Question 1

With a long 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.

Question 2

Futures contracts are regularly traded on the

Accepted Answer

A)  Chicago Board of Trade. 
B)  New York Stock Exchange. 
C)  American Stock Exchange. 
D)  Chicago Board Options Exchange. 
A)  Chicago Board of Trade. 
B)  New York Stock Exchange. 
C)  American Stock Exchange. 
D)  Chicago Board Options Exchange.

Question 3

By selling short a futures contract of $100,000 at a price of 115,you are agreeing to deliver ________ face value securities for ________.

Accepted Answer

A)  $100,000; $115,000 
B)  $115,000; $110,000 
C)  $100,000; $100,000 
D)  $115,000; $115,000 
A)  $100,000; $115,000 
B)  $115,000; $110,000 
C)  $100,000; $100,000 
D)  $115,000; $115,000

Question 4

The main reason to buy an option on a futures contract rather than the futures contract itself is

Accepted Answer

A)  to reduce transaction cost. 
B)  to preserve the possibility for gains. 
C)  to limit losses. 
D)  to remove the possibility for gains. 
A)  to reduce transaction cost. 
B)  to preserve the possibility for gains. 
C)  to limit losses. 
D)  to remove the possibility for gains.

Question 5

If a firm is due to be paid in euros in two months,to hedge against exchange rate risk the firm should

Accepted Answer

A)  sell foreign exchange futures short. 
B)  buy foreign exchange futures long. 
C)  stay out of the exchange futures market. 
D)  do none of the above. 
A)  sell foreign exchange futures short. 
B)  buy foreign exchange futures long. 
C)  stay out of the exchange futures market. 
D)  do none of the above.

Question 6

As compared to a default on the notional principle,a default on a swap

Accepted Answer

A)  is more costly. 
B)  is about as costly. 
C)  is less costly. 
D)  may cost more or less than default on the notional principle. 
A)  is more costly. 
B)  is about as costly. 
C)  is less costly. 
D)  may cost more or less than default on the notional principle.

Question 7

If you buy an option to sell 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 8

The most widely traded stock index future is on the

Accepted Answer

A)  Dow Jones 1000 index. 
B)  S&P 500 index. 
C)  NASDAQ index. 
D)  Dow Jones 30 index. 
A)  Dow Jones 1000 index. 
B)  S&P 500 index. 
C)  NASDAQ index. 
D)  Dow Jones 30 index.

Question 9

Define and distinguish between call options and put options.

Accepted Answer

Call options and put options are financi

Question 10

If a bank has a gap of -$10 million,it can reduce its interest-rate risk by

Accepted Answer

A)  paying a fixed rate on $10 million and receiving a floating rate on $10 million. 
B)  paying a floating rate on $10 million and receiving a fixed rate on $10 million. 
C)  selling $20 million fixed-rate assets. 
D)  buying $20 million fixed-rate assets. 
A)  paying a fixed rate on $10 million and receiving a floating rate on $10 million. 
B)  paying a floating rate on $10 million and receiving a fixed rate on $10 million. 
C)  selling $20 million fixed-rate assets. 
D)  buying $20 million fixed-rate assets.

Question 11

The biggest danger of financial derivatives occurs

Accepted Answer

A)  when notional amounts exceed a bank's capital. 
B)  when financial market prices and rates are highly volatile. 
C)  in the trading activities of financial institutions. 
D)  in the large amount of credit exposure. 
A)  when notional amounts exceed a bank's capital. 
B)  when financial market prices and rates are highly volatile. 
C)  in the trading activities of financial institutions. 
D)  in the large amount of credit exposure.

Question 12

Options on individual stocks are referred to as ________.

Accepted Answer

A)  stock options 
B)  futures options 
C)  American options 
D)  individual options 
A)  stock options 
B)  futures options 
C)  American options 
D)  individual options

Question 13

The main disadvantage of futures contracts as compared to options on futures contracts is that futures

Accepted Answer

A)  remove the possibility of gains. 
B)  increase the transactions cost. 
C)  are not as effective a hedge. 
D)  do not remove the possibility of losses. 
A)  remove the possibility of gains. 
B)  increase the transactions cost. 
C)  are not as effective a hedge. 
D)  do not remove the possibility of losses.

Question 14

The use of financial derivatives by financial institutions to hedge can decrease risk.However,they can also increase risk.Which of the following examples illustrates this?

Accepted Answer

A)  Financial derivatives allow financial institutions to increase their leverage. 
B)  Some institutions such huge amounts of derivatives that the amounts exceed capital. 
C)  All of the above are valid examples. 
D)  None of the above are valid examples. 
A)  Financial derivatives allow financial institutions to increase their leverage. 
B)  Some institutions such huge amounts of derivatives that the amounts exceed capital. 
C)  All of the above are valid examples. 
D)  None of the above are valid examples.

Question 15

Which is not a problem of forward contracts?

Accepted Answer

A)  A lack of liquidity 
B)  A lack of flexibility 
C)  The difficulty of finding a counterparty 
D)  Default risk 
A)  A lack of liquidity 
B)  A lack of flexibility 
C)  The difficulty of finding a counterparty 
D)  Default risk

Question 16

Distinguish between forward and futures contracts.

Accepted Answer

Futures are standardized contract and fo

Question 17

A long contract obligates the holder to sell securities in the future.

Accepted Answer

A) True 
 B)False

Exam 24: Hedging with Financial Derivatives

With a long contract,the investor (may)

Futures contracts are regularly traded on the

By selling short a futures contract of $100,000 at a price of 115,you are agreeing to deliver ________ face value securities for ________.

The main reason to buy an option on a futures contract rather than the futures contract itself is

If a firm is due to be paid in euros in two months,to hedge against exchange rate risk the firm should

As compared to a default on the notional principle,a default on a swap

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

The most widely traded stock index future is on the

Define and distinguish between call options and put options.

If a bank has a gap of -$10 million,it can reduce its interest-rate risk by

The biggest danger of financial derivatives occurs

Options on individual stocks are referred to as ________.

The main disadvantage of futures contracts as compared to options on futures contracts is that futures

The use of financial derivatives by financial institutions to hedge can decrease risk.However,they can also increase risk.Which of the following examples illustrates this?

Which is not a problem of forward contracts?

Distinguish between forward and futures contracts.

A long contract obligates the holder to sell securities in the future.

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 115,you are agreeing to deliver face value securities for .