Question 1

Forward transactions

Accepted Answer

A)  provide substantial liquidity. 
B)  entail small information costs. 
C)  provide risk sharing. 
D)  provide reduced tax payments. 
A)  provide substantial liquidity. 
B)  entail small information costs. 
C)  provide risk sharing. 
D)  provide reduced tax payments.

Question 2

The terms of futures contracts traded in the United States are

Accepted Answer

A)  standardized as to amount or value, but not as to location or time of delivery. 
B)  standardized as to location or time of delivery, but not as to amount or value. 
C)  not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. 
D)  standardized as to amount or value and as to location or time of delivery. 
A)  standardized as to amount or value, but not as to location or time of delivery. 
B)  standardized as to location or time of delivery, but not as to amount or value. 
C)  not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. 
D)  standardized as to amount or value and as to location or time of delivery.

Question 3

Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.

Accepted Answer

Buyers and sellers of futures contracts

Question 4

As an option nears its expiration date,the size of the premium approaches

Accepted Answer

A)  zero. 
B)  infinity. 
C)  its intrinsic value. 
D)  an amount which varies, depending on prevailing market interest rates on the expiration date. 
A)  zero. 
B)  infinity. 
C)  its intrinsic value. 
D)  an amount which varies, depending on prevailing market interest rates on the expiration date.

Question 5

Forward transactions originated in the market for

Accepted Answer

A)  common stock. 
B)  corporate bonds. 
C)  government bonds. 
D)  agricultural and other commodities. 
A)  common stock. 
B)  corporate bonds. 
C)  government bonds. 
D)  agricultural and other commodities.

Question 6

All of the following are roles of a exchange EXCEPT

Accepted Answer

A)  instituting margin requirements on futures contracts. 
B)  marking to market at the end of each day. 
C)  eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D)  reducing the default risk involving forward contracts. 
A)  instituting margin requirements on futures contracts. 
B)  marking to market at the end of each day. 
C)  eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. 
D)  reducing the default risk involving forward contracts.

Question 7

In comparing futures contracts with options contracts,we can say that

Accepted Answer

A)  in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B)  in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract,the buyer and seller have symmetric rights. 
C)  in both futures and options contracts, the buyer and seller have symmetric rights. 
D)  in both futures and options contracts, the buyer and seller have asymmetric rights. 
A)  in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. 
B)  in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract,the buyer and seller have symmetric rights. 
C)  in both futures and options contracts, the buyer and seller have symmetric rights. 
D)  in both futures and options contracts, the buyer and seller have asymmetric rights.

Question 8

The role of the Commodity Futures Trading Commission is to

Accepted Answer

A)  set the prices of futures contracts. 
B)  operate the Chicago Mercantile Exchange. 
C)  operate the Chicago Board of Trade. 
D)  monitor potential price manipulation in futures trading. 
A)  set the prices of futures contracts. 
B)  operate the Chicago Mercantile Exchange. 
C)  operate the Chicago Board of Trade. 
D)  monitor potential price manipulation in futures trading.

Question 9

Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?

Accepted Answer

A)  acquire a derivative that increases in value if grape prices increase 
B)  acquire a derivative that increases in value if grape jelly prices increase 
C)  sell a derivative that increases in value if grape prices increase 
D)  sell a derivative that increases in value if grape jelly prices increase 
A)  acquire a derivative that increases in value if grape prices increase 
B)  acquire a derivative that increases in value if grape jelly prices increase 
C)  sell a derivative that increases in value if grape prices increase 
D)  sell a derivative that increases in value if grape jelly prices increase

Question 10

One difference between futures and options contracts is

Accepted Answer

A)  funds change hands daily in the case of options but not with futures. 
B)  funds change hands daily in the case of futures, but not with options. 
C)  in the case of futures funds only change hands when they are exercised. 
D)  futures are designed to reduce risk while options are not. 
A)  funds change hands daily in the case of options but not with futures. 
B)  funds change hands daily in the case of futures, but not with options. 
C)  in the case of futures funds only change hands when they are exercised. 
D)  futures are designed to reduce risk while options are not.

Question 11

In an options contract,another name for the strike price is the

Accepted Answer

A)  market price. 
B)  exercise price. 
C)  equilibrium price. 
D)  fixed price. 
A)  market price. 
B)  exercise price. 
C)  equilibrium price. 
D)  fixed price.

Question 12

Why must the spot price equal the futures price on the settlement date?

Accepted Answer

If there were differ

Question 13

Using forward transactions allows

Accepted Answer

A)  holders of common stock to lock in future dividend payments. 
B)  the federal government to stabilize fluctuations in tax receipts. 
C)  corporations to reduce problems arising from future fluctuations in their dividend payments. 
D)  both buyers and sellers to reduce risks associated with price fluctuations. 
A)  holders of common stock to lock in future dividend payments. 
B)  the federal government to stabilize fluctuations in tax receipts. 
C)  corporations to reduce problems arising from future fluctuations in their dividend payments. 
D)  both buyers and sellers to reduce risks associated with price fluctuations.

Question 14

In derivative markets,trade takes place in

Accepted Answer

A)  assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B)  assets whose rates of returns must be derived from information published in financial tables. 
C)  assets that derive their value from underlying assets. 
D)  assets which are not allowed to be traded on organized exchanges. 
A)  assets such as bonds or common stock that derive their value from the value of the companies which issue them. 
B)  assets whose rates of returns must be derived from information published in financial tables. 
C)  assets that derive their value from underlying assets. 
D)  assets which are not allowed to be traded on organized exchanges.

Question 15

Suppose you purchase a call option to buy IBM common stock at $35 per share in September.The current price of IBM is 37 and the option premium is 4.What is the intrinsic value of the option? As the expiration date on the option approaches,what will happen to the size of the option premium?

Accepted Answer

The intrinsic value of the option is the

Question 16

In recent decades,

Accepted Answer

A)  trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures. 
B)  trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures. 
C)  trading in agricultural and commodities futures was discontinued. 
D)  trading in financial futures was discontinued. 
A)  trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures. 
B)  trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures. 
C)  trading in agricultural and commodities futures was discontinued. 
D)  trading in financial futures was discontinued.

Question 17

How does hedging affect the flow of funds in the financial system?

Accepted Answer

A)  It reduces it since it is a sign that investors do not like risk. 
B)  It reduces it because it increases risk by encouraging speculation. 
C)  It increases it because it reduces risk thus encouraging more people to make financial investments. 
D)  It increases it by encouraging more speculation. 
A)  It reduces it since it is a sign that investors do not like risk. 
B)  It reduces it because it increases risk by encouraging speculation. 
C)  It increases it because it reduces risk thus encouraging more people to make financial investments. 
D)  It increases it by encouraging more speculation.

Question 18

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share.The intrinsic value of your option is

Accepted Answer

A)  $25. 
B)  $75. 
C)  $100. 
D)  not possible to determine in the absence of information on values of the share price of Acme Widget between now and the expiration date of the call. 
A)  $25. 
B)  $75. 
C)  $100. 
D)  not possible to determine in the absence of information on values of the share price of Acme Widget between now and the expiration date of the call.

Question 19

Hedgers are primarily interested in

Accepted Answer

A)  betting on anticipated changes in prices. 
B)  reducing their exposure to the risk of price fluctuations. 
C)  increasing market liquidity. 
D)  reducing the spread between bid and ask prices on bonds. 
A)  betting on anticipated changes in prices. 
B)  reducing their exposure to the risk of price fluctuations. 
C)  increasing market liquidity. 
D)  reducing the spread between bid and ask prices on bonds.

Question 20

Why may some investors prefer forward contracts to futures?

Accepted Answer

Forward contracts ar

Forward transactions

The terms of futures contracts traded in the United States are

Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.

As an option nears its expiration date,the size of the premium approaches

Forward transactions originated in the market for

All of the following are roles of a exchange EXCEPT

In comparing futures contracts with options contracts,we can say that

The role of the Commodity Futures Trading Commission is to

Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?

One difference between futures and options contracts is

In an options contract,another name for the strike price is the

Why must the spot price equal the futures price on the settlement date?

Using forward transactions allows

In derivative markets,trade takes place in

Suppose you purchase a call option to buy IBM common stock at $35 per share in September.The current price of IBM is 37 and the option premium is 4.What is the intrinsic value of the option? As the expiration date on the option approaches,what will happen to the size of the option premium?

In recent decades,

How does hedging affect the flow of funds in the financial system?

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share.The intrinsic value of your option is

Hedgers are primarily interested in

Why may some investors prefer forward contracts to futures?

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

Exam 7: Derivatives and Derivative Markets

Forward transactions

The terms of futures contracts traded in the United States are

Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.

As an option nears its expiration date,the size of the premium approaches

Forward transactions originated in the market for

All of the following are roles of a exchange EXCEPT

In comparing futures contracts with options contracts,we can say that

The role of the Commodity Futures Trading Commission is to

Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?

One difference between futures and options contracts is

In an options contract,another name for the strike price is the

Why must the spot price equal the futures price on the settlement date?

Using forward transactions allows

In derivative markets,trade takes place in

Suppose you purchase a call option to buy IBM common stock at $35 per share in September.The current price of IBM is 37 and the option premium is 4.What is the intrinsic value of the option? As the expiration date on the option approaches,what will happen to the size of the option premium?

In recent decades,

How does hedging affect the flow of funds in the financial system?

Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share.The intrinsic value of your option is

Hedgers are primarily interested in

Why may some investors prefer forward contracts to futures?

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