M&B: Ch 7 TB
c
A swap is A) another name for a put option. B) another name for a call option. C) an agreement between two or more persons to exchange sets of cash flows over some future period. D) the name for the replacement of a futures contract by an options contract
c
Forward transactions would be useful to A) a government wanting to know the size of its future debt. B) a household wanting to reduce its future tax liability. C) a business wanting to know the cost of its funds on future loans. D) a business wanting to expand its operations in overseas markets
c
Forward transactions A) provide little risk sharing. B) are very liquid. C) have information problems. D) are widely used by sellers of commodities, but rarely used by buyers of commodities
c
Forward transactions A) provide substantial liquidity. B) entail small information costs. C) provide risk sharing. D) provide reduced tax payments
d
Forward transactions originated in the market for A) common stock. B) corporate bonds. C) government bonds. D) agricultural and other commodities
c
A call option is said to be in the money" if A) it is written on a Treasury bill or other money-market asset. B) it has increased in price since it was first written. C) the price of the underlying asset is currently greater than the strike price. D) the price of the underlying asset is currently greater than the strike price plus the option premium.
a
A futures contract is A) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date at a currently agreed-upon price. B) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date, with the price to be negotiated at the time of delivery. C) an agreement that specifies the delivery of a commodity or financial instrument at a currently agreed-upon price, with date of delivery to be negotiated subsequently. D) an agreement that specifies the delivery of a commodity or financial instrument, with the price and date of delivery to be negotiated subsequently
a
A key reason that firms and financial institutions might participate in an interest rate swap is A) to transfer interest rate risk to parties that are more willing to bear it. B) the low information costs of swaps compared with other derivative contracts. C) the greater liquidity of swaps compared with other derivative contracts. D) the favorable tax implications of swaps compared with other derivative contracts
b
A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by A) buying futures contracts on Treasury bills. B) selling futures contracts on Treasury bills. C) buying call options on Treasury bills. D) increasing the amount of money which it lends
c
A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise without eliminating the chance to profit from a decline in the cost of funds by A) buying futures contracts on Treasury bills. B) selling futures contracts on Treasury bills. C) buying put options on Treasury bills. D) buying call options on Treasury bills
c
A put option is said to be "in the money" if A) it is written on a Treasury bill or other money-market asset. B) it has increased in price since it was first written. C) the price of the underlying asset is currently less than the strike price. D) the price of the underlying asset is currently less than the strike price plus the option premium.
b
A shortcoming of swaps that has led to the participation of large firms and financial institutions is A) the lack of privacy. B) need to assess creditworthiness. C) desire for more flexibility. D) limited size of the market.
b
A speculator who believes strongly that interest rates will fall would be likely to A) buy futures contracts on Treasury bills. B) sell futures contracts on Treasury bills. C) sell Treasury bonds in the spot market. D) decrease now the amount of money which he lends
a
A speculator who believes strongly that interest rates will rise would be likely to A) buy futures contracts on Treasury bills. B) sell futures contracts on Treasury bills. C) buy Treasury bonds in the spot market. D) increase now the amount of money which he lends
c
A stock option is said to be "out of the money" if: A) the strike price equals the exercise price. B) stock price equals the strike price. C) strike price exceeds the stock price. D) stock price exceeds the strike price
d
AIG almost went bankrupt in 2008 because A) the value of the securities underlying its credit default swaps declined significantly. B) it lacked the collateral required by buyers of its credit default swaps. C) prices of securities underlying their credit default swaps were hard to determine since they were no longer actively traded. D) all of the above.
a
Financial futures contracts are regulated by A) the Commodity Futures Trading Commission. B) the Federal Trade Commission. C) the Interstate Commerce Commission. D) the Options and Futures Commission
d
All of the following are problems cited by Warren Buffet as problems with derivatives not traded on exchanges EXCEPT A) they are thinly traded which makes it difficult to determine their value. B) firms do not set aside reserves against potential losses. C) they involve substantial counterparty risk. D) they were not flexible enough due to lack of standardization
d
All of the following are roles of a exchange EXCEPT A) instituting margin requirements on futures contracts. B) marking to market at the end of each day. C) eliminate the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other. D) reducing the default risk involving forward contracts
a
All of the following are steps involved in basic currency swaps EXCEPT A) counterparties exchange the net interest at the end of the swap. B) the parties exchange principals in two currencies. C) the parties exchange periodic interest payments over the life of the agreement. D) the parties exchange the principal amount at the end of the agreement
c
All of the following describe the market for credit default swaps on mortgage-backed securities in the mid 2000s EXCEPT A) an increasing number of buyers were speculators. B) AIG apparently underestimated the risk involved with mortgage-backed securities. C) the volume of credit default swaps was too low making it difficult to assess their value. D) payments by buyers were too low relative to risk
a
An advantage of a swap over futures and options is that A) they can be written for long periods. B) they are more liquid. C) they carry less default risk. D) there is no need to assess the creditworthiness of participants
d
An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as A) swaption. B) swap option. C) forward swaps. D) plain vanilla
a
An option buyer A) has a greater insurance benefit than the purchaser of a futures contract. B) bears the risk of unfavorable price movements. C) is purchasing a naked option if he or she does not also own the underlying asset. D) generally will incur a lower cost than will the purchaser of a futures contract
a
An options contract A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. B) is another name for a futures contract. C) may be written for debt instruments, but not equities. D) may be written for equities, but not for debt instruments
c
As an option nears its expiration date, the size of the premium approaches A) zero. B) infinity. C) its intrinsic value. D) an amount which varies, depending on prevailing market interest rates on the expiration date
a
As the time of delivery in a futures contract gets closer A) the futures price gets closer to the spot price. B) the futures price generally rises further above the spot price. C) the futures price generally falls further below the spot price. D) the futures and spot prices remain the same as they were when the contract was first created
d
Forward contracts A) are highly liquid. B) entail small information costs. C) provide little risk sharing. D) are subject to default risk
a
Forward transactions A) allow savers and borrowers to conduct a transaction now and settle in the future. B) allow savers and borrowers to postpone a transaction from now to the future. C) always involve increased risk compared with spot transactions. D) may not be conducted on organized exchanges
d
Clearinghouses help to reduce default risk by A) being the intermediary in trades for buyers and sellers. B) margin requirements. C) marking to market. D) all of the above
b
Currently, A) trading futures contracts on agricultural and mineral commodities makes up a majority of all trading. B) trading in financial futures involves more transactions than trading in commodity futures. C) futures trading is allowed only for financial assets. D) futures trading is allowed only for commodities
c
Forward contracts are often illiquid because A) any capital gains on them are heavily taxed, making investors reluctant to sell them. B) government regulation has not provided for a secondary market in them. C) they generally contain terms specific to the particular buyer and seller. D) the brokerage fees involved in buying and selling them are very high.
c
Derivative instruments are A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. B) assets whose rates of returns must be derived from information published in financial tables. C) assets which derive their value from underlying assets. D) computers which display real-time financial information
b
Futures trading has traditionally been dominated by A) the New York Stock Exchange. B) the Chicago Board of Trade and the Chicago Mercantile Exchange. C) the London Stock Exchange. D) the Omaha Grain Exchange
c
Futures trading practices in the United States are regulated by A) the Chicago Board of Trade. B) the Chicago Mercantile Exchange. C) the Commodities Futures Trading Commission. D) the Board of Futures Trading
b
Hedgers are primarily interested in A) betting on anticipated changes in prices. B) reducing their exposure to the risk of price fluctuations. C) increasing market liquidity. D) reducing the spread between bid and ask prices on bonds
c
How does hedging affect the flow of funds in the financial system? A) It reduces it since it is a sign that investors do not like risk. B) It reduces it because it increases risk by encouraging speculation. C) It increases it because it reduces risk thus encouraging more people to make financial investments. D) It increases it by encouraging more speculation
b
Which of the following statements is NOT true of the VIX? A) it is calculated based on prices of call and put options of the S&P 500. B) investors who want to hedge against stock market volatility can sell VIX options. C) a VIX of 10 indicates investors expect the S&P 500 to fluctuate by 10% at an annual rate over the next 30 days. D) the VIX is a measure of fear in the stock market
b
If market participants believe that the wheat crop is likely to be unusually small, A) the spot price of wheat is likely to be above the futures price of wheat. B) the spot price of wheat is likely to be below the futures price of wheat. C) it will not be possible to find a seller of a futures contract in wheat. D) it will not be possible to find a buyer of a futures contract in wheat
a
If the price of a futures contract increases, then A) the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract. B) the exchange will collect the amount of the increase from the buyer of the contract and transfer it to the account of the seller of the contract. C) the exchange will collect the amount of the increase from both the buyer and the seller and place it in escrow until the delivery date. D) the additional funds will be required from either the buyer or the seller until the delivery date
a
If you buy a futures contract for U.S. Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected, you will have A) lost money on your long position. B) gained money on your long position. C) lost money on your short position. D) gained money on your short position
b
If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that A) Treasury bond prices will be higher in the future. B) Treasury bond yields will be higher in the future. C) Treasury bond yields will be lower in the future. D) futures prices will rise again at the end of the period
c
If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have A) lost money on your long position. B) gained money on your long position. C) lost money on your short position. D) gained money on your short position
a
In a call options contract, the A) seller has the obligation to deliver the instrument at a specified time. B) buyer has the obligation to receive the instrument at a specified time. C) seller may choose whether or not to deliver the instrument at a specified time. D) buyer will choose to exercise his option only if the value of the underlying security falls
a
In a put options contract, the A) seller has the obligation to receive the instrument at a specified time. B) buyer has the obligation to deliver the instrument at a specified time. C) buyer has the obligation to receive the instrument at a specified time. D) seller has the obligation to deliver the instrument at a specified time
b
In an options contract, another name for the strike price is the A) market price. B) exercise price. C) equilibrium price. D) fixed price
a
In comparing futures contracts with options contracts, we can say that A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract,the buyer and seller have symmetric rights. C) in both futures and options contracts, the buyer and seller have symmetric rights. D) in both futures and options contracts, the buyer and seller have asymmetric rights
c
In derivative markets, trade takes place in A) assets such as bonds or common stock that derive their value from the value of the companies which issue them. B) assets whose rates of returns must be derived from information published in financial tables. C) assets that derive their value from underlying assets. D) assets which are not allowed to be traded on organized exchanges
b
In recent decades, A) trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures. B) trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures. C) trading in agricultural and commodities futures was discontinued. D) trading in financial futures was discontinued
Forward contracts are more flexible than futures contracts
Why may some investors prefer forward contracts to futures?
If there were differences in prices, there would be opportunity for arbitrage
Why must the spot price equal the futures price on the settlement date?
c
Marking to market involves A) changing the futures price to the spot price each day. B) engaging in arbitrage so as to reduce the risk involved with futures contracts. C) crediting or debiting the margin account based on the net change in the value of the futures contract. D) updating the futures price after the market closes each day
c
Marking to market refers to A) the determination of the prices of options contracts by the interaction of demand and supply. B) the determination of the prices of futures contracts by the interaction of demand and supply. C) the settlement of gains and losses on futures contracts each day. D) the settlement of gains and losses on forward contracts each day
a
On the day of delivery A) the spot price will equal the futures price. B) the spot price will be greater than the futures price by an amount equal to the current interest rate times the futures price. C) the futures price will be greater than the spot price by an amount equal to the current interest rate times the spot price. D) there is no necessary relation between the spot price and the futures price
c
One benefit of a swap compared to futures and options is that they A) promote liquidity. B) reduce the risk for both the buyer and seller. C) can be better tailored to meet the needs of market participants. D) can involve financial instruments and not just commodities
b
One difference between futures and options contracts is A) funds change hands daily in the case of options but not with futures. B) funds change hands daily in the case of futures, but not with options. C) in the case of futures funds only change hands when they are exercised. D) futures are designed to reduce risk while options are not
d
Profits from speculation arise because of A) the spread between the bid and ask prices on bonds. B) the illiquidity of markets for derivative instruments. C) the high information costs in markets for derivative instruments. D) disagreements among traders about future prices of a commodity or financial instrument
a
Speculators are primarily interested in A) betting on anticipated changes in prices. B) reducing their exposure to the risk of price fluctuations. C) increasing market liquidity. D) reducing the spread between bid and ask prices on bonds
c
Speculators in derivatives markets A) reduce the efficiency of these markets. B) are acting contrary to U.S. securities laws. C) accept risk transferred to them by hedgers. D) reduce the liquidity of these markets
a
Spot transactions A) involve immediate settlement. B) may only take place in face-to-face trading. C) take place on-the-spot, rather than on an organized exchange. D) are relatively unimportant in financial markets.
a
Standardization of derivative contracts A) increases their liquidity. B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity. C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset. D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC.
a
Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is A) $25. B) $75. C) $100. D) not possible to determine in the absence of information on values of the share price of Acme Widget between now and the expiration date of the call
a
Suppose you are a manager for a company that produces grape jelly. Which of the following is the best way for you to reduce your risk? A) acquire a derivative that increases in value if grape prices increase B) acquire a derivative that increases in value if grape jelly prices increase C) sell a derivative that increases in value if grape prices increase D) sell a derivative that increases in value if grape jelly prices increase
a
Swaps differ from futures and options in all of the following ways EXCEPT: A) intended to reduce the risk faced by participants. B) more flexibility. C) more privacy. D) less regulation
b
The buyer of a futures contract A) assumes the short position. B) assumes the long position. C) may not sell the contract without the permission of the original seller. D) has the obligation to deliver the underlying financial instrument at the specified future date
c
The buyer of a futures contract A) assumes the short position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date
b
The choice between futures and options A) depends on whether the underlying instrument is a debt instrument or an equity. B) reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide. C) reflects a trade-off between the higher cost of using futures and the extra insurance benefits that futures provide. D) reflects a trade-off between the greater risk from using options and the extra insurance benefits that options provide.
a
The elimination of riskless profit opportunities is known as A) arbitrage. B) options. C) swaps. D) liquidity.
c
The existence of counterparty risk A) has no effect on the contracting parties. B) is disallowed under current government regulations. C) results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners. D) reduces the risk introduced by forward contracts
b
The fee charged by the seller of an option is referred to as the A) market price. B) option premium. C) futures fee. D) call price.
a
The futures price A) reflects traders' expectations of the spot price on the day of delivery. B) is always above the spot price on the day of delivery. C) is always below the spot price on the day of delivery. D) is always equal to the spot price at every point in time
b
The initial deposit required by a buyer or seller of a futures contract is known as A) credit. B) margin requirement. C) debit. D) marking
b
The intrinsic value of an option A) is equal to the option premium. B) is the amount the option actually is worth if it is immediately exercised. C) is the amount the option is expected to be worth on its expiration date. D) is impossible to determine in the absence of information on the future prices of the underlying asset.
c
The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as A) speculators. B) hedgers. C) rocket scientists. D) market makers
a
The most important derivative instruments are A) futures, options, and swaps. B) common and preferred stocks. C) corporate bonds. D) government bonds
b
The period over which a call or put option exists is A) determined by its delivery date. B) determined by its expiration date. C) determined by whether the contract is written for a commodity or for a financial instrument. D) indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it
c
The price at which an option may be exercised is called the A) market price. B) equilibrium price. C) strike price. D) fixed price.
d
The role of the Commodity Futures Trading Commission is to A) set the prices of futures contracts. B) operate the Chicago Mercantile Exchange. C) operate the Chicago Board of Trade. D) monitor potential price manipulation in futures trading
b
The seller of a futures contract A) assumes the long position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date
a
The seller of a futures contract A) assumes the short position. B) assumes the long position. C) has the obligation to receive the underlying financial instrument at the specified future date. D) is expecting the price of the underlying financial instrument to rise
d
The terms of futures contracts traded in the United States are A) standardized as to amount or value, but not as to location or time of delivery. B) standardized as to location or time of delivery, but not as to amount or value. C) not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. D) standardized as to amount or value and as to location or time of delivery
d
Using forward transactions allows A) holders of common stock to lock in future dividend payments. B) the federal government to stabilize fluctuations in tax receipts. C) corporations to reduce problems arising from future fluctuations in their dividend payments. D) both buyers and sellers to reduce risks associated with price fluctuations
b
Which best describes a credit default swap? A) It is designed to reduce interest-rate risk. B) The issuer receives payments from the buyer in return for agreeing to make payments to the buyer if the security goes into default. C) Issuers are taking out insurance in case of default. D) It represents a way for the issuer to establish its creditworthiness
d
Which of the following factors would tend to increase the size of the premium on an options contract? A) The option is near its expiration date. B) The current default-risk-free interest rate is high. C) The price volatility of the underlying asset is low. D) The option is far away from its expiration date
d
Which of the following financial futures contracts are traded in the United States? A) Interest rates B) Stock indexes C) Currencies D) All of the above
b
Which of the following is NOT a benefit of derivatives? A) risk sharing B) guaranteed minimum profit C) liquidity D) information services
b
Which of the following statements about the presence of speculators in futures markets is correct? A) Their main objective is to reduce their exposure to risk. B) They aid hedgers by increasing the liquidity in futures markets. C) They make it difficult for hedgers to find someone to take the opposite side of their positions. D) Once a futures market participant is known to be a speculator he or she is no longer allowed to participate in the market.
