Question 1

All other things held constant,premiums on both put and call options will increase when the

Accepted Answer

A)  exercise price increases. 
B)  volatility of the underlying asset increases. 
C)  term to maturity decreases. 
D)  futures price increases. 
A)  exercise price increases. 
B)  volatility of the underlying asset increases. 
C)  term to maturity decreases. 
D)  futures price increases.

Question 2

A forward contract is more flexible than a futures contract.

Accepted Answer

A) True 
 B)False

Question 3

Financial derivatives include ________.

Accepted Answer

A)  stocks 
B)  bonds 
C)  forward contracts 
D)  both A and B 
A)  stocks 
B)  bonds 
C)  forward contracts 
D)  both A and B

Question 4

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 liquid. 
D)  are none of the above. 
A)  are standardized. 
B)  have lower default risk. 
C)  are more liquid. 
D)  are none of the above.

Question 5

An option that can be exercised at any time up to 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 6

To reduce foreign exchange risk from selling goods to a foreign country,futures contracts should be sold.

Accepted Answer

A) True 
 B)False

Question 7

If a financial institution uses stock index futures to completely hedge the systematic component of its stock portfolio,the resulting portfolio will have a beta close to ________.

Accepted Answer

A)  0.00 
B)  1.00 
C)  2.00 
D)  0.50. 
A)  0.00 
B)  1.00 
C)  2.00 
D)  0.50.

Question 8

The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is

Accepted Answer

A)  controlled while preserving the possibility of gains. 
B)  controlled while removing the possibility of losses. 
C)  not controlled but the possibility of gains is preserved. 
D)  not controlled but the possibility of gains is lost. 
A)  controlled while preserving the possibility of gains. 
B)  controlled while removing the possibility of losses. 
C)  not controlled but the possibility of gains is preserved. 
D)  not controlled but the possibility of gains is lost.

Question 9

The elimination of riskless profit opportunities in the futures market is referred to as ________.

Accepted Answer

A)  speculation 
B)  hedging 
C)  arbitrage 
D)  open interest 
E)  mark to market 
A)  speculation 
B)  hedging 
C)  arbitrage 
D)  open interest 
E)  mark to market

Question 10

Futures differ from forwards because they are

Accepted Answer

A)  used to hedge portfolios. 
B)  used to hedge individual securities. 
C)  used in both financial and foreign exchange markets. 
D)  marked to market daily. 
A)  used to hedge portfolios. 
B)  used to hedge individual securities. 
C)  used in both financial and foreign exchange markets. 
D)  marked to market daily.

Question 11

Who would be most likely to buy a long stock index future?

Accepted Answer

A)  A mutual fund manager who believes the market will rise 
B)  A mutual fund manager who believes the market will fall 
C)  A mutual fund manager who believes the market will be stable 
D)  None of the above would be likely to purchase a futures contract 
A)  A mutual fund manager who believes the market will rise 
B)  A mutual fund manager who believes the market will fall 
C)  A mutual fund manager who believes the market will be stable 
D)  None of the above would be likely to purchase a futures contract

Question 12

The agency responsible for regulation of the futures exchanges and trading in financial futures is the

Accepted Answer

A)  Commodity Futures Trading Commission. 
B)  Securities and Exchange Commission. 
C)  Federal Trade Commission. 
D)  Futures Exchange Commission. 
A)  Commodity Futures Trading Commission. 
B)  Securities and Exchange Commission. 
C)  Federal Trade Commission. 
D)  Futures Exchange Commission.

Question 13

How would a firm use exchange rate futures to lock in current exchange rates?

Accepted Answer

For firms future changes in exchange rat

Question 14

Interest-rate swaps involve the exchange of a set of payments in one currency for a set of payments in another.

Accepted Answer

A) True 
 B)False

Question 15

The purpose of the Commodity Futures Trading Commission is to do all of the following except

Accepted Answer

A)  oversee futures trading. 
B)  see that prices are not manipulated. 
C)  approve proposed futures contracts. 
D)  establish minimum prices for futures contracts. 
A)  oversee futures trading. 
B)  see that prices are not manipulated. 
C)  approve proposed futures contracts. 
D)  establish minimum prices for futures contracts.

Question 16

Which of the following is a likely reason for a portfolio manager to sell a stock index future short?

Accepted Answer

A)  He believes the market will rise. 
B)  He wants to lock in current prices. 
C)  He wants to reduce stock market risk. 
D)  Both B and C are correct. 
A)  He believes the market will rise. 
B)  He wants to lock in current prices. 
C)  He wants to reduce stock market risk. 
D)  Both B and C are correct.

Question 17

If a firm must pay for goods it has ordered with foreign currency,it can hedge its foreign exchange rate risk by

Accepted Answer

A)  selling foreign exchange futures short. 
B)  buying foreign exchange futures long. 
C)  staying out of the exchange futures market. 
D)  doing none of the above. 
A)  selling foreign exchange futures short. 
B)  buying foreign exchange futures long. 
C)  staying out of the exchange futures market. 
D)  doing none of the above.

Question 18

Futures contracts are standardized.

Accepted Answer

A) True 
 B)False

Question 19

The global financial crisis illustrates that derivatives cannot be used to hedge - financial institutions should be barred from using them in any form.

Accepted Answer

A) True 
 B)False

Question 20

With a short contract,the investor (may)

Accepted Answer

A)  sell securities in the future. 
B)  buy securities in the future. 
C)  hedge in the future. 
D)  close out his position in the future. 
A)  sell securities in the future. 
B)  buy securities in the future. 
C)  hedge in the future. 
D)  close out his position in the future.

Exam 24: Hedging with Financial Derivatives

All other things held constant,premiums on both put and call options will increase when the

A forward contract is more flexible than a futures contract.

Financial derivatives include ________.

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

An option that can be exercised at any time up to maturity is called a(n)________.

To reduce foreign exchange risk from selling goods to a foreign country,futures contracts should be sold.

If a financial institution uses stock index futures to completely hedge the systematic component of its stock portfolio,the resulting portfolio will have a beta close to ________.

The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is

The elimination of riskless profit opportunities in the futures market is referred to as ________.

Futures differ from forwards because they are

Who would be most likely to buy a long stock index future?

The agency responsible for regulation of the futures exchanges and trading in financial futures is the

How would a firm use exchange rate futures to lock in current exchange rates?

Interest-rate swaps involve the exchange of a set of payments in one currency for a set of payments in another.

The purpose of the Commodity Futures Trading Commission is to do all of the following except

Which of the following is a likely reason for a portfolio manager to sell a stock index future short?

If a firm must pay for goods it has ordered with foreign currency,it can hedge its foreign exchange rate risk by

Futures contracts are standardized.

The global financial crisis illustrates that derivatives cannot be used to hedge - financial institutions should be barred from using them in any form.

With a short contract,the investor (may)

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

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