Question 1

An interest rate collar is

Accepted Answer

A) writing a floor and writing a cap. 
B) buying a cap and writing a floor. 
C) an option on a futures contract. 
D) buying a cap and buying a floor. 
E) None of these choices are correct. 
A) writing a floor and writing a cap. 
B) buying a cap and writing a floor. 
C) an option on a futures contract. 
D) buying a cap and buying a floor. 
E) None of these choices are correct.

Question 2

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans,the bank could
I. enter into a swap to pay fixed and receive variable.
II. enter into a swap to pay variable and receive fixed.
III. buy an interest rate floor.
IV. buy an interest rate cap.

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only

Question 3

An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next six months. The stock is at $45 and she buys a six-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?

Accepted Answer

A) −$500 
B) −$750 
C) −$900 
D) $400 
E) $500 
A) −$500 
B) −$750 
C) −$900 
D) $400 
E) $500

Question 4

A negotiated non-standardized agreement between a buyer and seller (with no third-party involvement)to exchange an asset for cash at some future date with the price set today is called a forward agreement.

Accepted Answer

A) True 
 B)False

Question 5

The higher the exercise price,the ________ the value of a put and the ________ the value of a call.

Accepted Answer

A) higher; higher 
B) lower; lower 
C) higher; lower 
D) lower; higher 
A) higher; higher 
B) lower; lower 
C) higher; lower 
D) lower; higher

Question 6

An interest rate floor is designed to protect an institution from
I. falling interest rates.
II. falling bond prices.
III. increased credit risk on loans.
IV. swap counterparty credit risk.

Accepted Answer

A) I and IV 
B) II and III 
C) I and III 
D) II and IV 
E) I only 
A) I and IV 
B) II and III 
C) I and III 
D) II and IV 
E) I only

Question 7

A stock is priced at $33.25. The stock has call options with an exercise price of $35 that expire in 60 days. The underlying stock price volatility is 39 percent per year and the annual risk-free rate is 4.5 percent. According to the Black-Scholes option pricing model,what is the most you should be willing to pay for this call option?   
   
Using the Normsdist function in Excel to find N(dx)
C0 = ($33.25 × 0.42131)- [$35e−0.045(60/365)× 0.3607]= $1.4781 or $147.81 per contract

Accepted Answer

Note to Instructor: This is an

Question 8

An agreement between two parties to exchange a series of specified periodic cash flows in the future based on some underlying instrument or price is a(n)

Accepted Answer

A) forward agreement. 
B) futures contract. 
C) interest rate collar. 
D) option contract. 
E) swap contract. 
A) forward agreement. 
B) futures contract. 
C) interest rate collar. 
D) option contract. 
E) swap contract.

Question 9

Refer to the Listed Stock Option Price Quote from February and assume it is now January:
 
Based on the option quote,the June put should cost
I. more than $477.
II. more than $665.
III. more than the March and June 60 calls.
IV. more than the March 60 call but no more than the June 60 call.

Accepted Answer

A) I only 
B) I,II,and IV only 
C) I,II,and III only 
D) I and III only 
E) IV only 
A) I only 
B) I,II,and IV only 
C) I,II,and III only 
D) I and III only 
E) IV only

Question 10

Forward contracts are marked to market daily.

Accepted Answer

A) True 
 B)False

Question 11

When would a forward contract be better for hedging than a futures contract?

Accepted Answer

A forward contract is better suited for

Question 12

Of the following,the most recent derivative security innovations are

Accepted Answer

A) foreign currency futures. 
B) interest rate futures. 
C) stock index futures. 
D) stock options. 
E) credit derivatives. 
A) foreign currency futures. 
B) interest rate futures. 
C) stock index futures. 
D) stock options. 
E) credit derivatives.

Question 13

A clearinghouse backs the buyer's and seller's position in a forward contract.

Accepted Answer

A) True 
 B)False

Question 14

When would an option hedge be better than a futures or forward hedge?

Accepted Answer

An option hedge is better than a futures

Question 15

When might an option on a futures contract be preferable to an option on the underlying instrument?

Accepted Answer

In general,the option on the futures wil

Question 16

American options can only be exercised at maturity.

Accepted Answer

A) True 
 B)False

Question 17

In a bear market,which option positions make money?
I. Buying a call.
II. Writing a call.
III. Buying a put.
IV. Writing a put.

Accepted Answer

A) I and II 
B) I and III 
C) II and IV 
D) II and III 
E) I and IV 
A) I and II 
B) I and III 
C) II and IV 
D) II and III 
E) I and IV

Question 18

Refer to the Listed Stock Option Price Quote from February and assume it is now January:
 
Based on the option quote,the March call should cost

Accepted Answer

A) more than $477. 
B) more than $102. 
C) less than $665 but more than $477. 
D) less than $225. 
E) $0. 
A) more than $477. 
B) more than $102. 
C) less than $665 but more than $477. 
D) less than $225. 
E) $0.

Question 19

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

Accepted Answer

A) a long position in a futures contract. 
B) a short position in a futures contract. 
C) sold a forward contract. 
D) purchased a forward contract. 
E) purchased a call option on a futures contract. 
A) a long position in a futures contract. 
B) a short position in a futures contract. 
C) sold a forward contract. 
D) purchased a forward contract. 
E) purchased a call option on a futures contract.

Question 20

How does a futures or option clearinghouse assist traders?

Accepted Answer

The clearinghouse interposes itself betw

Exam 10: Derivative Securities Markets

An interest rate collar is

A negotiated non-standardized agreement between a buyer and seller (with no third-party involvement)to exchange an asset for cash at some future date with the price set today is called a forward agreement.

The higher the exercise price,the ________ the value of a put and the ________ the value of a call.

An interest rate floor is designed to protect an institution from I. falling interest rates. II. falling bond prices. III. increased credit risk on loans. IV. swap counterparty credit risk.

An agreement between two parties to exchange a series of specified periodic cash flows in the future based on some underlying instrument or price is a(n)

Refer to the Listed Stock Option Price Quote from February and assume it is now January: Based on the option quote,the June put should cost I. more than $477. II. more than $665. III. more than the March and June 60 calls. IV. more than the March 60 call but no more than the June 60 call.

Forward contracts are marked to market daily.

When would a forward contract be better for hedging than a futures contract?

Of the following,the most recent derivative security innovations are

A clearinghouse backs the buyer's and seller's position in a forward contract.

When would an option hedge be better than a futures or forward hedge?

When might an option on a futures contract be preferable to an option on the underlying instrument?

American options can only be exercised at maturity.

In a bear market,which option positions make money? I. Buying a call. II. Writing a call. III. Buying a put. IV. Writing a put.

Refer to the Listed Stock Option Price Quote from February and assume it is now January: Based on the option quote,the March call should cost

You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have

How does a futures or option clearinghouse assist traders?

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

The higher the exercise price,the the value of a put and the the value of a call.