Question 1

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 2

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 3

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 4

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 5

Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?

Accepted Answer

A) standardized contracts 
B) traded up until maturity 
C) not tied to one specific type of bond 
D) marked to market daily 
A) standardized contracts 
B) traded up until maturity 
C) not tied to one specific type of bond 
D) marked to market daily

Question 6

Options on futures contracts 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 7

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 8

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 9

The agency which regulates futures options is the

Accepted Answer

A) Securities and Exchange Commission. 
B) Commodities Futures Trading Commission. 
C) Federal Trade Commission. 
D) Both A and B are true. 
A) Securities and Exchange Commission. 
B) Commodities Futures Trading Commission. 
C) Federal Trade Commission. 
D) Both A and B are true.

Question 10

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 11

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 12

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 13

A short contract requires that the investor

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 14

If you sell a short futures contract, you hope that bond prices will ________.

Accepted Answer

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

Question 15

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 16

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n)________.

Accepted Answer

A) interest-rate swap 
B) currency swap 
C) swaption 
D) notional swap 
A) interest-rate swap 
B) currency swap 
C) swaption 
D) notional swap

Question 17

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

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 18

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 19

The risk that occurs because stock prices fluctuate is called ________.

Accepted Answer

A) stock market risk 
B) reinvestment risk 
C) interest-rate risk 
D) default risk 
A) stock market risk 
B) reinvestment risk 
C) interest-rate risk 
D) default risk

Question 20

Which of the following is not a financial derivative?

Accepted Answer

A) stocks 
B) futures 
C) options 
D) forward contracts 
A) stocks 
B) futures 
C) options 
D) forward contracts

Exam 24: Hedging With Financial Derivatives

The seller of an option has the

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

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

The futures markets have grown rapidly in recent years because

Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?

Options on futures contracts are referred to as ________.

Options are contracts that give the purchasers the

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

The agency which regulates futures options is the

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

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

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

A short contract requires that the investor

If you sell a short futures contract, you hope that bond prices will ________.

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

A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n)________.

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

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

The risk that occurs because stock prices fluctuate is called ________.

Which of the following is not a financial derivative?

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

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