FINC 325 Ch 11+12
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.
The number of futures contracts required to hedge a position must account for I. the size of the spot position in relation to the size of the futures position. II. the relative price volatility of the spot and futures instruments. III. the initial margin requirement on the contract. IV. the termination date of the contract. a. I and II only. b. I and III only. c. II and IV only. d. III and IV only.
a. I and II only.
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.
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
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.
Which of the following is NOT a reason that foreign exchange markets exist? a. to allow firms to borrow money in their home currency. b. to exchange purchasing power between trading partners with different local currencies. c. to provide a means for passing the risk associated with changes in foreign exchange rates to professional risk-takers. d. to accommodate credit extension and delayed payments for goods and services between countries.
a. to allow firms to borrow money in their home currency.
A college endowment fund is committed to purchasing stock in 3 months when the next installment from its capital campaign is received. To reduce its price risk the fund could I. buy stock index put options II. buy stock index call options III. buy stock index futures IV. sell stock index futures a. I or III b. II or III c. I or IV d. II or IV
b. II or III
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.
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.
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. e. taking no action.
b. buying calls on financial futures.
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
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 e. futures
b. maintenance
French importers of U.S. merchandise are most likely to be involved in foreign exchange markets by a. buying Euros in return for U.S. dollars. b. selling Euros in return for U.S. dollars. c. selling dollars in return for Euros. d. buying both Euros and dollars.
b. selling Euros in return for U.S. dollars.
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
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
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.
A Mexican importer of computer parts from Canada denominated in Canadian dollars would take which action in the foreign exchange markets? a. supply Canadian dollars b. demand pesos c. demand Canadian dollars d. demand U.S. dollars
c. demand Canadian dollars
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
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
A foreign exchange rate is best described as a. the cost of an imported good. b. the current interest rates difference of varying countries. c. the cost of a unit of one currency in terms of another currency. d. the expected change in prices of international goods.
c. the cost of a unit of one currency in terms of another currency.
Which one of the following is the correct definition of segniorage? a. the cost to print money b. the difference between the current account and the financial account c. the difference between the cost of the printed currency and the exchange value of the currency d. the change in the value of the dollar due to balance of payment imbalances
c. the difference between the cost of the printed currency and the exchange value of the currency
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.
Exchange rate risk is best described as a. the cost of a unit of currency in terms of another. b. the variability in the current accounts balance of the balance of payments. c. the variability of investment returns or prices of goods and services caused by changes in the value of one currency versus another. d. the difference between domestic and international interest rates.
c. the variability of investment returns or prices of goods and services caused by changes in the value of one currency versus another.
Some countries have adopted a process of dollarization. This means a. they are members of the U.S. Federal Reserve System. b. they are signers of the Basel Accord. c. they have adopted the U.S. dollar as their currency. d. they have agreed to pay segniorage to the U.S. Federal Reserve.
c. they have adopted the U.S. dollar as their currency.
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
A portfolio manager plans to buy three-month T-bills with the total face value of $1,000,000 in one month. The current price for three-month T-bills is $988,520. What is the fair forward price if the current effective annual risk-free rate over one month is 4%? a. $950,500 b. $985,236 c. $988,520 d. $991,815 e. $1,028,061
d. $991,815
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.
The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon: I. The difference in the durations of bank assets and liabilities. II. The duration of the underlying security named in the futures contract. III. The price of the futures contract. a. I only b. I and II only c. II and III only d. I, II and III
d. I, II and III
The value of a call option varies directly with I. the price volatility of the underlying asset. II. the time to expiration. III. the exercise price. IV. the level of interest rates. a. I and II b. II, III and IV c. III and IV d. I, II and IV e. I, II, III and IV
d. I, II and IV
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.
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
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
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
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.
false
A country's forward exchange rate will represent a higher home currency value relative to its spot exchange rate when people expect it to have more inflation than other countries.
false
A hedger with a long spot position should buy futures to reduce their risk.
false
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.
false
A pension fund manager can protect his/her recent price gains by buying stock index futures contracts.
false
A swap entails buying and selling a futures contract at the same time
false
At least one of two counterparties in a forward contract must be a speculator
false
Exports grow when foreign currencies depreciate relative to the dollar.
false
Futures contracts eliminate risk to all participants.
false
If a Canadian dollar costs $0.83 in U.S. dollars, a U.S. dollar costs a Canadian $1.17 in Canadian dollars.
false
If a U.S. exporter agrees to receive payment in 60 days in pounds, the British importer has assumed the exchange rate risk in the transaction
false
If merchandise imports exceed merchandise exports, the trade balance is in a surplus position.
false
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.
false
Margin risk involves the chance that initial margin requirements will be increased once an investor buys the futures contract.
false
Most forward market contracts are settled before delivery
false
Portfolio insurance with stock index futures is used to eliminate unsystematic risk from stock portfolios.
false
Speculators are gamblers that provide no social value to the economy.
false
The Chicago Board Options Exchange is the primary regulator of options contracts
false
The long financial futures hedger net loses when futures contracts are marked to market after an increase in the price of the underlying asset.
false
When the foreign demand for a country's goods and services increases, the demand for the foreign country's currency also increases.
false
A Canadian dollar cost $0.84 in U.S. dollars and later costs $0.86. The U.S. dollar has depreciated relative to the Canadian dollar
true
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.
true
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.
true
A call option writer will profit if the underlying stock's volatility decreases in value, all else equal.
true
A deficit in the trade balance of payments puts downward pressure on the exchange rate.
true
A depository institution can reduce the variability of its cost of funds by selling Eurodollar futures.
true
A foreign currency will, on average over the long term, appreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States if purchasing power parity holds.
true
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
true
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.
true
A strong dollar would make imports cheaper, and may eventually force domestic producers of goods with import substitutes to lower prices.
true
A weak U. S. dollar will lead to increased foreign demand for U.S goods.
true
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.
true
Capital flight from a country tends to reduce the value of the country's currency relative to other countries.
true
Cross-hedgers involve more basis risk than direct hedges
true
Eurobonds are bearer bonds and do not have to be registered and often pay interest annually rather than semiannually.
true
Foreign financial investment in the U.S. is an inflow in the U.S. financial account and the interest earned on the investments would be an outflow in the U.S. current account.
true
Futures markets involve more standardized contracts compared to forward markets.
true
Governments whose country imports a lot encourage long-term foreign investment in their countries because it helps balance their balance of payments
true
If a government buys its domestic currency from foreigners, its exchange rate will rise all else equal.
true
If an investor can obtain more euros for a dollar in the forward market than in the spot market, then the euro is said to be selling at a discount to its spot rate.
true
If interest rates are higher in Japan than in the United States, the cost of a yen per U.S. dollar in the spot market will typically be higher than in the forward market.
true
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.
true
In balance of payments accounting, a deficit in the current account may be offset by a surplus in the financial accounts
true
In general, writing calls is riskier than buying puts.
true
In the balance of payments, the difference between current account flows, capital and financial account flows is shown as a statistical discrepancy.
true
Margin requirements relate to the amount of cash down payment or equity one must have deposited before participating in a futures trade
true
Options premiums vary directly with the maturity of the option.
true
The demand for foreign exchange by an importer is a demand derived from a pending economic transaction.
true
The open interest is the number of outstanding contracts that have not been offset
true
The price sensitivity rule assists the hedger by estimating the number of futures contracts to trade.
true
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.
true
Writing calls can generate potentially unlimited losses
true
