accepted Answer

A) Forward contracts have no default risk. 
B) Futures contracts require an initial margin requirement be paid. 
C) Forward contracts are marked to market daily. 
D) Forward contract buyers and sellers do not know who the counterparty is. 
E) Futures contracts are only traded over the counter. 
A) Forward contracts have no default risk. 
B) Futures contracts require an initial margin requirement be paid. 
C) Forward contracts are marked to market daily. 
D) Forward contract buyers and sellers do not know who the counterparty is. 
E) Futures contracts are only traded over the counter.

Question 5

An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next six months. The stock is at $45 and she buys a six-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?

Accepted Answer

A) -$500 
B) -$750 
C) -$900 
D) $400 
E) $500 
A) -$500 
B) -$750 
C) -$900 
D) $400 
E) $500

Question 6

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

Accepted Answer

A) a long position in a futures contract. 
B) a short position in a futures contract. 
C) sold a forward contract. 
D) purchased a forward contract. 
E) purchased a call option on a futures contract. 
A) a long position in a futures contract. 
B) a short position in a futures contract. 
C) sold a forward contract. 
D) purchased a forward contract. 
E) purchased a call option on a futures contract.

Question 7

A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk?
I. Buy a cap.
II. Buy an interest rate swap.
III. Buy a floor.
IV. Sell an interest rate swap.

Accepted Answer

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

Question 8

You have taken a stock option position and,if the stock's price increases,you could lose a fixed small amount of money,but if the stock's price decreases,your gain increases. You must have ________________________________.

Accepted Answer

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

Question 9

The type of swap most closely linked to the subprime mortgage crisis is the ____________.

Accepted Answer

A) interest rate swap 
B) currency swap 
C) equity linked swap 
D) credit default swap 
E) DIF swap 
A) interest rate swap 
B) currency swap 
C) equity linked swap 
D) credit default swap 
E) DIF swap

Question 10

A bank has made a risky loan to a midsize consumer goods manufacturer. With the weaker economy,the borrower is expected to have trouble repaying the loan. The bank decides to purchase a digital default option. Which one of the following payout patterns does a digital option provide?

Accepted Answer

A) The option seller pays a stated amount to the option buyer,usually the par on the loan or bond,in the event of a default on the underlying credit. 
B) The option seller pays the buyer if the default risk premium or yield spread on a specified benchmark bond of the borrower increases above some exercise spread. 
C) If the option buyer makes fixed periodic payments to the option seller,the seller will pay the option buyer if a credit event occurs. 
D) If the option buyer makes periodic payments to the seller and delivers the underlying bond or loan,the seller pays the par value of the security. 
E) If interest rates change,the option seller will begin making fixed-rate payments to the option buyer. 
A) The option seller pays a stated amount to the option buyer,usually the par on the loan or bond,in the event of a default on the underlying credit. 
B) The option seller pays the buyer if the default risk premium or yield spread on a specified benchmark bond of the borrower increases above some exercise spread. 
C) If the option buyer makes fixed periodic payments to the option seller,the seller will pay the option buyer if a credit event occurs. 
D) If the option buyer makes periodic payments to the seller and delivers the underlying bond or loan,the seller pays the par value of the security. 
E) If interest rates change,the option seller will begin making fixed-rate payments to the option buyer.

Question 11

Suppose a stock is priced at $50. You are bullish on the stock and are considering buying March calls with an exercise price of $45 and $55,respectively. The 45 call is priced at $8.50 and the 55 call is quoted at $2.75. What should you consider in deciding which to purchase if you do not plan on exercising prior to maturity?
 Be specific.

Accepted Answer

The 45 is in the money and could be exer

Question 12

How does a futures or option clearinghouse assist traders?

Accepted Answer

The clearinghouse interposes itself betw

Question 13

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought

Accepted Answer

A) the stock price would stay above $12. 
B) the stock volatility would increase. 
C) the stock price would fall below $18. 
D) the stock price would stay above $15. 
E) the stock price would rise above $18 or fall below $12. 
A) the stock price would stay above $12. 
B) the stock volatility would increase. 
C) the stock price would fall below $18. 
D) the stock price would stay above $15. 
E) the stock price would rise above $18 or fall below $12.

Question 14

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________.

Accepted Answer

A) $50; $45 
B) $55; $55 
C) $60; $45 
D) $60; $50 
E) One cannot tell from the information given. 
A) $50; $45 
B) $55; $55 
C) $60; $45 
D) $60; $50 
E) One cannot tell from the information given.

Question 15

When would a forward contract be better for hedging than a futures contract?

Accepted Answer

A forward contract is better suited for

Question 16

You find the following current quote for the March T-bond contract: $100,000; Pts 32nd,of 100 percent.   You went long in the contract at the open. Which of the following is/are true?
I. At the end of the day,your margin account would be increased.
II. 55,210 contracts were traded that day.
III. You agreed to deliver $100,000 face value T-bonds in March in exchange for $89,120.
IV. You agreed to purchase $100,000 face value T-bonds in March in exchange for $89,375.

Accepted Answer

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

Question 17

Writing a put option results in a potentially limited gain and a potentially unlimited loss.

Accepted Answer

A) True 
 B)False

Question 18

Your firm enters into a swap agreement with a notional principal of $40 million wherein the firm pays a fixed rate of interest of 5.50 percent and receives a variable rate of interest equal to LIBOR plus 150 basis points. If LIBOR is currently 3.75 percent,the NET amount your firm will receive (+)or pay (-)on the next transaction date is

Accepted Answer

A) -$2,200,000. 
B) $2,625,000. 
C) $125,000. 
D) -$100,000. 
E) -$875,000. 
A) -$2,200,000. 
B) $2,625,000. 
C) $125,000. 
D) -$100,000. 
E) -$875,000.

Question 19

You would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50.

Accepted Answer

A) True 
 B)False

Question 20

American options can only be exercised at maturity.

Accepted Answer

A) True 
 B)False

Forward contracts are marked to market daily.

The swap market's primary direct government regulator is (the)

Using the Black-Scholes model,explain what happens to the value of a call as S,T,and σ² change. Why is the relationship between risk and price different for options than for other securities?

Which of the following is true?

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk? I. Buy a cap. II. Buy an interest rate swap. III. Buy a floor. IV. Sell an interest rate swap.

You have taken a stock option position and,if the stock's price increases,you could lose a fixed small amount of money,but if the stock's price decreases,your gain increases. You must have ________________________________.

The type of swap most closely linked to the subprime mortgage crisis is the ____________.

A bank has made a risky loan to a midsize consumer goods manufacturer. With the weaker economy,the borrower is expected to have trouble repaying the loan. The bank decides to purchase a digital default option. Which one of the following payout patterns does a digital option provide?

How does a futures or option clearinghouse assist traders?

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be and the exercise price of the call must be __.

When would a forward contract be better for hedging than a futures contract?

Writing a put option results in a potentially limited gain and a potentially unlimited loss.

You would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50.

American options can only be exercised at maturity.

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

Exam 10: Derivative Securities Markets

Forward contracts are marked to market daily.

The swap market's primary direct government regulator is (the)

Using the Black-Scholes model,explain what happens to the value of a call as S,T,and σ2 change. Why is the relationship between risk and price different for options than for other securities?

Which of the following is true?

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk? I. Buy a cap. II. Buy an interest rate swap. III. Buy a floor. IV. Sell an interest rate swap.

You have taken a stock option position and,if the stock's price increases,you could lose a fixed small amount of money,but if the stock's price decreases,your gain increases. You must have ________________________________.

The type of swap most closely linked to the subprime mortgage crisis is the ____________.

A bank has made a risky loan to a midsize consumer goods manufacturer. With the weaker economy,the borrower is expected to have trouble repaying the loan. The bank decides to purchase a digital default option. Which one of the following payout patterns does a digital option provide?

How does a futures or option clearinghouse assist traders?

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________.

When would a forward contract be better for hedging than a futures contract?

Writing a put option results in a potentially limited gain and a potentially unlimited loss.

You would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50.

American options can only be exercised at maturity.

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

Using the Black-Scholes model,explain what happens to the value of a call as S,T,and σ² change. Why is the relationship between risk and price different for options than for other securities?

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be and the exercise price of the call must be __.