Question 1

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 2

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 3

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 4

An option that can be exercised at any time up to 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 5

If Friendly Finance Company has more rate-sensitive assets than rate-sensitive liabilities, it may reduce risk with a swap.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) short contract 
B) long contract 
C) hedge 
D) micro hedge 
A) short contract 
B) long contract 
C) hedge 
D) micro hedge

Question 7

Futures contracts are standardized.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Define and distinguish between call options and put options.

Accepted Answer

Call options and put options are financi

Question 10

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 11

One problem with a futures contract is finding a counterparty.

Accepted Answer

A) True 
 B)False

Question 12

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 13

An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.

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 14

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 15

When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called 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 16

A call option gives the owner 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 17

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 18

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 19

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 20

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

Exam 24: Hedging With Financial Derivatives

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

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

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

An option that can be exercised at any time up to maturity is called a(n)________.

If Friendly Finance Company has more rate-sensitive assets than rate-sensitive liabilities, it may reduce risk with a swap.

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

Futures contracts are standardized.

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.

Define and distinguish between call options and put options.

The disadvantage of swaps is that

One problem with a futures contract is finding a counterparty.

Options are contracts that give the purchasers the

An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.

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

When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a ________.

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

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

The agency which regulates futures options is the

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

Options on futures contracts are referred to as ________.

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 owner the to the underlying security.