Question 1

The futures markets have grown rapidly in recent years because

Accepted Answer

A)  interest rate volatility has increased. 
B)  financial managers are more risk averse. 
C)  of both A and B. 
D)  of neither A nor B. 
A)  interest rate volatility has increased. 
B)  financial managers are more risk averse. 
C)  of both A and B. 
D)  of neither A nor B.

Question 2

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________.

Accepted Answer

A)  cross hedge 
B)  cross call option 
C)  cross put option 
D)  swap 
A)  cross hedge 
B)  cross call option 
C)  cross put option 
D)  swap

Question 3

One advantage of using options to hedge is that the accounting transaction will never require the firm to show large unrecognized losses.

Accepted Answer

A) True 
 B)False

Question 4

Open interest allows investors to change the interest rate on futures contracts.

Accepted Answer

A) True 
 B)False

Question 5

Explain how a short hedge could be used to hedge a Treasury portfolio against interest-rate risk.

Accepted Answer

A short hedge can be used to hedge a Tre

Question 6

If you buy an option to buy Treasury futures at 115,and at expiration the market price is 110,

Accepted Answer

A)  the call will be exercised. 
B)  the put will be exercised. 
C)  the call will not be exercised. 
D)  the put will not be exercised. 
A)  the call will be exercised. 
B)  the put will be exercised. 
C)  the call will not be exercised. 
D)  the put will not be exercised.

Question 7

If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future,then he should

Accepted Answer

A)  sell stock index futures short. 
B)  buy stock index futures long. 
C)  stay out of the futures market. 
D)  borrow and buy securities now. 
A)  sell stock index futures short. 
B)  buy stock index futures long. 
C)  stay out of the futures market. 
D)  borrow and buy securities now.

Question 8

An option that can be exercised only at maturity is called a(n)________.

Accepted Answer

A)  swap 
B)  stock option 
C)  European option 
D)  American option 
A)  swap 
B)  stock option 
C)  European option 
D)  American option

Question 9

A contract that calls for the investor to (possibly)buy securities on a future date is called a ________.

Accepted Answer

A)  short contract 
B)  long contract 
C)  hedge 
D)  cross 
A)  short contract 
B)  long contract 
C)  hedge 
D)  cross

Question 10

Discuss the advantages of using swaps to protect against interest-rate risk rather than restructuring the balance sheet.

Accepted Answer

Swaps offer several advantages over rest

Question 11

If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500,you will ________.

Accepted Answer

A)  lose $12,500 
B)  gain $12,500 
C)  lose $50 
D)  gain $50 
A)  lose $12,500 
B)  gain $12,500 
C)  lose $50 
D)  gain $50

Question 12

The seller of an option has the

Accepted Answer

A)  right to buy or sell the underlying asset. 
B)  the obligation to buy or sell the underlying asset. 
C)  ability to reduce transaction risk. 
D)  right to exchange one payment stream for another. 
A)  right to buy or sell the underlying asset. 
B)  the obligation to buy or sell the underlying asset. 
C)  ability to reduce transaction risk. 
D)  right to exchange one payment stream for another.

Question 13

By selling short a futures contract of $100,000 at a price of 96,you are agreeing to deliver ________ face value securities for ________.

Accepted Answer

A)  $100,000; $104,167 
B)  $96,000; $100,000 
C)  $100,000; $96,000 
D)  $100,000; $100,000 
A)  $100,000; $104,167 
B)  $96,000; $100,000 
C)  $100,000; $96,000 
D)  $100,000; $100,000

Question 14

Options are contracts that give the purchasers the

Accepted Answer

A)  opportunity to buy or sell an underlying asset. 
B)  the obligation to buy or sell an underlying asset. 
C)  the right to hold an underlying asset. 
D)  the right to switch payment streams. 
A)  opportunity to buy or sell an underlying asset. 
B)  the obligation to buy or sell an underlying asset. 
C)  the right to hold an underlying asset. 
D)  the right to switch payment streams.

Question 15

Interest-rate swaps are more liquid than futures contracts.

Accepted Answer

A) True 
 B)False

Question 16

An increase in the exercise price,all other things held constant,will ________ the premium on call options.

Accepted Answer

A)  increase 
B)  decrease 
C)  not affect 
D)  Not enough information is given. 
A)  increase 
B)  decrease 
C)  not affect 
D)  Not enough information is given.

Question 17

Futures trading is regulated by the Commodity Futures Trading Commission.

Accepted Answer

A) True 
 B)False

Question 18

The advantage of forward contracts over futures contracts is that forward contracts

Accepted Answer

A)  are standardized. 
B)  have lower default risk. 
C)  are more flexible. 
D)  both A and B are true. 
A)  are standardized. 
B)  have lower default risk. 
C)  are more flexible. 
D)  both A and B are true.

Question 19

Intermediaries are active in the swap markets because

Accepted Answer

A)  they increase liquidity. 
B)  they reduce default risk. 
C)  they reduce search cost. 
D)  all of the above are true. 
A)  they increase liquidity. 
B)  they reduce default risk. 
C)  they reduce search cost. 
D)  all of the above are true.

Question 20

The disadvantage of swaps is that

Accepted Answer

A)  they lack liquidity. 
B)  it is difficult to arrange for a counterparty. 
C)  they suffer from default risk. 
D)  they are all of the above. 
A)  they lack liquidity. 
B)  it is difficult to arrange for a counterparty. 
C)  they suffer from default risk. 
D)  they are all of the above.

Exam 24: Hedging with Financial Derivatives

The futures markets have grown rapidly in recent years because

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________.

One advantage of using options to hedge is that the accounting transaction will never require the firm to show large unrecognized losses.

Open interest allows investors to change the interest rate on futures contracts.

Explain how a short hedge could be used to hedge a Treasury portfolio against interest-rate risk.

If you buy an option to buy Treasury futures at 115,and at expiration the market price is 110,

If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future,then he should

An option that can be exercised only at maturity is called a(n)________.

A contract that calls for the investor to (possibly)buy securities on a future date is called a ________.

Discuss the advantages of using swaps to protect against interest-rate risk rather than restructuring the balance sheet.

If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500,you will ________.

The seller of an option has the

By selling short a futures contract of $100,000 at a price of 96,you are agreeing to deliver ________ face value securities for ________.

Options are contracts that give the purchasers the

Interest-rate swaps are more liquid than futures contracts.

An increase in the exercise price,all other things held constant,will ________ the premium on call options.

Futures trading is regulated by the Commodity Futures Trading Commission.

The advantage of forward contracts over futures contracts is that forward contracts

Intermediaries are active in the swap markets because

The disadvantage of swaps is that

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

By selling short a futures contract of $100,000 at a price of 96,you are agreeing to deliver face value securities for .