Econ 2035 Chapter 7
Forward contracts A) are highly liquid. B) entail small information costs. C) provide little risk sharing. D) are subject to default risk.
are subject to default risk
The person on the other side of a transaction is referred to as the A) derivator. B) counterparty. C) hedger. D) speculator.
counterparty
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.
option premium.
An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as A) a swaption. B) a swap option. C) forward swaps. D) plain vanilla.
plain vanilla.
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.
the price of the underlying asset is currently greater than the strike price.
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.
the Commodity Futures Trading Commission.
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 an escrow account until the delivery date. D) the additional funds will not be required from either the buyer or the seller until the delivery date.
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
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.
the futures price gets closer to the spot price
When reading an options listing for a company like General Motors, the further away the expiration date A) the higher the price of the call option and the lower the price of the put option. B) the lower the price of the call option and the higher the price of the put option. C) the higher the price of both the call option and the put option. D) the lower the price of both the call option and the put option.
the higher the price of both the call option and the put option.
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 option.
$25
The primary difference between an American and a European option is A) American options must be exercised on the expiration date. B) European options must be exercised on the expiration date. C) American options may be exercised at any point up until the expiration date. D) European options may be exercised at any point up until the expiration date.
American options may be exercised at any point up until the expiration date.
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.
Investors who want to hedge against stock market volatility can sell VIX options.
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.
It increases it because it reduces risk thus encouraging more people to make financial investments.
The interest rate at which international banks loan to each other is called the A) LIBOR. B) federal funds rate. C) prime rate. D) international bank lending rate.
LIBOR.
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
The issuer receives payments from the buyer in return for agreeing to make payments to the buyer if the security goes into default.
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.
The option is far away from its expiration date.
Which of the following is NOT a regulation applying to swap dealers as a result of the Dodd-Frank Act? A) Swaps must be traded through a clearinghouse. B) The value of swap contracts are limited to no more than $8 billion. C) Dealers are required to deposit a fraction of the value of the contract with the clearinghouse. D) Data on trades must be publicly available.
The value of swap contracts are limited to no more than $8 billion.
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.
They aid hedgers by increasing the liquidity in futures markets.
Which of the following statements regarding futures is TRUE? 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.
Trading in financial futures involves more transactions than trading in commodity futures.
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.
Treasury bond yields will be higher in the future.
Which of the following referred to derivatives as "financial weapons of mass destruction"? A) Ben Bernanke B) Barack Obama C) Warren Buffett D) Michael Lewis
Warren Buffett
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.
assumes the short position.
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.
a business wanting to know the cost of its funds on future loans.
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.
accept risk transferred to them by hedgers
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
acquire a derivative that increases in value if grape prices increase
Forward transactions originated in the market for A) common stock. B) corporate bonds. C) government bonds. D) agricultural and other commodities.
agricultural and other commodities
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.
all of the above
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
all of the above
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.
allow savers and borrowers to conduct a transaction now and settle in the future.
A swap is A) another name for a put option. B) another name for a call option. C) an agreement between two or more counterparties to exchange sets of cash flows over some future period. D) the name for the replacement of a futures contract by an options contract.
an agreement between two or more counterparties to exchange sets of cash flows over some future period.
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.
an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date at a currently agreed-upon price
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.
assets that derive their value from underlying assets.
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.
assets which derive their value from underlying assets.
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.
assumes the long position.
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.
betting on anticipated changes in prices
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.
both buyers and sellers to reduce risks associated with price fluctuations
When reading an options listing for a company like Microsoft A) both call and put options are listed. B) call options, but not put options, are listed. C) put options, but not call options, are listed. D) neither call nor put options are listed.
both call and put options are listed.
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.
buy futures contracts on Treasury bills
An investor who is considering hedging by selling Treasury futures can also hedge by A) buying Treasury put options. B) selling Treasury put options. C) buying Treasury call options. D) buying European Treasury options.
buying Treasury put options.
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.
buying put options on Treasury bills.
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.
can be better tailored to meet the needs of market participants.
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 for equities. D) may be written for equities, but not for debt instruments.
confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time.
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.
counterparties exchange the net interest at the end of the swap.
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.
crediting or debiting the margin account based on the net change in the value of the futures contract.
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.
disagreements among traders about future prices of a commodity or financial instrument
In an options contract, another name for the strike price is the A) market price. B) exercise price. C) equilibrium price. D) fixed price.
exercise price.
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.
funds change hands daily in the case of futures, but not with options.
The most important derivative instruments are A) futures, options, and swaps. B) common and preferred stocks. C) corporate bonds. D) government bonds.
futures, options, and swaps
Which of the following is NOT a benefit of derivatives? A) risk sharing B) guaranteed minimum profit C) liquidity D) information services
guaranteed minimum profit
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.
has a greater insurance benefit than the purchaser of a futures contract.
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.
has the obligation to deliver the underlying financial instrument at the specified date.
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.
has the obligation to receive the underlying financial instrument at the specified future date.
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.
have information problems
A shortcoming of swaps that has led to the domination of the swaps market by large firms and financial institutions is the A) lack of privacy. B) need to assess creditworthiness. C) desire for more flexibility. D) limited size of the market.
need to assess creditworthiness.
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.
in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights.
Which of the following is NOT an advantage of a futures contract over a forward contract? A) reduced counterparty risk B) increased flexibility C) lower information cost D) increased liquidity
increased flexibility
Which of the following is NOT a result of the ability of investors to hedge? A) increased access to funds by firms and households B) investors are more willing to invest C) increased risk aversion D) slower economic growth
increased risk aversion
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.
increases their liquidity.
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.
indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it.
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.
involve immediate settlement.
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.
is the amount the option actually is worth if it is immediately exercised.
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.
its intrinsic value.
A common estimate of individuals who actively trade stocks or derivatives is that A) an equal number earn a profit as suffer a loss. B) more than 75% either break even or earn a profit. C) twice as many suffer losses as earn profits. D) less than 5% are able to break even.
less than 5% are able to break even.
Options traded on exchanges are known as A) listed options. B) exchange traded options. C) call options. D) put options.
listed options.
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.
lost money on your long position.
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.
lost money on your short position.
In 2016, individual investors for the first time A) made up more than 10% of the volume of daily trading of oil futures on the Chicago Mercantile Exchange. B) were prohibited from trading in oil futures. C) were allowed to trade in oil futures. D) surpassed high-income investors in the volume of trading of oil futures on the Chicago Mercantile Exchange.
made up more than 10% of the volume of daily trading of oil futures on the Chicago Mercantile Exchange.
An order from an exchange for a seller to add enough funds to meet the minimum balance in a margin account is called a A) maintenance margin. B) margin option. C) margin call. D) margin put.
margin call.
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.
margin requirement.
Which of the following accurately describes possible positions taken by hedgers? A) may take a short position in the futures market to offset a long position in the spot market B) may take a short position in the spot market to offset a long position in the futures market C) may take a long position in the spot market to offset a short position in the futures market D) may take a long position in the futures market to offset a long position in the spot market
may take a short position in the futures market to offset a long position in the spot market
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.
monitor potential price manipulation in futures trading.
If insurance is available on an activity A) more of that activity will occur. B) less of that activity will occur. C) investors will be less likely to hedge. D) it increases the risk of engaging in that activity.
more of that activity will occur
Forward transactions A) provide substantial liquidity. B) entail small information costs. C) provide risk sharing. D) provide reduced tax payments.
provide risk sharing.
During the financial crisis of 2007-2009, the VIX A) remained relatively stable. B) fell to zero. C) recorded negative values for the first time in history. D) reached a level of 80.
reached a level of 80.
All of the following are roles of an exchange EXCEPT A) instituting margin requirements on futures contracts. B) marking to market at the end of each day. C) eliminating 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.
reducing the default risk involving forward contracts
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.
reducing their exposure to the risk of price fluctuations
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.
reflects a trade-off between the higher cost of using options and the extra insurance benefits that options provide.
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.
reflects traders' expectations of the spot price on the day of delivery.
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.
results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners.
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.
rocket scientists.
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.
sell futures contracts on Treasury bills.
How can a bond investor hedge against a possible bear market in bonds? A) sell futures contracts on Treasury notes B) buy futures contracts on Treasury notes C) going long in the spot market D) going short in the spot market
sell futures contracts on Treasury notes
Swaps differ from futures and options in all of the following ways EXCEPT A) swaps are intended to reduce the risk faced by participants. B) swaps have more flexibility. C) swaps have more privacy. D) swaps have less regulation.
swaps are intended to reduce the risk faced by participants.
The counterparty of someone buying a futures contract on the Chicago Board of Trade is A) the Chicago Board of Trade. B) a hedger. C) a speculator. D) a trader.
the Chicago Board of Trade
Futures trading has traditionally been conducted by A) the New York Stock Exchange. B) the Chicago Board of Trade and the New York Mercantile Exchange. C) the London Stock Exchange. D) the Omaha Grain Exchange.
the Chicago Board of Trade and the New York Mercantile Exchange.
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.
the Commodities Futures Trading Commission
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.
seller has the obligation to deliver the instrument at a specified time.
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.
seller has the obligation to receive the instrument at a specified time.
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.
selling futures contracts on Treasury bills.
When talking about forward contracts, the date on which the contracted delivery must take place is called the A) settlement date. B) counterparty date. C) forward date. D) spot date.
settlement date
When you borrow stock from a broker and sell it now with plans to buy it back after it drops in price, you are engaging in a(n) A) margin call. B) European option. C) American option. D) short sale.
short sale.
Warren Buffet argued that ________ contributed significantly to the financial crisis. A) all derivatives B) only derivatives that are exchange traded C) some derivatives that are not exchange traded D) virtually no derivatives
some derivatives that are not exchange traded
Investors who buy and sell oil derivatives with the hope of profiting from price changes in crude oil are known as A) arbitrageurs. B) speculators. C) wildcatters. D) profiteers.
speculators.
Which of the following best characterizes the profit of a buyer of a futures contract? A) spot price at settlement minus futures price at purchase B) futures price at settlement minus spot price at purchase C) futures price at purchase minus spot price at settlement D) spot price at purchase minus futures price at settlement
spot price at settlement minus futures price at purchase
The terms of futures contracts traded in the United States are A) standardized as to amount or value, but not as to settlement dates. B) standardized as to settlement dates, 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 settlement dates.
standardized as to amount or value and as to settlement dates
A stock option is said to be "out of the money" if the A) 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.
strike price exceeds the stock price.
The price at which an option may be exercised is called the A) market price. B) equilibrium price. C) strike price. D) fixed price.
strike price.
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.
the price of the underlying asset is currently less than the strike price.
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.
the settlement of gains and losses on futures contracts each day.
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.
the spot price will equal the futures price.
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.
the volume of credit default swaps was too low making it difficult to assess their value.
Why do investors hedge using futures contracts? A) they are seeking to increase liquidity B) they are willing to pay for a reduction in risk C) in order to provide a counterparty to speculators D) they are more flexible than forward contracts
they are willing to pay for a reduction in risk
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.
they can be written for long periods.
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.
they generally contain terms specific to the particular buyer and seller.
All of the following are 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.
they were not flexible enough due to lack of standardization.
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.
to transfer interest rate risk to parties that are more willing to bear it.
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.
trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures.
