Finance Exam 1 Qualitative

Which of the following is true about a long forward contract? A. The contract becomes more valuable as the price of the asset rises. B. The contract is worth zero if the price of the asset rises after the contract has been entered into. C. The contract becomes more valuable as the price of the asset declines. D. The contract is worth zero if the price of the asset declines after the contract has been entered into.

A

Which of the following is true about a short forward contract? A. The contract becomes more valuable as the price of the asset declines. B. The contract is worth zero if the price of the asset declines after the contract has been entered into C. The contract becomes more valuable as the price of the asset rises. D. The contract is worth zero if the price of the asset rises after the contract has been entered into

A

Which of the following is true? A. If all companies in an industry do not hedge, a company is liable to increase its risk by hedging. B. If all companies in an industry hedge, a company in the industry can reduce its risk by choosing not to hedge. C. Hedging can always be done more easily by a company's shareholders than by the company itself. D. If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging.

A

Bootstrapping involves : A. The calculation of par yields. B. Working from short maturity instruments to longer maturity instruments determining zero rates at each step. C. Calculating the bond yield D. Working from long maturity instruments to shorter maturity instruments determining zero rates at each step.

B

Given a choice between 5-year and 1-year instruments most people would choose 5-year instruments when borrowing and 1-year instruments when lending. Which of the following is a theory consistent with this observation? A. Expectations Theory B. Liquidity preference theory C. Maturity Preference Theory D. Market segmentation theory

B

Which of the following describes the way the futures price of a foreign currency is quoted? A. The number of foreign currency per US dollars (USD). B. The number of US dollars (USD) per unit of the foreign currency C. Some futures prices are always quoted as the number of USD per unit of the foreign currency and some are always quoted the other way round D. There are no quotation conventions for futures prices.

B

Which of the following increases basis risk? A. A large difference between the futures price when the hedge is put in place and when it is closed out. B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure. C. A reduction in the time between the date and when the futures contract is closed and its delivery month.

B

Which of the following is NOT true about forward and futures contracts? A. Taxes and transaction costs can lead to forward and futures prices being different. B. Forward contracts are more liquid than futures contracts. C. In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates. D. The futures contracts are traded on exchanges while forward contracts are traded in OTC.

B

Which of the following is not true about call and put options? A. A European option can only be exercised on the maturity date. B. The price of a call option increases as the strike price increases. C. Investors must pay an upfront price (the option premium) for an option contract. D. An American option can be exercised at any time during its life.

B

Which of the following is true? A. Forward contracts are traded on exchanges, but futures contracts are not. B. Futures contracts are traded on exchanges, but forward contracts are not. C. Both forward and futures contracts are traded on exchanges. D. Neither futures contracts nor forward contracts are traded on exchanges

B

Which of the following parties to an option contract on a company's shares is obligated to buy shares at the option strike price if the option is exercised? A. Call seller B. Put seller C. Put buyer

B

which of the following is NOT true? A. The forward price of an investment asset can be obtained from the spot price, interest rates, and the income paid on the asset. B. Investment assets are never held for consumption. C. Investment assets are held by significant numbers of investors for investment purposes. D. Gold and silver are invested assets

B

which of the following is true? A. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. B. Futures contracts nearly always last longer than forward contracts. C. Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates. D. Futures contracts are standardized; forward contracts are not.

B

Which of the following best describes the term futures price? A. the price of renting an asset B. the price for immediate delivery C. the price for delivery at a future time D. the price of an asset that has been damaged

C

Which of the following is true for a consumption commodity? A. There is a lower limit to the futures price but no upper limit B. There is not limit to how high or low the futures price can be, except that the futures price cannot be negative C. There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative D. The futures price can be determined with reasonable accuracy from the spot price and interest rates.

C

Which of the following parties to an option contract on a company's shares has the right to buy shares at the exercise price? A. Call seller B. Put seller C. Call buyer

C

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true? A. A forward contract will always give a better outcome than an option. B. An option will always give a better outcome than a forward contract. C. An option can be used to lock in the exchange rate. D. A forward contract can be used to lock in the exchange rate.

D

Under liquidity preference theory, which of the following is always true? A. The spot rate for a certain maturity is higher than the par yield for that maturity. B. Forward rates are unbiased predictors of expected future spot rates. C. The forward rate is higher than the spot rate when both have the same maturity. D. Forward rates are higher than expected future spot rates.

D

What does not describe beta? A. A measure of the sensitivity of the return on an asset to the return on an index. B. The hedge ratio necessary to remove market risk from a portfolio C. The slope of the best fit line when the return on an asset is regressed against the return on the market. D. Measures correlation between futures price and spot prices.

D

Which of the following is NOT true? A. A put option gives the holder the right to sell an asset by a certain date for a certain price. B. The holder of a forward contract is obligated to buy or sell an asset. C. A call option gives the holder the right to buy an asset by a certain date for a certain price. D. The holder of a call or put option must exercise the right to sell or buy an asset.

D

What should a trader do when the one-year forward price of an asset is TOO LOW?

borrow the price of the asset, buy one unit of the asset, and enter a long forward contract to buy the asset in one year

the frequency which margin accounts are adjusted for gains/losses is :

daily

Counterparty risk is most likely lower for :

futures contracts

swap contracts :

have an initial net value of zero, changes in value as the underlying changes in value ; one side of the swap contract loses while the other side gains ; mostly traded in private or OTC

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a long futures position. The basis increases unexpectedly. The hedger's position:

improves

As the convenience yield _______, the one-year futures price as a percentage of the spot price _____ :

increases ; decreases

A one-year forward contract is an agreement where :

one side has the obligation to buy an asset for a certain price at some time during the next year

forward contracts and futures contracts are similar with respect to :

payoffs at maturity

the value of a derivatives contract is most likely to be directly affected by the :

price of the underlying

you hold one long futures contract that expires in April =. To close your position in the futures before the delivery date you must ______ ________ ______ futures contract :

sell ; one ; april

Farmer Bob will harvest his soybeans crop in 6 months, but wants to lock in a price today. Farmer Bob will most likely:

sell a soybeans future contract

who initiates delivery in a soybean futures contract?

short position

an advantage a forward contract has is :

the ability to customize the contract

What best describes the term spot price?

the price for immediate delivery

A repo rate is :

the rate implicit in a transaction where securities are sold and bought back at a higher price

open interest includes :

the sum of short and long positions

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis decreases unexpectedly. The hedger's position:

worsens