Exam 10: Derivative Securities Markets

Measured by the amount outstanding,the largest type of derivative market in the world is the

Buying an "at-the-money" call option and writing an "at-the-money" put option are two ways to make money when prices rise. When would each be the preferable strategy?

Which of the following is true?

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.

A U.S. firm has a European subsidiary that earns euros. The subsidiary has borrowed dollars at a floating rate of interest. What kind of risk does the subsidiary have? What kind of swap could be used to limit the subsidiary's risk? Be specific.

European-style options are options that may only be exercised at maturity.

A contract wherein the buyer agrees to pay a specified interest rate on a loan that will be originated at some future time is called a(n)

If you think that interest rates are likely to rise substantially over the next several years,you might sell a T-bond futures contract or buy an interest rate cap to take advantage of your expectations.

Two competing fully electronic derivatives markets in the United States are

Your firm enters into a swap agreement with a notional principal of $40 million wherein the firm pays a fixed rate of interest of 5.50 percent and receives a variable rate of interest equal to LIBOR plus 150 basis points. If LIBOR is currently 3.75 percent,the NET amount your firm will receive (+)or pay (−)on the next transaction date is

An increase in which of the following would increase the price of a call option on common stock,ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price

A stock is priced at $27. An American call option on this stock with a $25 strike must be worth at least how much? Numerically show why.

You have taken a stock option position and,if the stock's price increases,you could lose a fixed small amount of money,but if the stock's price decreases,your gain increases. You must have ________.

An in the money American call option increases in value as expiration approaches,but an out of the money American call option decreases in value as expiration approaches.

An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes. However,he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?

Futures or option exchange members who take positions on contracts for only a few moments are called scalpers.

A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n)

The purchaser of a T-bond futures contract priced at 101-16 at the time of sale agrees to deliver $100,000 face value Treasury bonds in exchange for receiving $101,500 at contract maturity.

A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.

A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk? I. Buy a cap. II. Buy an interest rate swap. III. Buy a floor. IV. Sell an interest rate swap.