finance chapter 10

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true

The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases.

c

The higher the exercise price, the ________________ the value of a put and the _______________ the value of a call. A. higher; higher B. lower; lower C. higher; lower D. lower; higher

false

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.

b

Which of the following is true? A. Forward contracts have no default risk. B. Futures contracts require an initial margin requirement be paid. C. Forward contracts are marked to market daily. D. Forward contract buyers and sellers do not know who the counterparty is. E. Futures contracts are only traded over the counter.

true

Writing a put option results in a potentially limited gain and a potentially unlimited loss.

true

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.

false

you would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50.

e

16. Of the following, the most recent derivative security innovations are A. foreign currency futures. B. interest rate futures. C. stock index futures. D. stock options. E. credit derivatives.

a

17. By convention, a swap buyer on an interest rate swap agrees to A. periodically pay a fixed rate of interest and receive a floating rate of interest. B. periodically pay a floating rate of interest and receive a fixed rate of interest. C. swap both principal and interest at contract maturity. D. back both sides of the swap agreement. E. act as the dealer in the swap agreement.

c

18. 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. II only B. II and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

b

20. A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a A. floor broker. B. day trader. C. position trader. D. specialist. E. hedger.

b

21. 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 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.

d

22. You find the following current quote for the March T-bond contract: $100,000; Pts 32nd, of 100 percent. You went long in the contract at the open. Which of the following is/are true? I. At the end of the day, your margin account would be increased. II. 55,210 contracts were traded that day. III. You agreed to deliver $100,000 face value T-bonds in March in exchange for $89,120. IV. You agreed to purchase $100,000 face value T-bonds in March in exchange for $89,375. A. I, II, and III only B. I, II, and IV only C. I and III only D. I and IV only E. IV only

d

23. A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n) A. American call option. B. European call option. C. American put option. D. European put option. E. knockout option.

b

24. A higher level of which of the following variables would make a put option on common stock more valuable, ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price A. II only B. II and IV only C. I, II, and III only D. I, III, and IV only E. I, II, III, and IV

c

26. You have taken a stock option position and, if the stock's price drops, you will get a level gain no matter how far prices fall, but you could go bankrupt if the stock's price rises. You have________________________________. A. bought a call option. B. bought a put option. C. written a call option. D. written a put option. E. written a straddle.

b

27. 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 ________________________________. A. bought a call option B. bought a put option C. written a call option D. written a put option E. purchased a straddle

d

28. 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 A. I and II B. I and III C. II and IV D. II and III E. I and IV

c

30. Measured by the amount outstanding, the largest type of derivative market in the world is the A. futures market. B. forward market. C. swap market. D. options market. E. credit forward market.

e

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

a

34. New futures contracts must be approved by A. the CFTC. B. the SEC. C. the Warren Commission. D. the NYSE. E. the Federal Reserve.

b

35. 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? A. -$500 B. -$750 C. -$900 D. $400 E. $500 [[($45 - $54) * 100] + (($54- $50) * 100)] - $250 = -$750

b

36. A bank with short-term floating-rate assets funded by long-term fixed-rate liabilities could hedge this risk by I. buying a T-bond futures contract. II. buying options on a T-bond futures contract. III. entering into a swap agreement to pay a fixed rate and receive a variable rate. IV. entering into a swap agreement to pay a variable rate and receive a fixed rate. A. I and III only B. I, II, and IV only C. II and IV only D. III only E. IV only

e

37. The swap market's primary direct government regulator is (the) A. SEC. B. CFTC. C. NYSE. D. WTO. E. Nobody.

a

38. 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. A. I and II only B. III only C. I and IV only D. II and III only E. III and IV only

e

39. 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. A. I and IV B. II and III C. I and III D. II and IV E. I only

b

40. An interest rate collar is 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 the options.

c

41. 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. A. I and III only B. I and IV only C. II and III only D. II and IV only

a

42. 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) A. forward rate agreement. B. futures loan. C. option on a futures contract. D. interest rate swap contract. E. currency swap contract.

a

43. Two competing fully electronic derivatives markets in the United States are A. CME Globex and Eurex. B. Philadelphia Exchange and AMEX. C. NYSE and ABS. D. CME and Pacific Exchange. E. D-Trade and IMM.

true

5. 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.

false

American options can only be exercised at maturity.

false

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.

c

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? A. $700 B. -$800 C. -$400 D. -$200 E. -$100 [[($68 - $76) * 100] + (($75 - $68) * 100)] - $300 = -$400

true

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

false

Forward contracts are marked to market daily.

true

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

true

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

false

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

true

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

A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if he thought A. the stock price would stay above $12. B. the stock volatility would increase. C. the stock price would fall below $18. D. the stock price would stay above $15. E. the stock price would rise above $18 or fall below $12.

d

A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________. A. $50; $45 B. $55; $55 C. $60; $45 D. $60; $50 E. One cannot tell from the information given.

true

In a futures contract, if funds in the margin account fall below the maintenance margin requirement, a margin call is issued.


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