Question 1

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 A

Question 2

The agency which regulates stock 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. A

Question 3

A swap that involves the exchange of one set of interest payments for another set of interest payments is called 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 A

Question 4

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 5

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 6

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 7

Using options to control interest-rate risk reduces the chance of a loss but increases the chance of a gain.

Accepted Answer

A) True 
 B)False

Question 8

An option that gives the holder the right to buy an asset in the future is a put.

Accepted Answer

A) True 
 B)False

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

Intermediaries add value to the swap markets by reducing default risk.

Accepted Answer

A) True 
 B)False

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

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 13

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 14

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 15

Explain how option contracts could be used to protect against losses in portfolio value that may occur as interest rates increase.

Accepted Answer

Option contracts can be used to protect

Question 16

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 flexible. 
D) both A and B are true. 
A) are standardized. 
B) have lower default risk. 
C) are more flexible. 
D) both A and B are true.

Question 17

If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to

Accepted Answer

A) pay a fixed rate while receiving a floating rate. 
B) receive a fixed rate while paying a floating rate. 
C) both receive and pay a fixed rate. 
D) both receive and pay a floating rate. 
A) pay a fixed rate while receiving a floating rate. 
B) receive a fixed rate while paying a floating rate. 
C) both receive and pay a fixed rate. 
D) both receive and pay a floating rate.

Question 18

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 19

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 20

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.

Exam 24: Hedging With Financial Derivatives

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

The agency which regulates stock options is the

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

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

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

Which is not a problem of forward contracts?

Using options to control interest-rate risk reduces the chance of a loss but increases the chance of a gain.

An option that gives the holder the right to buy an asset in the future is a put.

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

Intermediaries add value to the swap markets by reducing default risk.

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

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

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.

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

Explain how option contracts could be used to protect against losses in portfolio value that may occur as interest rates increase.

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

If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to

Futures contracts are regularly traded on 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)________.

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

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

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.