Chapter 10 Reading

One stock option gives the holder the right to buy or sell ______ share(s) of the underlying stock. Multiple choice question. 100 1 10 50

100

Approximately ______ percent of all futures contracts are liquidated before maturity by taking an offsetting position. Multiple choice question. 50 10 75 99

99

The largest options exchange is the Multiple choice question. European Options Exchange. London International Financial Futures Exchange. Chicago Board Options Exchange. Frankfurt Options Exchange.

Chicago Board Options Exchange.

For a call option, if the asset's market price is "S" and the strike price is "X", then the intrinsic value of an in-the-money call option is Multiple choice question. just S. X - S. S - X. just X.

S - X.

The two primary regulators of derivatives trading in the U.S. are the ______ and the ______. Multiple choice question. SEC; U.S. Treasury CFTC; FINRA SEC; Federal Reserve SEC; CFTC

SEC; CFTC

True or false: Commercial banks are required to include swap risk exposure when calculating risk-based capital requirements. True false question. True False

True

True or false: U.S. markets and currencies dominate global derivative securities markets. True false question.TrueFalse

True

For a put option, if the asset's market price is "S" and the strike price is "X", then the intrinsic value of an in-the-money put option is Multiple choice question. S - X. just S. X - S. just X.

X - S.

Options are classified as either ______ options or ______ options. Multiple choice question. short; long profitable; unprofitable call; put high; low

call; put

A _____ is like a call option on interest rates, and is used to hedge against increases in interest rates. Multiple choice question. collar cap futures option floor

cap

The buyer of a cap receives a payment from the seller proportional to the amount that interest rates exceed a specified ______ at maturity. cap rate notional amount floor rate collar rate

cap rate

The buyer of a cap receives a payment from the seller proportional to the amount that interest rates exceed a specified ______ at maturity. Multiple choice question. collar rate cap rate notional amount floor rate

cap rate

One difference between a stock option and a stock index option is that at expiration, the stock index option is always settled in Multiple choice question. cash. stock. treasury bonds. a portfolio of stocks.

cash.

In the post-2008 era, swap markets have introduced ________ to act as the counterparty to both sides of a swap transaction and thus reduce risk to both buyers and sellers. Multiple choice question. credit default swaps central clearinghouses government swap dealers special purpose vehicle

central clearinghouses

Buyers and sellers of futures contracts do not deal directly with each other, but rather with the exchange ________ who ensures that all trades are completed. Multiple choice question. dealer professional trader clearinghouse broker

clearinghouse

The exchange ________ breaks up every trade into a buy and sell transaction and takes the opposite side of each transaction, separating buyers from sellers and guaranteeing that the trades will be completed. Multiple choice question. professional trade clearinghouse dealer broker

clearinghouse

A total return swap provides some protection from both ______ and ______. Multiple choice question. credit risk; foreign exchange risk foreign exchange risk; liquidity risk interest rate risk; foreign exchange risk credit risk; interest rate risk

credit risk; interest rate risk

In an interest rate swap, the buyer and seller exchange payments on the same ______ and based on the same ______. Multiple choice question. notional principal; interest rate dates; interest rate dates; notional principal notional principal; exchange rate

dates; notional principal

Among the professional traders working in futures exchanges, the _______ take a position within a day and liquidate it by day's end. Multiple choice question. auction traders position traders scalpers day traders

day traders

Among the professional traders working in futures exchanges, the _______ take a position within a day and liquidate it by day's end. Multiple choice question. position traders auction traders scalpers day traders

day traders

Futures contracts are not subject to ______ risk. Multiple choice question. exchange rate liquidity interest rate default

default

A(n) _________ generally involves an agreement between two parties to exchange a standard quantity of an asset or cash flow at a predetermined price and at a specified date in the future. Multiple choice question. secondary security linked security derivative security integral security

derivative security

A financial security whose payoff is linked to another, previously issued security is called a(n) Multiple choice question. integral security. secondary security. linked security. derivative security.

derivative security.

Minimum margin levels are set by Multiple choice question. each exchange. the Federal Reserve. the SEC. state regulators.

each exchange.

Futures contracts are ______ contracts with ______ terms and conditions. Multiple choice question. over-the-counter (OTC); customized exchange traded; standardized exchange traded; customized over-the-counter (OTC); standardized

exchange traded; standardized

The CFTC has exclusive jurisdiction over all Multiple choice question. stock option trading. futures contract trading. exchange-traded derivative securities. over-the-counter derivative securities trading.

exchange-traded derivative securities.

If a call option is "in the money", the buyer of the call can ______, buying the stock at the ______ and selling it at the market price. Multiple choice question. let the option expire; market price let the option expire; strike price "X" exercise the option; market price exercise the option; strike price "X"

exercise the option; strike price "X"

Buying a put option is an appropriate position when the underlying asset's value is expected to Multiple choice question. fall. remain the same. rise. fluctuate.

fall.

The counterparty to a forward contract is often a(n) Multiple choice question. broker. currency exchange. household. financial institution.

financial institution.

One of the risks of a fixed-fixed currency swap is that the ______ in the swap contract may favor one party over the other depending upon the current _______. Multiple choice question. fixed exchange rate; spot rate fixed exchange rate; forward rate fixed exchange rate; futures rate fixed exchange rate; interest rates

fixed exchange rate; spot rate

In a(n) ________, two parties agree to swap currencies based on a agreed-upon fixed exchange rate over a period of time. Multiple choice question. fixed-fixed currency swap total return swap interest rate swap pure credit swap

fixed-fixed currency swap

The buyer of a floor receives a payment from the seller proportional to the amount that interest rates drop below a specified ______ at maturity. Multiple choice question. cap rate notional amount floor rate collar rate

floor rate

Currency swaps can be effectively used to reduce Multiple choice question. foreign exchange risk. default risk. interest rate risk. liquidity risk.

foreign exchange risk.

Swaps help their users better manage risks, such as (choose all that apply) Multiple select question. foreign exchange risk. liquidity risk. operating risk. credit risk. interest rate risk.

foreign exchange risk. credit risk. interest rate risk.

A(n) ________ in futures contracts buys or sells futures contracts as protection against the rise or fall of the price of the underlying asset. Multiple choice question. hedger arbitrageur bank speculator

hedger

A holder of a futures contract can liquidate their position by (choose two) Multiple select question. contacting the clearinghouse to cancel the contract. holding the futures contract to expiration and settling. selling the position to another investor. liquidating the position before the futures contract expires.

holding the futures contract to expiration and settling. liquidating the position before the futures contract expires.

If the price of the underlying stock is less than the strike price, the put option is said to be Multiple choice question. profitable. at the money. out of the money. in the money.

in the money.

Spot transactions occur because the buyer of the asset believes its value will Multiple choice question. increase in the distant future. increase in the immediate future. decrease in the distant future. decrease in the immediate future.

increase in the immediate future.

As the price of the underlying asset decreases, the put buyer's potential profit Multiple choice question. is small. increases to a limit. is large. is completely unlimited.

increases to a limit.

Brokerage firms require that their customers initially post only a portion of their futures contracts, called a(n) _______, whenever they request a trade. Multiple choice question. initial margin short margin discounted payment maintenance margin

initial margin

Interest rate swaps can be effectively used to reduce Multiple choice question. default risk. foreign exchange risk. liquidity risk. interest rate risk.

interest rate risk.

Another measure introduced post-2008 to reduce risk in swap markets was Multiple choice question. international standardization of credit swap contracts. government swap dealers. special purpose designated trading vehicles. central clearinghouses.

international standardization of credit swap contracts.

Another measure introduced post-2008 to reduce risk in swap markets was Multiple choice question. special purpose designated trading vehicles. central clearinghouses. international standardization of credit swap contracts. government swap dealers.

international standardization of credit swap contracts.

At expiration, an option's value is equal to its Multiple choice question. intrinsic value. strike price. time value. premium value.

intrinsic value.

When an investor buys a futures contract, they are taking a Multiple choice question. limit position. long position. market position. short position.

long position.

If at the end of the trading day, the level of funds in a margin account drops below the _______, the customer receives a margin call requesting they add funds to their account to bring it back up to the ______ level. Multiple choice question. maximum level; minimum initial margin; maintenance margin maintenance margin; initial margin minimum level; maximum

maintenance margin; initial margin

Similar to trading in the stock market, futures trades may be placed as ________ or ________. Multiple choice question. market orders; limit orders market orders; short orders market orders; long orders short orders; long orders

market orders; limit orders

Similar to trading in the stock market, futures trades may be placed as ________ or ________. Multiple choice question. short orders; long orders market orders; short orders market orders; long orders market orders; limit orders

market orders; limit orders

To liquidate a futures contract before expiration, the futures holder calls their and requests a(n) _______, thus locking in their gains or losses on the position up to that point. Multiple choice question. cancellation of contract immediate settlement of contract offsetting trade to their original position sale of the contract to another investor

offsetting trade to their original position

Options are traded ______ and ______. Multiple choice question. by mail; by computer network over the counter; by computer network on exchanges; by mail on exchanges; over the counter

on exchanges; over the counter

Like futures trading, options trading on exchanges occurs using a(n) _______ method. Multiple choice question. dutch auction direct auction open-outcry auction sealed bid auction

open-outcry auction

If the price of the underlying stock is less than the strike price "X", the call option is said to be Multiple choice question. profitable. in the money. out of the money. not profitable.

out of the money.

On futures exchanges, _______ perform a similar function as the designated market makers do in the stock exchanges. Multiple choice question. auctioneers professional traders commission brokers floor brokers

professional traders

On futures exchanges, _______ perform a similar function as the designated market makers do in the stock exchanges. Multiple choice question. professional traders auctioneers floor brokers commission brokers

professional traders

A ______ gives the buyer the right but not the obligation to sell an underlying security at a prespecified price called the exercise or strike price. Multiple choice question. forward contract call option put option futures contract

put option

A ______ gives the buyer the right but not the obligation to sell an underlying security at a prespecified price called the exercise or strike price. Multiple choice question. futures contract call option put option forward contract

put option

The buyer of the put option must pay the writer of the option an up-front fee known as a(n) Multiple choice question. bid price. put premium. ask price. call premium.

put premium.

An option is a contract that gives the holder the ______ but not the ______ to buy or sell an underlying asset at a prespecified price for a specified time period. Multiple choice question. right; ability right; obligation opportunity; obligation opportunity; right

right; obligation

The derivative securities markets that are mostly second to the U.S. are in Multiple choice question. China. Japan. Hong Kong. Europe.

Europe.

A forward contract can be used as ______ against the risk that future spot prices on an asset will move against the investor, by guaranteeing a future price for the asset today. Multiple choice question. a warning insurance a hedge speculation

a hedge

A(n) ________ in futures contracts seeks to take advantage of inefficiencies in the pricing of an asset between two markets by taking a long position in one market and a short position in the other market. Multiple choice question. bank hedger arbitrageur speculator

arbitrageur

With a forward contract, cash payments between buyer and seller occur ______, while futures contracts are ______. Multiple choice question. at contract maturity; at contract maturity at contract maturity; marked to market daily at the start of the contract; at contract maturity at the start of the contract; marked to market daily

at contract maturity; marked to market daily

If the price of the underlying stock is equal to the strike price, the put option is said to be Multiple choice question. profitable. at the money. in the money. out of the money.

at the money.

If the futures holder keeps the contract to maturity, the parties will either _________ or _________ at maturity. Multiple choice question. transfer the underlying asset from seller to buyer; request that the clearinghouse cancel the trade settle for the cash difference between the asset price and the futures price; transfer the underlying asset from seller to buyer for cash settle for the cash difference between the asset price and the futures price; request that the clearinghouse cancel the trade transfer the underlying asset from seller to buyer; sell the underlying asset to the clearinghouse for cash

settle for the cash difference between the asset price and the futures price; transfer the underlying asset from seller to buyer for cash

A(n) ________ in futures contracts buys to profit from a price increase or sells to profit from a price decrease. Multiple choice question. speculator hedger arbitrageur bank

speculator

An agreement that involves the immediate and simultaneous exchange of cash for securities is called a Multiple choice question. futures contract. forward contract. short sale. spot contract.

spot contract.

An agreement that involves the immediate and simultaneous exchange of cash for securities is called a Multiple choice question. futures contract. forward contract. spot contract. short sale.

spot contract.

An investor who thinks the stock market index will rise will buy a _____, and the investor who thinks the stock market index will fall will buy a ______. Multiple choice question. stock call option; stock put option stock put option; stock call option stock index call option; stock index put option stock index put option; stock index call option

stock index call option; stock index put option

An option contract for which the underlying asset is the value of a major stock market index is a Multiple choice question. credit option. futures option. stock option. stock index option.

stock index option.

An option contract for which the underlying asset is the value of a major stock market index is a Multiple choice question. stock index option. futures option. stock option. credit option.

stock index option.

A(n) ______ is an agreement between two parties to exchange specified periodic cash flows in the future based on an underlying instrument or price. Multiple choice question. future swap option forward

swap

Whether the call option buyer exercises the option profitably or lets it expire un-exercised, the buyer always loses Multiple choice question. the exercise price. the market price. the premium paid. the strike price.

the premium paid.

Whether the call option buyer exercises the option profitably or lets it expire un-exercised, the buyer always loses Multiple choice question. the premium paid. the strike price. the market price. the exercise price.

the premium paid.

A(n) ______ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan (interest and principal value changes). Multiple choice question. total return swap pure credit swap currency swap interest rate swap

total return swap