BADM 710 Final Exam (Connect Quizzes)

Which of these will decrease the value of a put option? I. An increase in the market value of the underlying asset II. An increase in the option's strike price III. A decrease in the market value of the underlying asset IV. A decrease in the option's strike price

1 and 4 only

Which of these will increase the value of a call option? I. An increase in the market value of the underlying asset II. An increase in the option's strike price III. A decrease in the market value of the underlying asset IV. A decrease in the option's strike price

1 and 4 only

Which one of these bonds has the highest duration?

15-year zero coupon

Which one of these bonds will have the lowest percentage price change for a stated shift in interest rates?

5-year, high coupon

The main difference between a forward contract and a cash transaction is

A forward contract is fulfilled at a later date while the cash transaction is carried out immediately

If you owe a foreign currency denominated debt, you can hedge with

A long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign country

If you have a long position in a foreign currency, you can hedge with

A short position in a currency forward contract

An in-the-money put option is one that

Has an exercise price greater than the underlying stock price

Suenette wants to own bonds but also wants their market values to remain as steady as possible. Which type of bonds are best suited to her wishes?

High-coupon, short-term

Which one of these statements is true?

Importer and exporters are key players in the exchange market

If a call option has a positive intrinsic value at expiration the call is said to be

In the money

You hold a futures contract to take delivery of U.S. Treasury bonds in 6 months. If the entire term structure of interest rates shifts down over the 6-month period, the value of the forward contract will have _____ the date of delivery

Increased in value by

The value of an option if it were to immediately expire, that is, its lower pricing bound, is called an option's _____ value

Intrinsic

The duration of a pure discount bond is

Is equal to the bond's maturity

The duration of a coupon bond is

Less than that of a zero coupon bond of equal maturity

LIBOR stands for

London Interbank Offered Rate

A miller who needs wheat to mill into flour most likely uses the futures market for taking a

Long hedge position to lock in production costs

A bond manager who wishes to hold the bonds with the greatest potential price volatility should acquire

Long-term, zero-coupon bonds

A financial institution can hedge its interest rate risk by

Matching the duration of its assets, weighted by the market value of its assets with the duration of its liabilities, weighted by the market value of its liabilities

Comparing long-term bonds with short-term bonds, long-term bonds are _____ volatile and therefore experience _____ price change than short-term bonds for the same interest rate shift

More; more

When interest rates shift, the price of zero coupon bonds are ____ volatile ____

More; than coupon bonds of the same maturity

Derivatives can be used to either hedge or speculate. These strategies

Offset risk by hedging and increase rick by speculating

The foreign exchange market is where

One country's currency is traded for another's

A financial contract that provides its owner with the right, but not the obligation, to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract

Option

A put option on ABC stock with an exercise price of $35 expires today. The current price of ABC stock is $36. The put is

Out of the money

Suppose the spot exchange rate is $1 = £.7304 and the 1-month forward rate is $1 = £.7303. Given this, you know the

Pound is selling at a premium

The maximum value of a call option is equal to the

Price of the underlying stock

Jillian owns a call option on WAN stock with a strike price of $20 a share. Currently, WAN is selling for $24.50 a share. Jillian would like to profit on this option but is not permitted to exercise the option for another two weeks. She believes the stock will decline in value before the two weeks is up. What should she do?

Sell her option today

An out-of-the-money call option is best defined as an option that

Should not be exercised

An out-of-the-money call option is best defined as an option that

Should not be exercised at this time

In percentage terms, higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a stated change in market interest rates

Smaller

An agreement to trade currencies based on the exchange rate set today for settlement within two business days is called a(n) _____ trade

Spot

The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's

Strike Price

A security issued in the United States that represents shares of a foreign stock and allows that stock to be traded in the United States is called a(n)

American Depository Receipt

The cross rate is

An implicit rate based on two currencies and their individual relationships with a third currency

If the producer of a product has entered into a fixed price sale agreement for that output, the producer generally faces

An uncertain profit if the input prices are volatile. This risk can be reduced by a long hedge.

Futures contracts

Are standardized

A forward contract is described as agreeing today to either purchase or sell an asset or security

At a later date at a price set today

The price of one country's currency expressed in terms of another country's currency is called the

Exchange rate

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price. How will these two market reactions affect the value of call options on Hi-Tech stock?

Both reactions increase the value of the call options

A _____ is a derivative security that gives the owner the right, but not the obligation, to buy an asset at a fixed price for a specified period of time

Call option

You own stock in a firm that has a pure discount loan due in six months. The loan has a face value of $50,000. The assets of the firm are currently worth $62,000. The stockholders in this firm basically own a _____ option on the assets of the firm with a strike price of ______

Call; $50,000

At expiration, the maximum price of a ____ is the greater of the

Call; stock price minus the exercise price, or 0

Which one of the following is not associated with forward contracts?

Cash transaction

The implicit exchange rate between two currencies when both are quoted in some third currency is called a(n)

Cross-rate

Triangle arbitrage can occur when the _____ rate between two currencies is not _____ to the ratio of the two direct rates

Cross; equal

The most direct and popular way of hedging transaction exposure is by

Currency forward contracts

A financial institution has equity equal to one-tenth of its assets. If its asset duration is currently equal to its liability duration, then to immunize, the firm needs to

Decrease the duration of its assets

An option that may be exercised only on the expiration date is called a(n) _____ option

European

A swap is an arrangement for two counterparties to

Exchange cash flows over time

The act of buying or selling the underlying asset via the option contract is called _______________ the option

Exercising

The act where an owner of an option buys or sells the underlying asset, as is his right, is called ______ the option

Exercising

The last day on which an owner of an option can elect to exercise that option is referred to as the _____ date

Expiration

A European option may be exercised anytime up to and including the expiration date

False (A European option may be exercised only on the expiration date.)

To compute the value of a put using the Black-Scholes option pricing model, you

First have to compute the value of both N(-d1) and N(-d2)

Interest rate swaps allow one party to exchange a

Floating interest rate for a fixed rate

An agreement to exchange currencies at some point in the future using an exchange rate agreed upon today is called a _____ trade

Forward

What kind of trade involves agreeing today on an exchange rate for settlement in 90 days?

Forward trade

A 3-month futures contract on gold is priced at $1,200 per troy ounce when the contract is initiated. If the price of gold rises every day over the 3-month period, then when the contract is settled, the buyer will _____ and the seller will _____

Gain; lose

The buyer of a forward contract will be

Taking delivery of the goods at a later date at a pre-specified price

Which one of the following statements concerning call option writers is true?

The call option writer receives a cash payment when the option is written

Calculate the duration of a $1,000 zero-coupon bond with a current price of $455.59, a maturity of 6 years, and a yield to maturity of 14 percent

The duration of a zero-coupon bond equals to its maturity: 6 years

A potential disadvantage of forward contracts versus futures contracts is

The higher incentive for a particular party to default

Transaction exposure is defined as

The sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes