Question 1

Financial derivatives include ________.

Accepted Answer

A) stocks 
B) bonds 
C) futures 
D) none of the above 
A) stocks 
B) bonds 
C) futures 
D) none of the above

Question 2

Futures trading is regulated by the Commodity Futures Trading Commission.

Accepted Answer

A) True 
 B)False

Question 3

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 4

A call option gives the seller the ________ to ________ the underlying security.

Accepted Answer

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

Question 5

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 6

The number of contracts outstanding in a particular financial future is the ________.

Accepted Answer

A) demand coefficient 
B) open interest 
C) index level 
D) outstanding balance 
A) demand coefficient 
B) open interest 
C) index level 
D) outstanding balance

Question 7

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 8

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 9

A contract that requires the investor to 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

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 11

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 12

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

Accepted Answer

A) premium 
B) strike price 
C) exercise price 
D) both B and C of the above. 
A) premium 
B) strike price 
C) exercise price 
D) both B and C of the above.

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

Interest-rate swaps are more liquid than futures contracts.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Define and distinguish between call options and put options.

Accepted Answer

Call options and put options are financi

Question 17

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

Accepted Answer

A) premium 
B) call 
C) strike price 
D) put 
A) premium 
B) call 
C) strike price 
D) put

Question 18

An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a(n)________.

Accepted Answer

A) call option 
B) put option 
C) American option 
D) European option 
A) call option 
B) put option 
C) American option 
D) European option

Question 19

Explain how a long hedge could be used to protect a bank from the risk that interest rates could rise before a loan is funded.

Accepted Answer

A long hedge could be used by a bank to

Question 20

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.

Exam 24: Hedging With Financial Derivatives

Financial derivatives include ________.

Futures trading is regulated by the Commodity Futures Trading Commission.

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

A call option gives the seller the ________ to ________ the underlying security.

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 number of contracts outstanding in a particular financial future is the ________.

Futures contracts are regularly traded on the

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

A contract that requires the investor to buy securities on a future date is called a ________.

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

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

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

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

Interest-rate swaps are more liquid than futures contracts.

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

Define and distinguish between call options and put options.

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a(n)________.

Explain how a long hedge could be used to protect a bank from the risk that interest rates could rise before a loan is funded.

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

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

A call option gives the seller the to the underlying security.

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