Question 1

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

Accepted Answer

not answered

Question 2

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 B

Question 3

Financial futures are regularly traded on all of the following except the

Accepted Answer

A) Chicago Board of Trade. 
B) Chicago Mercantile Exchange. 
C) New York Futures Exchange. 
D) Chicago Commodity Markets Board. 
A) Chicago Board of Trade. 
B) Chicago Mercantile Exchange. 
C) New York Futures Exchange. 
D) Chicago Commodity Markets Board. D

Question 4

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 5

One advantage of using swaps to eliminate interest-rate risk is that swaps

Accepted Answer

A) are less costly than futures. 
B) are less costly than rearranging balance sheets. 
C) are more liquid than futures. 
D) have better accounting treatment than options. 
A) are less costly than futures. 
B) are less costly than rearranging balance sheets. 
C) are more liquid than futures. 
D) have better accounting treatment than options.

Question 6

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 7

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.

Question 8

By buying a long $100,000 futures contract for 115, you agree to pay ________ for ________ face value securities.

Accepted Answer

A) $100,000; $115,000 
B) $115,000; $100,000 
C) $86,956; $100,000 
D) $86,956; $115,000 
A) $100,000; $115,000 
B) $115,000; $100,000 
C) $86,956; $100,000 
D) $86,956; $115,000

Question 9

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 10

Currency swaps involve the exchange of a set of payments on one currency for a set of payments in another.

Accepted Answer

A) True 
 B)False

Question 11

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 12

To reduce the interest-rate risk of holding a portfolio of bonds, Treasury bond futures contracts should be bought.

Accepted Answer

A) True 
 B)False

Question 13

Why have the futures markets grown so rapidly in recent years?

Accepted Answer

The futures markets have experienced rap

Question 14

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 15

Discuss the challenges regulators face in controlling the use of derivatives by financial institutions.

Accepted Answer

The use of derivatives by financial inst

Question 16

If you buy a long contract on financial futures, you hope interest rates will ________.

Accepted Answer

A) rise 
B) fall 
C) not change 
D) fluctuate 
A) rise 
B) fall 
C) not change 
D) fluctuate

Question 17

Explain how a swap could be used to reduce interest-rate risk for a bank with more rate-sensitive assets than rate-sensitive liabilities.

Accepted Answer

A swap could be used to reduce interest-

Question 18

When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is a ________.

Accepted Answer

A) macro hedge 
B) micro hedge 
C) cross hedge 
D) futures hedge 
A) macro hedge 
B) micro hedge 
C) cross hedge 
D) futures hedge

Question 19

The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

Accepted Answer

A) obligation; right 
B) right; obligation 
C) obligation; obligation 
D) right; right 
A) obligation; right 
B) right; obligation 
C) obligation; obligation 
D) right; right

Question 20

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures.

Accepted Answer

A) buy put 
B) buy call 
C) sell put 
D) sell call 
A) buy put 
B) buy call 
C) sell put 
D) sell call

Exam 24: Hedging With Financial Derivatives

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

Which is not a problem of forward contracts?

Financial futures are regularly traded on all of the following except the

Intermediaries are active in the swap markets because

One advantage of using swaps to eliminate interest-rate risk is that swaps

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

The disadvantage of swaps is that

By buying a long $100,000 futures contract for 115, you agree to pay ________ for ________ face value securities.

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

Currency swaps involve the exchange of a set of payments on one currency for a set of payments in another.

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

To reduce the interest-rate risk of holding a portfolio of bonds, Treasury bond futures contracts should be bought.

Why have the futures markets grown so rapidly in recent years?

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

Discuss the challenges regulators face in controlling the use of derivatives by financial institutions.

If you buy a long contract on financial futures, you hope interest rates will ________.

Explain how a swap could be used to reduce interest-rate risk for a bank with more rate-sensitive assets than rate-sensitive liabilities.

When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is a ________.

The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures.

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 Why Are They so Damaging to the Economy

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

Savings Associations and Credit Unions

Finance Companies

Filters

By buying a long $100,000 futures contract for 115, you agree to pay for face value securities.

The seller of an option has the to buy or sell the underlying asset, while the purchaser of an option has the to buy or sell the asset.