Question 1

Swaps differ from futures and options in all of the following ways EXCEPT:

Accepted Answer

A)  intended to reduce the risk faced by participants. 
B)  more flexibility. 
C)  more privacy. 
D)  less regulation. 
A)  intended to reduce the risk faced by participants. 
B)  more flexibility. 
C)  more privacy. 
D)  less regulation. A

Question 2

The existence of counterparty risk

Accepted Answer

A)  has no effect on the contracting parties. 
B)  is disallowed under current government regulations. 
C)  results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners. 
D)  reduces the risk introduced by forward contracts. 
A)  has no effect on the contracting parties. 
B)  is disallowed under current government regulations. 
C)  results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners. 
D)  reduces the risk introduced by forward contracts. C

Question 3

Why do futures have lower information costs and higher liquidity than forward contracts?

Accepted Answer

The exchange stands as a counterparty to each trade,thus reducing counterparty risk and information costs.The reduced risk and information costs,along with the standardization of contract terms,increase the willingness of investors to buy and sell futures contracts.The large number of buyers and sellers results in increased liquidity.

Question 4

AIG almost went bankrupt in 2008 because

Accepted Answer

A)  the value of the securities underlying its credit default swaps declined significantly. 
B)  it lacked the collateral required by buyers of its credit default swaps. 
C)  prices of securities underlying their credit default swaps were hard to determine since they were no longer actively traded. 
D)  all of the above. 
A)  the value of the securities underlying its credit default swaps declined significantly. 
B)  it lacked the collateral required by buyers of its credit default swaps. 
C)  prices of securities underlying their credit default swaps were hard to determine since they were no longer actively traded. 
D)  all of the above.

Question 5

Explain how each of the following might make use of the futures market.
(a)A lender who is worried that its cost of funds might rise during the term of a loan it has made
(b)A speculator who believes strongly that interest rates will rise

Accepted Answer

(a)The lender could hedge the

Question 6

Which of the following is NOT a benefit of derivatives?

Accepted Answer

A)  risk sharing 
B)  guaranteed minimum profit 
C)  liquidity 
D)  information services 
A)  risk sharing 
B)  guaranteed minimum profit 
C)  liquidity 
D)  information services

Question 7

If the price of a futures contract increases,then

Accepted Answer

A)  the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract. 
B)  the exchange will collect the amount of the increase from the buyer of the contract and transfer it to the account of the seller of the contract. 
C)  the exchange will collect the amount of the increase from both the buyer and the seller and place it in escrow until the delivery date. 
D)  the additional funds will be required from either the buyer or the seller until the delivery date. 
A)  the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract. 
B)  the exchange will collect the amount of the increase from the buyer of the contract and transfer it to the account of the seller of the contract. 
C)  the exchange will collect the amount of the increase from both the buyer and the seller and place it in escrow until the delivery date. 
D)  the additional funds will be required from either the buyer or the seller until the delivery date.

Question 8

If you buy a futures contract for U.S.Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected,you will have

Accepted Answer

A)  lost money on your long position. 
B)  gained money on your long position. 
C)  lost money on your short position. 
D)  gained money on your short position. 
A)  lost money on your long position. 
B)  gained money on your long position. 
C)  lost money on your short position. 
D)  gained money on your short position.

Question 9

Which of the following factors would tend to increase the size of the premium on an options contract?

Accepted Answer

A)  The option is near its expiration date. 
B)  The current default-risk-free interest rate is high. 
C)  The price volatility of the underlying asset is low. 
D)  The option is far away from its expiration date. 
A)  The option is near its expiration date. 
B)  The current default-risk-free interest rate is high. 
C)  The price volatility of the underlying asset is low. 
D)  The option is far away from its expiration date.

Question 10

Southwest Airlines relies on jet fuel to operate its planes.If it chooses to hedge against future changes in fuel prices,what positions (long or short)will it take in the spot and futures markets?

Accepted Answer

Southwest will take

Question 11

The seller of a futures contract

Accepted Answer

A)  assumes the short position. 
B)  assumes the long position. 
C)  has the obligation to receive the underlying financial instrument at the specified future date. 
D)  is expecting the price of the underlying financial instrument to rise. 
A)  assumes the short position. 
B)  assumes the long position. 
C)  has the obligation to receive the underlying financial instrument at the specified future date. 
D)  is expecting the price of the underlying financial instrument to rise.

Question 12

Marking to market refers to

Accepted Answer

A)  the determination of the prices of options contracts by the interaction of demand and supply. 
B)  the determination of the prices of futures contracts by the interaction of demand and supply. 
C)  the settlement of gains and losses on futures contracts each day. 
D)  the settlement of gains and losses on forward contracts each day. 
A)  the determination of the prices of options contracts by the interaction of demand and supply. 
B)  the determination of the prices of futures contracts by the interaction of demand and supply. 
C)  the settlement of gains and losses on futures contracts each day. 
D)  the settlement of gains and losses on forward contracts each day.

Question 13

As the time of delivery in a futures contract gets closer

Accepted Answer

A)  the futures price gets closer to the spot price. 
B)  the futures price generally rises further above the spot price. 
C)  the futures price generally falls further below the spot price. 
D)  the futures and spot prices remain the same as they were when the contract was first created. 
A)  the futures price gets closer to the spot price. 
B)  the futures price generally rises further above the spot price. 
C)  the futures price generally falls further below the spot price. 
D)  the futures and spot prices remain the same as they were when the contract was first created.

Question 14

A key reason that firms and financial institutions might participate in an interest rate swap is

Accepted Answer

A)  to transfer interest rate risk to parties that are more willing to bear it. 
B)  the low information costs of swaps compared with other derivative contracts. 
C)  the greater liquidity of swaps compared with other derivative contracts. 
D)  the favorable tax implications of swaps compared with other derivative contracts. 
A)  to transfer interest rate risk to parties that are more willing to bear it. 
B)  the low information costs of swaps compared with other derivative contracts. 
C)  the greater liquidity of swaps compared with other derivative contracts. 
D)  the favorable tax implications of swaps compared with other derivative contracts.

Question 15

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

Accepted Answer

A)  swaption. 
B)  swap option. 
C)  forward swaps. 
D)  plain vanilla. 
A)  swaption. 
B)  swap option. 
C)  forward swaps. 
D)  plain vanilla.

Question 16

The initial deposit required by a buyer or seller of a futures contract is known as

Accepted Answer

A)  credit. 
B)  margin requirement. 
C)  debit. 
D)  marking. 
A)  credit. 
B)  margin requirement. 
C)  debit. 
D)  marking.

Question 17

Why are forward contracts typically illiquid?

Accepted Answer

Because forward contracts usually contai

Question 18

Clearinghouses help to reduce default risk by

Accepted Answer

A)  being the intermediary in trades for buyers and sellers. 
B)  margin requirements. 
C)  marking to market. 
D)  all of the above. 
A)  being the intermediary in trades for buyers and sellers. 
B)  margin requirements. 
C)  marking to market. 
D)  all of the above.

Question 19

All of the following are problems cited by Warren Buffet as problems with derivatives not traded on exchanges EXCEPT

Accepted Answer

A)  they are thinly traded which makes it difficult to determine their value. 
B)  firms do not set aside reserves against potential losses. 
C)  they involve substantial counterparty risk. 
D)  they were not flexible enough due to lack of standardization. 
A)  they are thinly traded which makes it difficult to determine their value. 
B)  firms do not set aside reserves against potential losses. 
C)  they involve substantial counterparty risk. 
D)  they were not flexible enough due to lack of standardization.

Question 20

Forward transactions

Accepted Answer

A)  provide little risk sharing. 
B)  are very liquid. 
C)  have information problems. 
D)  are widely used by sellers of commodities, but rarely used by buyers of commodities. 
A)  provide little risk sharing. 
B)  are very liquid. 
C)  have information problems. 
D)  are widely used by sellers of commodities, but rarely used by buyers of commodities.

Swaps differ from futures and options in all of the following ways EXCEPT:

The existence of counterparty risk

Why do futures have lower information costs and higher liquidity than forward contracts?

AIG almost went bankrupt in 2008 because

Explain how each of the following might make use of the futures market. (a)A lender who is worried that its cost of funds might rise during the term of a loan it has made (b)A speculator who believes strongly that interest rates will rise

Which of the following is NOT a benefit of derivatives?

If the price of a futures contract increases,then

If you buy a futures contract for U.S.Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected,you will have

Which of the following factors would tend to increase the size of the premium on an options contract?

Southwest Airlines relies on jet fuel to operate its planes.If it chooses to hedge against future changes in fuel prices,what positions (long or short)will it take in the spot and futures markets?

The seller of a futures contract

Marking to market refers to

As the time of delivery in a futures contract gets closer

A key reason that firms and financial institutions might participate in an interest rate swap is

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

The initial deposit required by a buyer or seller of a futures contract is known as

Why are forward contracts typically illiquid?

Clearinghouses help to reduce default risk by

All of the following are problems cited by Warren Buffet as problems with derivatives not traded on exchanges EXCEPT

Forward transactions

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

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Exam 7: Derivatives and Derivative Markets

Swaps differ from futures and options in all of the following ways EXCEPT:

The existence of counterparty risk

Why do futures have lower information costs and higher liquidity than forward contracts?

AIG almost went bankrupt in 2008 because

Explain how each of the following might make use of the futures market. (a)A lender who is worried that its cost of funds might rise during the term of a loan it has made (b)A speculator who believes strongly that interest rates will rise

Which of the following is NOT a benefit of derivatives?

If the price of a futures contract increases,then

If you buy a futures contract for U.S.Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected,you will have

Which of the following factors would tend to increase the size of the premium on an options contract?

Southwest Airlines relies on jet fuel to operate its planes.If it chooses to hedge against future changes in fuel prices,what positions (long or short)will it take in the spot and futures markets?

The seller of a futures contract

Marking to market refers to

As the time of delivery in a futures contract gets closer

A key reason that firms and financial institutions might participate in an interest rate swap is

An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

The initial deposit required by a buyer or seller of a futures contract is known as

Why are forward contracts typically illiquid?

Clearinghouses help to reduce default risk by

All of the following are problems cited by Warren Buffet as problems with derivatives not traded on exchanges EXCEPT

Forward transactions

Introducing Money and the Financial System

Money and the Payments System

Interest Rates and Rates of Return

Determining Interest Rates

The Risk Structure and Term Structure of Interest Rates

The Stock Market, information, and Financial Market Efficiency

The Market for Foreign Exchange

Transactions Costs, asymmetric Information, and the Structure of the Financial System

The Economics of Banking

Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System

Financial Crises and Financial Regulation

The Federal Reserve and Central Banking

The Federal Reserves Balance Sheet and the Money Supply Process

Monetary Policy

The International Financial System and Monetary Policy

Monetary Theory I: the Aggregate Demand and Aggregate Supply Model

Monetary Theory Ii: the Is-Mp Model

Filters