Deck 1: Introduction to Derivatives

Question 1

This measures the number of financial claims that change hands either daily or annually.

A) Trading volume
B) Market value
C) Notational value
D) Open Interest

Answer 1

A

Question 2

Select the family member who is offering the most diversification to the rest of the family.

A) Dad works for General Motors
B) Mom works for Goodyear
C) Daughter works for Jiffy Lube
D) Son works for Eli Lilly & Company

Answer 2

D

Question 3

During the growing season a corn farmer sells short corn futures contracts in an amount equal to her crop. If upon harvesting and selling her crop she maintains the contracts, she is then considered a:

A) Hedger
B) Speculator
C) Arbitrager
D) None of the above

Answer 3

B

Question 4

Assume that an investor lends 100 shares of Jiffy, Inc. common stock to a short seller. The bid-ask prices are $32.00 - $32.50. When the position is closed the bid-ask prices are $32.50 - $33.00. The commission rate is 0.5%. The market interest rate is 5.0% and the short rebate rate is 3.0%. Calculate the gain or loss to the lender. Assume the lender is not subject to a bid-ask loss or commissions.

A) $164.00 gain
B) $164.00 loss
C) $100.00 gain
D) $100.00 loss

Question 5

All of the following are financially engineered products, except:

A) Mortgage
B) Mortgage backed security
C) Interest only
D) Principal only

Question 6

Assume that you purchase 100 shares of Jiffy, Inc. common stock at the bid-ask prices of $32.00 - $32.50. When you sell the bid-ask prices are $32.50 - $33.00. If you pay a commission rate of 0.5%, what is your profit or loss?

A) $0
B) $16.25 loss
C) $32.50 gain
D) $32.50 loss

Question 7

What phrase might be used to describe the final transaction a short seller conducts when shorting an equity security?

A) Buy
B) Sell
C) Borrow
D) Covering

Question 8

The total number of contracts which exist and are delivery or payment is referred to as the .

A) Trading volume
B) Market value
C) Notational value
D) Open Interest

Question 9

What phrase is often used interchangeably with the phrase market capitalization?

A) Trading volume
B) Market value
C) Notational value
D) Open Interest

Question 10

What is the cost of 100 shares of Jiffy, Inc. stock given that the bid-ask prices are $31.25 - $32.00 and a $15.00 commission per transaction exists?

A) $3215
B) $3140
C) $3125
D) $3200

Question 11

What kind of risk does not disappear when spread across many investors?

A) Diversifiable
B) Nondiversifiable
C) Catastrophic
D) Predictive

Question 12

Assume that you open a 100 share short position in Jiffy, Inc. common stock at the bid-ask price of $32.00 - $32.50. When you close your position the bid-ask prices are $32.50 - $33.00. If you pay a commission rate of 0.5%, calculate your profit or loss on the short investment?

A) $32.50 gain
B) $16.25 loss
C) $132.50 loss
D) $100.00 gain

Question 13

What phrase might be used to describe the initial transaction a short seller initiates when shorting an equity security?

A) Buy
B) Sell
C) Borrow
D) Covering

Question 14

A mutual fund is engaged in the short term and temporary purchase of index futures, for purposes of minimizing its cash exposures. Which ʺuseʺ most closely explains their actions?

A) Risk management
B) Speculation
C) Reduced transaction costs
D) Regulatory arbitrage

Question 15

A firm provides a service that benefits from decreasing employment. This firm has a risk exposure to macro event. All other variables being equal, which of the following derivative securities is the firm most likely use to hedge its exposure?

A) Short position in an economic futures
B) Long position in an economic futures
C) Short position in an interest rate futures
D) Long position in an interest rate futures

Question 16

Which of the following is not a derivative instrument?

A) Contract to sell corn
B) Option agreement to buy land
C) Installment sales agreement
D) Mortgage backed security

Question 17

According to trading volume data tabulated for 2002, which international futures exchange market experienced the highest total trading volume in the world?

A) Chicago Board of Trade
B) Chicago Mercantile Exchange
C) Eurex
D) New York Mercantile Exchange

Question 18

The scale by which a derivative instrument is measured and references the underlying asset is called the .

A) Trading volume
B) Market value
C) Notational value
D) Open Interest

Question 19

Assume that you open a 100 share short position in Jiffy, Inc. common stock at the bid-ask prices of $32.00 - $32.50. When you close your position the bid-ask prices are $32.50 - $33.00. You pay a commission rate of 0.5%. The market interest rate is 5.0% and the short rebate rate is 3.0%. What is your additional gain or loss due to leasing the asset?

A) $64.00 loss
B) $160.00 loss
C) $96.00 gain
D) $0

Question 20

Who from the following list would be considered a speculator by entering into a futures or options contract on commodities?

A) Farmer
B) Corn delivery truck driver
C) Food manufacturer
D) None of the above

Question 21

For families employed and living in ʺcompany townsʺ (i.e., where the major employer owns all homes, retail stores, etc.), explain the lack of diversification.

Question 22

Why might a variable rate mortgage be considered a ʺderivativeʺ and a fixed rate mortgage not?

Question 23

Why would a corn farmer, who maintains a short futures contract after harvesting and selling her crop, be considered a speculator?

Question 24

Describe the concept of a bid-ask spread and how that impacts the cash flows of an investor.