FINN 3053 - CH 11
Traditional swap contracts are most frequently used to a. eliminate credit risk b. offset interest rate risk c. hedge basis risk d. speculate on market manipulations
b. offset interest rate risk
The SEC regulates all U.S. markets in a. derivatives b. options on equity securities c. futures d. financial futures
b. options on equity securities
Futures market participants include all the following except a. traders b. specialists c. speculators d.hedgers
b. specialists
The purchase of U.S. Treasury bonds for immediate delivery is a _______ market transaction. a. stock b. spot c. futures d. forward e. swap
b. spot
You have a right, but not the obligation, to buy a security at a specific price on a specific date if you _______ on this security. a. bought a forward contract b. sold a futures contract c. bought a put option d. sold a call option e. bought a call option
e. bought a call option
An investor planning to buy IBM stock in 30 days who believes that IBM's price will be very volatile in the near future can best protect himself against price risk by a. selling an IBM put option that matures in 30 days b. buying an IBM call option that matures in 30 days c. selling an IBM call option that matures in 30 days d. buying an IBM put option that matures in 30 days e. selling IBM stock short
b. buying an IBM call option that matures in 30 days
An insurance company can best preserve the right to invest funds which are coming to the company in the future at today's interest rates by a. selling calls on financial futures. b. buying calls on financial futures. c. buying financial futures. d. selling financial futures.
b. buying calls on financial futures.
Margin requirements relate to the amount of cash down payment or equity one must have deposited before participating in a futures trade.
T
Options premiums vary directly with the maturity of the option.
T
The open interest is the number of outstanding contracts that have not been offset.
T
The price sensitivity rule assists the hedger by estimating the number of futures contracts to trade.
T
A hedger with a long spot position should buy futures to reduce their risk.
F
A pension fund manager can protect his/her recent price gains by buying stock index futures contracts.
F
A swap entails buying and selling a futures contract at the same time.
F
At least one of two counterparties in a forward contract must be a speculator.
F
Futures contracts eliminate risk to all participants.
F
If you forecast that interest rates are likely to decrease 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.
F
Most forward market contracts are settled before delivery.
F
Portfolio insurance with stock index futures is used to eliminate unsystematic risk from stock portfolios.
F
Speculators are gamblers that provide no social value to the economy.
F
The Chicago Board Options Exchange is the primary regulator of options contracts.
F
A non-standardized agreement that is negotiated between a buyer and seller to exchange an asset for cash at some future date, with the price set today is called a future agreement.
F Forward Aggrement
The long financial futures hedger net loses when futures contracts are marked to market after an increase in the price of the underlying asset.
F Long Position -> Protects Against Increase
Margin risk involves the chance that initial margin requirements will be increased once an investor buys the futures contract.
F Lose more than you invested
The writer of a call option on stock benefits if the underlying stock price decrease or if the volatility of the stock's price decreases.
T
Writing calls can generate potentially unlimited losses.
T
A bank has invested in a portfolio of mortgage backed securities. To limit its credit risk it should also issue a credit default swap on the mortgage portfolio.
T
A bank has made fixed rate loans funded with shorter term certificates of deposit. To reduce its interest rate risk the bank could sell short term interest rate futures.
T
A bank has made mortgages funded with 1 year certificates of deposit. To reduce its interest rate risk the bank could enter into a swap to pay a fixed rate of interest and receive a variable rate of interest.
T
A call option writer will profit if the underlying stock's volatility decreases in value, all else equal.
T
A depository institution can reduce the variability of its cost of funds by selling Eurodollar futures.
T
A hedger who is contracted to buy a commodity in the future may wish to reduce their price risk by buying futures contracts on the commodity.
T
A savings and loan with interest rate-sensitive liabilities and interest rate insensitive assets (i.e., a negative GAP) might swap future fixed rate interest payments to receive variable rate interest payments to reduce its risk.
T
Basis risk is the risk that the price of futures contracts will not vary in exactly the same way as the price of the item being hedged.
T
Cross-hedgers involve more basis risk than direct hedges.
T
Futures markets involve more standardized contracts compared to forward markets.
T
If a stock's price is $56 per share a call option with a $60 exercise price will cost less than an equivalent maturity put option with the same exercise price.
T
If the option exercise price is greater than the current stock price, a call option is out-of- the-money but the put option is in-the-money.
T
In general, writing calls is riskier than buying puts.
T
Daily changes in futures prices means one party (hedger or speculator) has gained while another lost money on the contract. How are the exchanges able to keep the "daily" loser in the contract and prevent default? a. by the threat of bankruptcy b. by daily margin calls if needed c. by loans d. by guarantees by third parties
b. by daily margin calls if needed
What action would the holder of a maturing call option take if an option which cost $300, had a strike price of $50, and the market value of the stock was $52? a. let the option expire unexercised b. exercise the option c. request that the $300 be returned d. exercise the right to extend the option
b. exercise the option
The value of a call option _______ and the value of a put option with the same price and expiration date _______ when the spot price of an underlying increases. a. increases; increases b. increases; falls c. does not change; does not change d. falls; increases e. falls; falls
b. increases; falls
On the second Friday of March, the market closing price of Independence & Co. stock is $100. Its March options are about to expire. One of its puts is worth $10 and one of its calls is worth $5. The exercise price of the put must be _____ and the exercise price of the call must be _____. a. 110, 95 b. 105, 95 c. 90, 105 d. 105, 90
a. 110, 95
Which is not true of futures markets? a. Almost all contracts are settled by actual delivery. b. All contracts are "zero sum games". c. Contracts trade on organized exchanges. d. Sellers need not worry about creditworthiness of buyers.
a. Almost all contracts are settled by actual delivery.
Which of the following statement is false? a. Forward contracts do not have credit risk. b. Futures contracts are standardized; forward contracts are not. c. Futures markets' price changes are settled daily. d. Delivery is made in forward markets but often not in futures
a. Forward contracts do not have credit risk.
A financial institution wishing to avoid higher borrowing costs would be most likely to use: a. a short or selling hedge in futures. b. a long or buying hedge in futures. c. purchase a call option on futures contracts. d. sell a put option on futures contracts.
a. a short or selling hedge in futures.
A European option is an option contract that allows the holder to a. exercise the option only on the expiration date. b. exercise the option on or before the expiration date. c. exercise the option before but not on the expiration date. d. exercise the option after the expiration date.
a. exercise the option only on the expiration date.
"Cross-hedging" will tend to a. increase basis risk b. decrease related-contract risk c. increase manipulation risk d. eliminate margin risk
a. increase basis risk
A(n) ____ margin is deposited before entering into the futures contract; thereafter, the balance cannot fall below a(n) _______ margin. a. initial; maintenance b. initial; enforced c. net; seller's d. safe; double e. first; second
a. initial; maintenance
You manage a stock portfolio worth $3,000,000 that has a beta of 1.25. In order to completely hedge the portfolio, you decide to trade S&P 500 futures contracts. Each contract is worth $250 per index point. How many contracts do you need to buy or sell if the S&P 500 index is currently at 1,500? a. sell 10 contracts b. buy 10 contracts c. sell 8 contracts d. buy 8 contracts
a. sell 10 contracts
A bank with a high positive duration GAP wishing to hedge its interest rate risk might a. sell financial futures. b. purchase financial futures. c. sell puts on financial futures. d. buy calls on financial futures.
a. sell financial futures.
A small commercial bank with more rate sensitive assets than rate sensitive liabilities sells T-bill futures. The bank is a. speculating. b. hedging. c. neither hedging nor speculating. d. both hedging and speculating.
a. speculating.
A fairly priced forward contract should have a. zero NPV b. positive NPV c. a price higher than the spot price d. a price lower than the spot price
a. zero NPV
Which of the following is true about hedging using duration analysis? a. The institution may hedge its earnings and its net worth simultaneously. b. If market value weighted asset duration is greater than the liability counterpart, sell financial futures to "immunize." c. If market value weighted asset duration is greater than the liability counterpart, buy financial futures to "immunize." d. Maturity hedging provides the same outcomes as duration hedging.
b. If market value weighted asset duration is greater than the liability counterpart, sell financial futures to "immunize."
An agreement between a business and a large money center bank to sell 10 million dollars of T-Bills in sixty days at a price set today is called a a. a call option. b. a forward contract. c. a put option. d. a long futures position.
b. a forward contract.
Linda writes an option contract obligating her to sell 100 shares of Southwest Airlines at $10 per share if the holder exercises the option. Linda does not currently hold any stock in Southwest Airlines. Linda has written a. a covered call b. a naked call c. a covered put d. a naked put
b. a naked call
A bank which hedges its future funding costs in the T-bill futures market is a. hedging perfectly. b. accepting some basis risk. c. speculating. d. accepting some default risk in the futures position.
b. accepting some basis risk.
The lowest amount of funds required to maintain a positions in a futures contract is called a(n) _______ margin. a. initial b. maintenance c. variation d. parity
b. maintenance
A portfolio manager is concerned that the expected drop in interest rates is going to lower the yield on the $1,000,000 of T-Bill she plans to buy in 3 months. She can best hedge this potential interest rate risk by a. taking a short position in 3-month T-bill futures. b. taking a long position in 3-month T-bill futures. c. selling a call option on 3-month T-bill futures. d. buying a put option on 3-month T-bill futures.
b. taking a long position in 3-month T-bill futures.
A five-member federal regulatory commission which serves as the primary regulator of the futures market is the a. Chicago Mercantile Exchange. b. Federal Commodity Futures Commission. c. Commodity Futures Trading Commission. d. Chicago Board of Trade.
c. Commodity Futures Trading Commission.
Which one of the following statements is true? a. Derivatives markets are used to eliminate risk from the financial system. b. Derivatives markets may be used to transfer risk from speculators to other speculators. c. Derivatives markets may be used to transfer risk from speculators to hedgers. d. Derivatives markets are used to transfer risk from exchanges to investors.
c. Derivatives markets may be used to transfer risk from speculators to hedgers
First National Bank recently purchased a T-bill futures contract to hedge a risk position at the bank. If the price of the futures contract is increasing, a. First National is "net gaining." b. First National is "net losing." c. First National is neither "net gaining" nor "net losing." d. First National's hedge is not working properly.
c. First National is neither "net gaining" nor "net losing."
Which of the following statements is NOT true? a. A swap is like a forward contract in that it guarantees the exchange of two items of value at some future point in time. b. Only the net interest difference is swapped in an interest rate swap. c. Swaps involve no credit risk just like futures contracts. d. Many swaps are between fixed interest rate payments and variable interest rate payments.
c. Swaps involve no credit risk just like futures contracts.
What is the regulator that approves newly issued futures contracts? a. The Federal Reserve b. The SEC c. The CFTC d. The NYSE
c. The CFTC
Unlike hedging with futures, hedging with options a. locks in a particular price or rate of return for a hedger. b. exposes a hedger to a risk of large losses. c. allows a hedger to benefit from the upside potential of his spot position. d. requires no up front investment.
c. allows a hedger to benefit from the upside potential of his spot position.
Common types of derivative contracts include all the following except a. futures b. options c. asset-backed securities d. swaps
c. asset-backed securities
A firm is bidding on a construction project in Brazil. The outcome of the bid will not be known for 3 months. The firm will be paid in Reals in 6 months if they win the bid. The best way for the firm to hedge this risk over the entire time period is to a. buy Real futures. b. sell the Real forward. c. buy put options on the Real. d. buy call options on the Real.
c. buy put options on the Real.
All of the following are risks associated with futures contracts except a. margin risk. b. basis risk. c. default risk. d. market manipulation risk.
c. default risk.
The value of a "put" varies a. inversely with stock price and time to expiration b. directly with stock price and time to expiration c. inversely with stock price but directly with time to expiration d. directly with stock price but inversely with time to expiration
c. inversely with stock price but directly with time to expiration
Program trading or "index arbitrage" a. guarantees a risk-free return. b. reduces volatility of stock prices. c. keeps index futures prices more in line with underlying stock prices. d. involves relatively small trading volumes
c. keeps index futures prices more in line with underlying stock prices.
Which of the following terms is associated with futures as opposed to options? a. exercise price b. premium c. marking-to-market d. American vs European
c. marking-to-market
Loan prepayments are an example of a. credit risk b. basis risk c. related-contract risk d. manipulation risk
c. related-contract risk
If a corporation wanted to guarantee its long-term costs of financing an investment project, it could best hedge its risk by a. selling T-bill futures for when the funds were needed. b. buying T-bill futures for when the funds were needed. c. selling T-bond futures for when the funds were needed. d. buying T-bond futures for when the funds were needed.
c. selling T-bond futures for when the funds were needed.
A bank that has promised to make a loan to a customer in 6 months might best hedge its interest rate risk by a. buying interest rate futures b. buying stock index futures c. selling interest rate futures d. selling stock index futures
c. selling interest rate futures
The forward price for an asset is a. equal to the face value of the asset. b. always higher than the current price of the asset. c. the price that makes the forward contract have zero net present value. d. adjusted downward to incorporate storage costs.
c. the price that makes the forward contract have zero net present value.
Which is NOT a function of the CFTC? a. to approve new futures contracts b. to monitor enforcement of exchange rules c. to make sure traders maintain their margin level d. to investigate violations of futures trading laws
c. to make sure traders maintain their margin level
Suppose General Electric declares a larger than expected dividend. a. Put options on GE stock will gain value. b. Call options on GE stock will gain value. c. All options on GE stock will gain value. d. All options on GE stock will lose value.
d. All options on GE stock will lose value.
Problems with credit default swaps included all the following except a. Sellers did not adequately price their risk. b. Buyers did not have to own the underlying assets. c. Sellers were not subject to capital requirements. d. Buyers were not subject to capital requirements.
d. Buyers were not subject to capital requirements
What is the relationship between spot market prices and forward market prices of a good or financial asset? a. Spot prices equal expected forward prices. b. Forward prices are always higher than spot prices. c. Spot prices are always higher than forward prices. d. Forward prices are closely related to expected future spot prices.
d. Forward prices are closely related to expected future spot prices.
Which of the following is not a derivative security? a. a call option on a stock index b. a futures contract c. an interest rate swap d. a repurchase agreement
d. a repurchase agreement
A hedger in the financial futures market a. usually buys futures contracts. b. usually sells futures contracts. c. either buys or sells so that underlying asset gains/losses are directly related to futures contract gains/losses. d. either buys or sells so that underlying asset gains/losses are inversely related to futures contract gains/losses.
d. either buys or sells so that underlying asset gains/losses are inversely related to futures contract gains/losses.
The most active forward markets are those for a. precious metals b. financial assets c. agricultural commodities d. foreign exchange
d. foreign exchange
A farmer growing wheat is in wheat and may hedge by _ wheat futures. a. short; long b. short; selling c. long; buying d. long; selling
d. long; selling
Uses of the financial futures markets include all the following except a. managing systematic risk b. speculating on interest rate fluctuations c. guaranteeing cost of funds d. managing credit risk
d. managing credit risk
A pension fund wishes to reduce the beta of its portfolio from 1.2 to 0.5. The portfolio's market value is $5 million and the quote for the futures price is 2200. The contract has a 250 multiplier. Rounded to the nearest whole number, how many contracts should the pension fund use and should they buy or sell the contracts? a. buy 9 contracts b. sell 9 contracts c. buy 6 contracts d. sell 6 contracts
d. sell 6 contracts
In the following who will lose if the price of an underlying asset falls? a. the seller of a futures contract b. the buyer of a put c. the writer of a call d. the buyer of a futures contract
d. the buyer of a futures contract
You speculated that the stock price of Cino. Co. will move toward a certain direction and decided to taken an option position of this stock to make profit. For that position, if the stock's price drops you will get a level gain no matter how much prices decrease. However, you could go bankrupt if the stock's price rises sufficiently. What is your option position? You have ____________. a. purchased a call option b. purchased a put option c. written a put option d. written a call option
d. written a call option
