Chapter 9 - Money and Banking

a price of a futures contract for US Treasury Bonds listed as "111-15" is measured in:

A. 32nds

assume we have a stock currently worth $50. We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $50. if the stock can rise or fall by $10 with equal probability over the option period, and the option cannot be exercised until the expiration date, what's the time value of this option?

A. 5 10 x .5

if a futures contract for U.S Treasury bonds decreases by "17" in the financial page listings, the price of the contract decreased by:

A. 531.25 17 x 31.25

The short position in a futures contract is the party that will:

A. Deliver a commodity or financial instrument to the buyer at a future date

Sue sells a futures contract for US Treasury bonds and on the settlement date the interest rate on US treasury bonds is lower than Sue expected. Sue will have:

A. Lost money on her short position

The key difference between a forward and futures contract is:

A. a forward contract is customized where a futures contract is not

There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2017: the option writer:

A. has the requirement to sell 100 shares of GM for $85 a share on or before the third Friday of October 2017 if the option holder wants to exercise the option

An investor who purchases a call option is:

A. highly leveraged for a gain but is limited in losses

The process of marking to market:

A. is done by the clearing corporation to reduce risk in futures contracts

if the price of the underlying asset has a standard deviation of zero:

A. options for this asset would likely not exist - no volatility

An individual who neither uses nor produces a commodity but sells a futures contract for the asset is:

A. speculating that the price of the commodity is going to fall

Considering interest-rate swaps, the swap rate is:

A. the benchmark rate plus a premium

There is a futures contract for the purchase of 1,000 bushels of corn at $3.00 per bushel. At the end of the day when the market price of corn falls to $2.50:

A. the buyer (long position) needs to transfer $500 to the seller (short position)

as an option approaches its expiration date, the value of the option approaches:

A. the intrinsic value

considering a call option, if the price of the underlying asset decreases:

A. the intrinsic value of the option decreases if it is above zero

we have a stock selling for $90. there's a put option for this stock with a strike price of $85 and an option price of $1.20:

A. the intrinsic value of this option is 0 and the time value is 1.20

The option writer is:

A. the seller of an option

A put option described as out of the money would find:

A. the strike price is below the market price of the stock

comparing an option to a futures contract it would be correct to say:

B. A futures contract carries more risk than the options contract

The clearing corporation's main role in the futures market is to:

B. Act as the counterparts to both sides of the transaction, thereby guaranteeing a payment

the main difference between European and American options is:

B. American option holders have more options than European options holders

With a futures contract:

B. No payment is made until the settlement date

If market participants believe next year's corn crop is likely to be unusually large:

B. The current spot market price of corn is likely to be above the futures price of corn

There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel. At the end of the day when the market price of wheat increases to $3.00 per bushel:

B. The seller (short position) needs to transfer $50 to the buyer (long position)

Interest-rate swaps are:

B. agreements between two parties to exchange periodic interest-rate payments over some future period

A call option is:

B. an option giving the holder the right to buy a given quantity of an asset at a specific price on or before a specified date

considering a put option, an increase in the strike price:

B. causes the intrinsic value of the option to increase if it is above zero

Forward contracts are:

B. contracts usually involving the exchange of a commodity or financial instrument

Marking to market is a process that:

B. ensures that the buyers and sellers receive what the contract promises

A U.S Treasury bond dealer with a large portfolio who sells a futures contract for U.S Treasury bonds is:

B. ensuring the sales price o the bond through hedging

Tom buys a futures contract for US treasury bonds and on the settlement date the interest rate on US treasury bonds is lower than tom expected. Tom will have:

B. gained money on his long position

with a call option, the option holder:

B. has the right to buy the asset

speculators differ from hedgers in the sense that:

B. hedgers seek to transfer risk

the time value of the option should:

B. increase the longer the time to expiration

Futures markets and derivatives contribute to economic growth by:

B. increasing the risk-taking capacity of the economy

the intrinsic value of the option

B. is the amount the option is worth if it is exercised immediately

Tom buys a futures contract for U.S Treasury bonds and on the settlement date the interest rate on the bonds is higher than Tom expected. Tom will have:

B. lost money on his long position

the seller of a put option is transferring the risk:

B. of a price increase of the stock to the buyer of the option

the primary risk in swaps is that:

B. one of the parties will default

An individual who neither uses nor produces a commodity but buys a futures contract for the asset is:

B. speculating that the price of the commodity is going to increase

The user of a commodity who is trying to insure against the price of the commodity rising would:

B. take the long position in a futures contract

for a given call option price, which of the following statements is correct?

B. the closer the strike price is to the current price of the underlying asset, the larger is the time value of the option

considering interest-rate swaps, the swap spread is:

B. the difference between the benchmark rate and the swap rate

Derivatives are financial instruments that:

B. when used correctly can actually lower risk

assume we have a stock currently worth $100. We also assume the interest rate is zero, and we can buy option for this stock with a strike price of $100. if the stock can rise or fall by $20 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of the option?

C. 10 20X.5

if a futures contract for US Treasury bonds increases by "12" in the financial page listings, the value of the contract is increased by:

C. 375

The long position in a futures contract is the party that will:

C. Benefit from increases in the price of the underlying asset

the right to buy a given quantity of an underlying asset at a predetermined price on or before a specified date is called a(n):

C. Call option

the value of a derivative is determined by:

C. The value of the underlying asset

In a derivative transaction:

C. What one person gains is what the other person loses

An option's value will never be less than 0 because:

C. an option holder will never make an additional payment to exercise the option

with a put option, the option holder:

C. has the right to sell the asset

One key difference between options contracts and futures contracts is:

C. in an options contract both parties have equal rights

As the volatility of the stock price increases, the time value of the option:

C. increases

the intrinsic value of the call option:

C. is the greater of zero or the difference between the price of the underlying asset and the strike price

at expiration, the time value of an option:

C. is zero

Sue buys a futures contract for U.S treasury bonds and on the settlement date the interest rate is higher than expected. Sue will have:

C. lost money on her long position

a key use of interest-rate swaps is to:

C. provide a hedge against interest-rate risk

The option holder is:

C. the buyer of the option

on the settlement date of a futures contract:

C. the future's price is equal to the price of the underlying asset

the two parts that make up an option's price are:

C. the intrinsic value and the time value of the option

if we have a stock selling for $95 and a call option for this stock has a strike price of $82 and an option price of $13.6:

C. the intrinsic value of the option is 13 and the time value of the option is .60

with a call option that is described as in the money:

C. the market price of the stock is above the strike price

The strike price of an option is:

C. the price at which the option holder has the right to buy or sell

considering a put option; if the price of the underlying asset increases:

C. the value of the option decreases

Options are popular because of all of the following except:

C. they present a tool to limit losses but also limit gains

A pension fund manager who plans on purchasing bonds in the future:

C. will take the long position in a futures contract

a wheat farmer who must purchase his inputs now but will sell his wheat at a market price at a future dateL

C. would hedge by taking the short position in a wheat futures contract

Assume we have a stock currently worth 100. we also assume the interest rate is zero, and we can buy options for this stock with a strike price of $100. if the stock can rise or fall by $5 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of this option?

D none of the answers is correct should be 5x.5=2.5

Users of commodities are:

D. Buyers of futures

The purpose of derivatives is to:

D. Transfer the risk from one person to another

which of the following statements is true: a. call options can be sold prior to expiration but put options cannot b. put options can be sold prior to expiration but call options cannot c. no option can be sold prior to expiration d. both american and european options can be sold prior to expiration

D. both American and European options can be sold prior to expiration

A baker of bread has a long-term fixed-price contract to supply bread. which of the following would NOT reduce her risk? a. raking the long position in wheat futures contract b. hedging this risk in the wheat futures market c. finding a wheat farmer who will take the short position in a wheat futures contract d. finding a wheat farmer who will take the long position in a wheat futures contract

D. finding a wheat farmer who will take the long position in a wheat futures contract

at expiration, the value of an option:

D. is equal to intrinsic value

the principal in an interest rate swap is:

D. is not borrowed, lent, or exchanges. it just serves as the basis for the calculation of cash flows

there's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third friday of October 2018: the option writer:

D. is required to post margin

standardization of derivative contracts:

D. leads to greater liquidity and lower risk

one key difference between swaps and options contracts is:

D. options trade on organized exchanges and swaps do not

one argument why farmers in poor countries remain poor is:

D. poor farmers in many countries lack access to commodity futures markets

An arbitrageur is someone who:

D. simultaneously buys and sells financial instruments to benefit from temporary price differences

the time value of the option can best be defined as:

D. the fee paid for the potential benefits from buying an option (excluding its intrinsic value)

A call option described as at the money would find:

D. the market price of the stock equals the strike price

as the time of settlement gets closer:

D. the price of the futures contract will move in lockstep with the price of the underlying asset

someone who purchases a call option is really buying insurance to protect against:

D. the price of the stock rising

A call option described as out of the money would find

D. the strike price is above the market price of the stock

which of the following would tend to decrease the size of the time value of the option?

D. the time to expiration of the options contract is near

a put option that is described as in the money would find:

the strike price is above the market price of the stock