Chapter 10 Pre Work

With a forward contract, cash payments between buyer and seller occur ______, while futures contracts are ______. Multiple choice question. at contract maturity; at contract maturity at contract maturity; marked to market daily at the start of the contract; marked to market daily at the start of the contract; at contract maturity

at contract maturity; marked to market daily

With a forward contract, cash payments between buyer and seller occur ______, while futures contracts are ______. Multiple choice question. at contract maturity; at contract maturity at the start of the contract; marked to market daily at the start of the contract; at contract maturity at contract maturity; marked to market daily

at contract maturity; marked to market daily

If the price of the underlying stock is equal to the strike price, the put option is said to be Multiple choice question. at the money. out of the money. in the money. profitable.

at the money.

The derivative securities markets that are mostly second to the U.S. are in Multiple choice question. Europe. Japan. China. Hong Kong.

Europe.

The two primary regulators of derivatives trading in the U.S. are the ______ and the ______. Multiple choice question. CFTC; FINRA SEC; U.S. Treasury SEC; Federal Reserve SEC; CFTC

SEC; CFTC

True or false: Interest rate swaps are by far the largest segment of the swap market. True false question. True False

True

True or false: U.S. markets and currencies dominate global derivative securities markets. True false question. True False

True

For a put option, if the asset's market price is "S" and the strike price is "X", then the intrinsic value of an in-the-money put option is Multiple choice question. S - X. just S. just X. X - S.

X - S.

A forward contract can be used as ______ against the risk that future spot prices on an asset will move against the investor, by guaranteeing a future price for the asset today. Multiple choice question. insurance a hedge speculation a warning

a hedge

A forward contract can be used as ______ against the risk that future spot prices on an asset will move against the investor, by guaranteeing a future price for the asset today. Multiple choice question. insurance a warning speculation a hedge

a hedge

Select all that apply In an interest rate swap, the ______ agrees to make a number of _______ payments based on a rate and a notional principal. Multiple select question. buyer; floating-rate buyer; fixed-rate seller; floating-rate seller; fixed-rate

buyer; fixed-rate seller; floating-rate

Options are classified as either ______ options or ______ options. Multiple choice question. short; long profitable; unprofitable call; put high; low

call; put

A _____ is like a call option on interest rates, and is used to hedge against increases in interest rates. Multiple choice question. collar floor futures option cap

cap

In the post-2008 era, swap markets have introduced ________ to act as the counterparty to both sides of a swap transaction and thus reduce risk to both buyers and sellers. Multiple choice question. central clearinghouses government swap dealers credit default swaps special purpose vehicles

central clearinghouses

The exchange ________ breaks up every option trade into a buy and sell transaction and takes the opposite side of each transaction, separating buyers from sellers and guaranteeing that the trades will be completed. Multiple choice question. clearinghouse dealer broker professional trade

clearinghouse

A total return swap provides some protection from both ______ and ______. Multiple choice question. interest rate risk; foreign exchange risk foreign exchange risk; liquidity risk credit risk; interest rate risk credit risk; foreign exchange risk

credit risk; interest rate risk

In an interest rate swap, the buyer and seller exchange payments on the same ______ and based on the same ______. Multiple choice question. dates; notional principal notional principal; exchange rate dates; interest rate notional principal; interest rate

dates; notional principal

Futures contracts are not subject to ______ risk. Multiple choice question. interest rate exchange rate liquidity default

default

A(n) _________ generally involves an agreement between two parties to exchange a standard quantity of an asset or cash flow at a predetermined price and at a specified date in the future. Multiple choice question. integral security derivative security secondary security linked security

derivative security

The CFTC has exclusive jurisdiction over all Multiple choice question. futures contract trading. stock option trading. exchange-traded derivative securities. over-the-counter derivative securities trading.

exchange-traded derivative securities.

If a call option is "in the money", the buyer of the call can ______, buying the stock at the ______ and selling it at the market price. Multiple choice question. exercise the option; strike price "X" let the option expire; strike price "X" exercise the option; market price let the option expire; market price

exercise the option; strike price "X"

One of the risks of a fixed-fixed currency swap is that the ______ in the swap contract may favor one party over the other depending upon the current _______. Multiple choice question. fixed exchange rate; interest rates fixed exchange rate; forward rate fixed exchange rate; futures rate fixed exchange rate; spot rate

fixed exchange rate; spot rate

In a(n) ________, two parties agree to swap currencies based on a agreed-upon fixed exchange rate over a period of time. Multiple choice question. interest rate swap total return swap pure credit swap fixed-fixed currency swap

fixed-fixed currency swap

A _____ is like a put option on interest rates, and is used to hedge against decreases in interest rates. Multiple choice question. futures option collar floor cap

floor

The buyer of a floor receives a payment from the seller proportional to the amount that interest rates drop below a specified ______ at maturity. Multiple choice question. collar rate notional amount cap rate floor rate

floor rate

Currency swaps can be effectively used to reduce Multiple choice question. liquidity risk. interest rate risk. default risk. foreign exchange risk.

foreign exchange risk.

A ________ is a contractual agreement between a buyer and a seller at time 0 to exchange a prespecified asset for cash at some later date at a price set at time 0. Multiple choice question. spot contract currency agreement forward rate agreement forward contract

forward contract

Like a forward contract, a ________ is a contractual agreement between a buyer and a seller at time 0 to exchange a prespecified asset for cash at some later date at a price set at time 0. Multiple choice question. forward rate agreement spot contract futures contact currency agreement

futures contact

Spot transactions occur because the buyer of the asset believes its value will Multiple choice question. increase in the immediate future. decrease in the immediate future. increase in the distant future. decrease in the distant future.

increase in the immediate future.

Select all that apply Swaps help their users better manage risks, such as (choose all that apply) Multiple select question. interest rate risk. operating risk. liquidity risk. credit risk. foreign exchange risk.

interest rate risk. credit risk. foreign exchange risk.

Another measure introduced post-2008 to reduce risk in swap markets was Multiple choice question. special purpose designated trading vehicles. international standardization of credit swap contracts. central clearinghouses. government swap dealers.

international standardization of credit swap contracts.

At expiration, an option's value is equal to its Multiple choice question. intrinsic value. time value. strike price. premium value.

intrinsic value.

Similar to trading in the stock market, options trades may be placed as ________ or ________. Multiple choice question. market orders; long orders market orders; short orders short orders; long orders market orders; limit orders

market orders; limit orders

If the price of the underlying stock is greater than the strike price, the put option is said to be Multiple choice question. profitable. out of the money. in the money. not profitable.

out of the money.

If the price of the underlying stock is less than the strike price "X", the call option is said to be Multiple choice question. in the money. profitable. out of the money. not profitable.

out of the money.

If the price of the underlying stock is less than the strike price "X", the call option is said to be Multiple choice question. not profitable. profitable. out of the money. in the money.

out of the money.

A ______ gives the buyer the right but not the obligation to sell an underlying security at a prespecified price called the exercise or strike price. Multiple choice question. forward contract put option call option futures contract

put option

The buyer of the put option must pay the writer of the option an up-front fee known as a(n) Multiple choice question. ask price. call premium. bid price. put premium.

put premium.

An option is a contract that gives the holder the ______ but not the ______ to buy or sell an underlying asset at a prespecified price for a specified time period. Multiple choice question. opportunity; obligation right; obligation opportunity; right right; ability

right; obligation

Derivative securities allow _____ to be transferred from those that want less to those that are willing to bear more. Multiple choice question. losses risk volatility returns

risk

An agreement that involves the immediate and simultaneous exchange of cash for securities is called a Multiple choice question. forward contract. short sale. futures contract. spot contract.

spot contract.

A(n) ______ is an agreement between two parties to exchange specified periodic cash flows in the future based on an underlying instrument or price. Multiple choice question. swap future forward option

swap

A(n) ______ involves swapping an obligation to pay interest at a fixed or floating rate for payments representing the total return on a loan (interest and principal value changes). Multiple choice question. interest rate swap total return swap pure credit swap currency swap

total return swap

The intrinsic value of any out-of-the-money option is Multiple choice question. the market price minus the strike price. zero. just X. the strike price minus the market price.

zero.