Money and Banking Chapter 14

23) If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________.

B) loss; $1000

24) If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________.

B) loss; $1000

15) If you sell a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108, your ________ is ________.

B) loss; $3000

12) If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________.

B) loss; $4000

24) When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a

B) micro hedge.

3) The seller of an option has the

B) obligation to buy or sell the underlying asset.

12) A call option gives the seller the

B) obligation to sell the underlying security.

5) The amount paid for an option is the

B) premium.

1) The payoffs for financial derivatives are linked to

C) previously issued securities.

10) On the expiration date of a futures contract, the price of the contract converges to the

C) price of the underlying asset.

22) If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________.

C) profit; $3000

25) If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________.

C) profit; $3000

11) A call option gives the owner the

C) right to buy the underlying security.

2) The price specified on an option at which the holder can buy or sell the underlying asset is called the

C) strike price.

1) A tool for managing interest-rate risk that requires exchange of payment streams is a

C) swap.

5) A firm that sells goods to foreign countries on a regular basis can avoid exchange-rate risk by

C) using a foreign exchange swap.

6) A contract that requires the investor to buy securities on a future date is called a

B) long contract.

21) If you sell twenty-five $100,000 futures contracts to hedge holdings of a Treasury security, the value of the Treasury securities you are holding is

C) $2,500,000.

27) Futures differ from forwards because they are

D) a standardized contract.

6) An option that can be exercised at any time up to maturity is called

D) an American option.

2) Which of the following is not a financial derivative?

A) Stock

3) Suppose you are currently in the long position of a long-term bond. In this case, to hedge against a capital loss, you would enter into a ________ contract to ________ a long-term bond in the future.

A) interest-rate forward; sell

17) If you bought a long contract on financial futures you hope that interest rates

B) fall.

19) If you sold a short futures contract you will hope that bond prices

B) fall.

9) Options on futures contracts are referred to as

B) futures options.

2) The advantage of forward contracts over future contracts is that they

D) are more flexible

28) Hedging by buying an option

B) limits losses.

2) Futures contracts are regularly traded on the

A) Chicago Board of Trade.

4) A swap that involves the exchange of one set of interest payments for another set of interest payments is called

A) an interest rate swap.

27) If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could ________ options on financial futures.

A) buy put

10) An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a

A) call option.

19) If you buy a call option on Treasury futures at 110, and at expiration the market price is 115, the ________ will ________ exercised.

A) call; be

26) The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is

A) controlled while preserving the possibility of gains.

1) The credit derivative that, for a fee, gives the purchaser the right to receive profits that are tied either to the price of an underlying security or to an interest rate is called a

A) credit option.

29) All other things held constant, premiums on call options will increase when the

A) exercise price falls.

8) If a bank has more rate-sensitive assets than rate-sensitive liabilities

A) it reduces interest rate risk by swapping rate-sensitive income for fixed rate income.

8) A person who agrees to buy an asset at a future date is going

A) long.

25) When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a

A) macro hedge.

4) The seller of an option has the ________ to buy or sell the underlying asset while the purchaser of an option has the ________ to buy or sell the asset.

A) obligation; right

1) Forward contracts are of limited usefulness to financial institutions because

A) of default risk.

1) Options are contracts that give the purchasers the

A) option to buy or sell an underlying asset.

9) If Second National Bank has more rate-sensitive liabilities then rate-sensitive assets, it can reduce interest rate risk with a swap that requires Second National to

A) pay fixed rate while receiving floating rate.

13) If you purchase a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108, your ________ is ________.

A) profit; $3000

14) If you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________.

A) profit; $4000

17) An option allowing the owner to sell an asset at a future date is a

A) put option.

3) By hedging a portfolio, a bank manager

A) reduces interest-rate risk.

15) A put option gives the owner the

A) right to sell the underlying security.

16) If you sold a short contract on financial futures you hope interest rates

A) rise.

18) If you bought a long futures contract you hope that bond prices

A) rise.

9) A short contract requires that the investor

A) sell securities in the future.

6) By taking the short position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________.

A) sell; $100,000; $115,000.

7) By taking the short position on a futures contract of $100,000 at a price of 96 you are agreeing to ________ a ________ face value security for ________.

A) sell; $100,000; $96,000.

28) If a firm is due to be paid in euros in two months, to hedge against exchange-rate risk the firm should ________ foreign exchange futures ________.

A) sell; short

5) Parties who have sold a futures contract and thereby agreed to ________ (deliver) the bonds are said to have taken a ________ position.

A) sell; short

10) A contract that requires the investor to sell securities on a future date is called a

A) short contract.

8) Options on individual stocks are referred to as

A) stock options.

4) Hedging risk for a short position is accomplished by

A) taking a long position.

23) Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates fall

A) the increase in the value of the securities equals the decrease in the value of the futures contracts.

6) The most common type of interest-rate swap is

A) the plain vanilla swap.

3) A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is

B) a currency swap.

11) Elimination of riskless profit opportunities in the futures market is

B) arbitrage.

10) One advantage of using swaps to eliminate interest-rate risk is that swaps

B) are less costly than rearranging balance sheets.

7) A long contract requires that the investor

B) buy securities in the future.

29) If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange-rate risk by ________ foreign exchange futures ________.

B) buying; long

13) An option allowing the holder to buy an asset in the future is a

B) call option.

11) An advantage of using swaps to hedge interest-rate risk is that swaps

B) can be written for long horizons.

2) Suppose that Wells Fargo Home Mortgage sells $10 million worth of mortgage payments to GMAC in exchange for $10 million in auto loan payments. This type of transaction is called a

B) credit swap.

14) An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a

B) put option.

20) If you buy a put option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised.

B) put; be

7) If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap that requires Second National to

B) receive fixed rate while paying floating rate.

5) Hedging risk for a long position is accomplished by

B) taking a short position.

22) Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise

B) the decrease in the value of the securities equals the increase in the value of the futures contracts.

30) All other things held constant, premiums on options will increase when the

B) volatility of the underlying asset increases.

7) An option that can only be exercised at maturity is called

C) an European option.

8) By taking the long position on a futures contract of $100,000 at a price of 115 you are agreeing to ________ a ________ face value security for ________.

C) buy; $100,000; $115,000.

9) By taking the long position on a futures contract of $100,000 at a price of 96 you are agreeing to ________ a ________ face value security for ________.

C) buy; $100,000; $96,000.

18) If you buy a call option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised.

C) call; not be

4) Suppose Ford Motor Company issues a 5% bond with a stipulation that if a national index of SUV sales drops by 10%, then Ford can decrease the coupon rate to 3%. This security is called a

C) credit-linked note.

3) When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market

C) has no change in its income.

1) To say that the forward market lacks liquidity means that

C) it may be difficult to make the transaction.

20) To hedge the interest rate risk on $4 million of Treasury bonds with $100,000 futures contracts, you would need to purchase

D) 40 contracts.

4) Parties who have bought a futures contract and thereby agreed to ________ (take delivery of) the bonds are said to have taken a ________ position.

D) buy; long

3) If one party pays a fixed fee on a regular basis in return for a contingent payment that is triggered by a downgrading of a firm's credit rating, that is called a

D) credit default swap.

16) A put option gives the seller the

D) obligation to buy the underlying security.

26) The number of futures contracts outstanding is called

D) open interest.

21) If you buy a put option on treasury futures at 110, and at expiration the market price is 115, the ________ will ________ exercised.

D) put; not be

2) A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a

D) swap.