Deck 17: Derivative Assets

Question 1

The best known of the derivative assets are

A) futures and options contracts.
B) shares of common stock.
C) interest rate swaps.
D) when-issued stock.

Answer 1

futures and options contracts.

Question 2

The futures market enables farmers to

A) forego crop insurance.
B) largely eliminate price risk.
C) protect against a bad crop.
D) sell their crop for a higher price.

Answer 2

largely eliminate price risk.

Question 3

All of the following are common uses of derivatives except

A) income generation
B) risk management.
C) transferring ownership.
D) income generation.

Answer 3

transferring ownership.

Question 4

Which of the following is not necessary to identify an option?

A) premium
B) striking price
C) underlying asset
D) expiration

Question 5

A put option gives its owner

A) the right to buy.
B) the right to sell.
C) the right to buy or sell.
D) the right to buy back shares previously sold.

Question 6

A football ticket is most similar to

A) a share of stock.
B) a bond.
C) a put option.
D) a call option.

Question 7

The quantity of XYZ option contracts in existence

A) changes every day
B) increases every day
C) decreases every day
D) remains constant every day.

Question 8

Selling an option as an opening transaction is called

A) putting on a hedge.
B) lifting a leg of the hedge.
C) writing the option.
D) laying off the risk.

Question 9

An important characteristic of options is

A) their constant cost.
B) their fungibility.
C) their protection by the CFTC.
D) their guaranteed minimum return.

Question 10

During options trading, credit differentials are unimportant because of the

A) Securities and Exchange Commission.
B) Options Clearing Corporation.
C) Chicago Board Options Exchange.
D) Price reporting system.

Question 11

An option premium equals

A) intrinsic value minus time value.
B) time value minus intrinsic value.
C) time value plus intrinsic value.
D) time value.

Question 12

An option that is in-the-money

A) must have intrinsic value.
B) must have time value.
C) must have a negative premium.
D) must have time value greater than its premium.

Question 13

A put is in-the-money if

A) its strike price equals the stock price.
B) its strike price is greater than the stock price.
C) its strike price is less than the stock price.
D) it is guaranteed by the OCC.

Question 14

An at-the-money option

A) has a striking price equal to the premium.
B) has a striking price equal to the stock price.
C) has zero time value.
D) has a premium less than zero.

Question 15

An option that can be exercised anytime is a(n) _____ option.

A) American
B) European
C) knock-out
D) barrier

Question 16

Which of the following is false?

A) The option premium is a down payment on the option terms.
B) The option premium should never be less than the intrinsic value.
C) A call option and a put option with similar terms cannot both be in-the-money at the same time.
D) Call premiums and put premiums can both change in value every day.

Question 17

Which of the following is most correct?

A) Options are usually exercised early.
B) Options are never exercised early.
C) Valuable options are usually sold rather than exercised.
D) The option writer decides when and if to exercise.

Question 18

A futures contract is a _____ ; an option is a _____ .

A) right, promise.
B) promise, right.
C) promise, promise.
D) right, right.

Question 19

Futures contracts have a

A) delivery month.
B) expiration date.
C) fixed settlement date.
D) exercise window.

Question 20

For a futures contract to be successful, both _____ and _____ should be present.

A) short- and long-term investors
B) gamblers and speculators
C) hedgers and speculators
D) taxable investors and tax-exempt investors

Question 21

_____ accept risk from _____ .

A) Hedgers, speculators
B) Speculators, hedgers
C) Hedgers, gamblers
D) Speculators, gamblers

Question 22

The futures market helps reduce _____ risk.

A) crop failure
B) bond default
C) financial
D) price

Question 23

Trades between _____ and _____ usually flow through _____ .

A) marketmakers, hedgers, speculators
B) marketmakers, speculators, hedgers
C) hedgers, speculators, marketmakers
D) hedgers, marketmakers, speculators

Question 24

Purchase of a futures contract requires payment of _____ .

A) a good faith deposit
B) half the contract value
C) a maintenance margin
D) 30% of the contract value

Question 25

The most popular stock index futures contract is on the _____ .

A) Dow Jones Industrial Average
B) Standard & Poor's 500 index
C) Value Line Equity
D) Wilkshire 2000 Index

Question 26

Which of the following regarding T-bill futures contracts is incorrect?

A) They are fungible.
B) They are cash-settled.
C) They are marked to market.
D) They rise in value when interest rates fall.

Question 27

Everything else being equal, a T-bond with a high coupon has a

A) higher duration.
B) lower yield to maturity.
C) more distant first call date.
D) higher Chicago Board of Trade conversion factor.

Question 28

An important bond with T-bond futures is the bond that is

A) cheapest to deliver.
B) most fungible.
C) most recently issued.
D) next callable.

Question 29

Which of the following statements is most accurate?

A) Over-the-counter derivatives are safer than exchange-traded derivatives.
B) Exchange-traded derivatives have less credit risk than OTC derivatives.
C) OTC derivatives are marketable.
D) OTC derivatives are government regulated, while exchange-traded derivatives are not.

Question 30

Fundamental option valuation research methodology was undertaken by

A) Brown & Root
B) Dun & Bradstreet
C) Black & Scholes
D) Fama & Jensen

Question 31

All of the following are derivative market participants except

A) Hedgers
B) Marketmakers
C) Speculators
D) none since all are participants

Question 32

The first U.S. derivatives exchange was the New York Stock Exchange.

Question 33

Futures markets provide for the reduction or elimination of price risk.

Question 34

Some derivatives can be used for income generation.

Question 35

A put option gives its owner the right to sell a particular underlying asset.

Question 36

Option striking prices are standardized in two dollar intervals.

Question 37

Buying an option as an opening transaction is called writing the option.

Question 38

An in-the-money option must have intrinsic value.

Question 39

A European option may only be exercised at its maturity.

Question 40

Valuable options are usually sold rather than exercised.

Question 41

The option writer decides when and if to exercise the option.

Question 42

Futures contracts do not expire unexercised.

Question 43

Speculators use futures contracts to reduce risk.

Question 44

Another name for a good faith deposit is performance bond.

Question 45

If the stock market rises substantially, the value of an S&P 500 futures contract should decline.

Question 46

Eurodollars and T-bill futures are both short-term interest rate instruments.

Question 47

For futures delivery purposes, some Treasury bonds are more valuable than others.

Question 48

Accrued interest is part of the invoice price with Treasury bond futures contract delivery.

Question 49

There is usually a single Treasury bond issue that is cheapest to deliver.

Question 50

Foreign currency futures call for the delivery of foreign money at one of three banks in New York City.

Question 51

Derivative assets are neutral products; they are not inherently risky or conservative.

Question 52

The participants in futures trading include only hedgers and speculators.

Question 53

A corn farmer would buy corn futures to hedge his price risk in corn.

Question 54

A futures contract is exchange-traded; a forward contract is not.

Question 55

Writers of call options must own the underlying security.

Question 56

After a company has finished hedging (futures) its price risk associated with raw materials, it closes the hedge by selling an equal number of futures contracts.