Question 1

Forward transactions&#10;A) allow savers and borrowers to conduct a transaction now and settle in the future.&#10;B) allow savers and borrowers to postpone a transaction from now to the future.&#10;C) always involve increased risk compared with spot transactions.&#10;D) may not be conducted on organized exchanges.

Accepted Answer

Forward transactions involve an agreement between a saver (usually a lender) and a borrower to conduct a transaction now, but settle it in the future. This allows borrowers to plan ahead and lock in interest rates, while savers can guarantee a return on their investment. Forward transactions can be conducted over-the-counter or on organized exchanges, and do not necessarily involve increased risk compared to spot transactions.

Question 2

Which of the following is NOT a result of the ability of investors to hedge?&#10;A) increased access to funds by firms and households&#10;B) investors are more willing to invest&#10;C) increased risk aversion&#10;D) slower economic growth

Accepted Answer

Increased risk aversion is not a result of the ability of investors to hedge. Hedging allows investors to reduce their risk, which makes them more willing to invest.

Question 3

Forward transactions originated in the market for&#10;A) common stock.&#10;B) corporate bonds.&#10;C) government bonds.&#10;D) agricultural and other commodities.

Accepted Answer

Forward transactions are commonly done in the market for agricultural and other commodities, such as grains, livestock, and precious metals. These contracts allow buyers and sellers to agree on a future price for these goods, which can help them manage price risk and plan for future delivery. While forward contracts can also be used in other markets, such as stocks, bonds, and currencies, they are most commonly associated with commodities trading.

Question 4

Which of the following is NOT a benefit of derivatives?&#10;A) risk sharing&#10;B) guaranteed minimum profit&#10;C) liquidity&#10;D) information services

Accepted Answer

Derivatives do provide risk sharing, liquidity, and information services, but they do not guarantee minimum profits. In fact, the value of a derivative can fluctuate greatly depending on market conditions and other factors, so there is no guarantee of any profits or returns.

Question 5

Speculators are primarily interested in&#10;A) betting on anticipated changes in prices.&#10;B) reducing their exposure to the risk of price fluctuations.&#10;C) increasing market liquidity.&#10;D) reducing the spread between bid and ask prices on bonds.

Accepted Answer

Speculators seek to profit from anticipated changes in prices by buying and selling financial assets. They take on risk in the hope of making a profit, rather than seeking to reduce exposure to risk or increase market liquidity.

Question 6

Spot transactions&#10;A) involve immediate settlement.&#10;B) may only take place in face-to-face trading.&#10;C) take place on-the-spot, rather than on an organized exchange.&#10;D) are relatively unimportant in financial markets.

Accepted Answer

Spot transactions involve immediate settlement, meaning that payment and delivery of the asset occur simultaneously. This differentiates them from futures or options contracts, which involve an agreement to transact at a later date.

Question 7

Using forward transactions allows&#10;A) holders of common stock to lock in future dividend payments.&#10;B) the federal government to stabilize fluctuations in tax receipts.&#10;C) corporations to reduce problems arising from future fluctuations in their dividend payments.&#10;D) both buyers and sellers to reduce risks associated with price fluctuations.

Accepted Answer

Forward transactions allow both buyers and sellers to lock in a price for a future transaction, reducing the risks associated with price fluctuations. This can benefit corporations who want to hedge against future price changes, but it is not specifically related to reducing problems with dividend payments. The federal government may use other strategies to stabilize tax receipts, so option B is not correct. Option A is incorrect because common stockholders generally do not receive guaranteed dividend payments, let alone the ability to lock in future payments.

Question 8

Forward transactions would be useful to&#10;A) a government wanting to know the size of its future debt.&#10;B) a household wanting to reduce its future tax liability.&#10;C) a business wanting to know the cost of its funds on future loans.&#10;D) a business wanting to expand its operations in overseas markets.

Accepted Answer

Forward transactions are agreements between parties to buy or sell an asset at a future date at a predetermined price. Businesses can use forward transactions to know the cost of funds on future loans. This can help them make better decisions about whether or not to take on debt, and if so, how much debt to take on. It can also help them plan for future expenses and manage their cash flow more effectively. Governments may also use forward transactions to know the size of their future debt, but households wanting to reduce their future tax liability and businesses wanting to expand their operations in overseas markets would not typically use forward transactions for these purposes.

Question 9

In derivative markets,trade takes place in&#10;A) assets such as bonds or common stock that derive their value from the value of the companies which issue them.&#10;B) assets whose rates of returns must be derived from information published in financial tables.&#10;C) assets that derive their value from underlying assets.&#10;D) assets which are not allowed to be traded on organized exchanges.

Accepted Answer

In derivative markets, trade takes place in assets that derive their value from underlying assets. Examples of underlying assets include commodities, currencies, and stock market indices. These underlying assets are used to create financial instruments such as futures contracts, options contracts, and swaps. Because the value of these derivatives is based on the value of an underlying asset, they are considered to be derived from that asset.

Question 10

The most important derivative instruments are&#10;A) futures, options, and swaps.&#10;B) common and preferred stocks.&#10;C) corporate bonds.&#10;D) government bonds.

Accepted Answer

Futures, options, and swaps are the most important derivative instruments as they allow investors to manage financial risks by entering into contracts based on underlying assets such as stocks, bonds, commodities, or currencies. Common and preferred stocks, corporate bonds, and government bonds are not derivative instruments, as they represent ownership in a company or a fixed-income security.

Question 11

Forward transactions&#10;A) provide little risk sharing.&#10;B) are very liquid.&#10;C) have information problems.&#10;D) are widely used by sellers of commodities, but rarely used by buyers of commodities.

Accepted Answer

The answer of Forward transactions&#10;A) provide little risk sharing.&#10;B) are...

Question 12

Derivative instruments are&#10;A) assets such as bonds or common stock that derive their value from the value of the companies which issue them.&#10;B) assets whose rates of returns must be derived from information published in financial tables.&#10;C) assets which derive their value from underlying assets.&#10;D) computers which display real-time financial information.

Accepted Answer

The answer of Derivative instruments are&#10;A) assets such as bonds...

Question 13

Hedgers are primarily interested in&#10;A) betting on anticipated changes in prices.&#10;B) reducing their exposure to the risk of price fluctuations.&#10;C) increasing market liquidity.&#10;D) reducing the spread between bid and ask prices on bonds.

Accepted Answer

The answer of Hedgers are primarily interested in&#10;A) betting on...

Question 14

Describe two useful purposes served by speculators in derivatives markets.

Accepted Answer

The answer of Describe two useful purposes served by speculators...

Question 15

Profits from speculation arise because of&#10;A) the spread between the bid and ask prices on bonds.&#10;B) the illiquidity of markets for derivative instruments.&#10;C) the high information costs in markets for derivative instruments.&#10;D) disagreements among traders about future prices of a commodity or financial instrument.

Accepted Answer

The answer of Profits from speculation arise because of&#10;A) the...

Question 16

How does hedging affect the flow of funds in the financial system?&#10;A) It reduces it since it is a sign that investors do not like risk.&#10;B) It reduces it because it increases risk by encouraging speculation.&#10;C) It increases it because it reduces risk thus encouraging more people to make financial investments.&#10;D) It increases it by encouraging more speculation.

Accepted Answer

The answer of How does hedging affect the flow of...

Question 17

If insurance is available on an activity&#10;A) more of that activity will occur.&#10;B) less of that activity will occur.&#10;C) investors will be less likely to hedge.&#10;D) it increases the risk of engaging in that activity.

Accepted Answer

The answer of If insurance is available on an activity&#10;A)...

Question 18

Suppose you are a manager for a company that produces grape jelly.Which of the following is the best way for you to reduce your risk?&#10;A) acquire a derivative that increases in value if grape prices increase&#10;B) acquire a derivative that increases in value if grape jelly prices increase&#10;C) sell a derivative that increases in value if grape prices increase&#10;D) sell a derivative that increases in value if grape jelly prices increase

Accepted Answer

The answer of Suppose you are a manager for a...

Question 19

Investors who buy and sell oil derivatives with the hope of profiting from price changes in crude oil are known as&#10;A) arbitrageurs.&#10;B) speculators.&#10;C) wildcatters.&#10;D) profiteers.

Accepted Answer

The answer of Investors who buy and sell oil derivatives...

Question 20

Speculators in derivatives markets&#10;A) reduce the efficiency of these markets.&#10;B) are acting contrary to U.S. securities laws.&#10;C) accept risk transferred to them by hedgers.&#10;D) reduce the liquidity of these markets.

Accepted Answer

The answer of Speculators in derivatives markets&#10;A) reduce the efficiency...

Question 21

Forward contracts are often illiquid because&#10;A) any capital gains on them are heavily taxed, making investors reluctant to sell them.&#10;B) government regulation has not provided for a secondary market in them.&#10;C) they generally contain terms specific to the particular buyer and seller.&#10;D) the brokerage fees involved in buying and selling them are very high.

Accepted Answer

The answer of Forward contracts are often illiquid because&#10;A) any...

Question 22

Why are forward contracts typically illiquid?

Accepted Answer

The answer of Why are forward contracts typically illiquid?...

Question 23

The seller of a futures contract&#10;A) assumes the short position.&#10;B) assumes the long position.&#10;C) has the obligation to receive the underlying financial instrument at the specified future date.&#10;D) is expecting the price of the underlying financial instrument to rise.

Accepted Answer

The answer of The seller of a futures contract&#10;A) assumes...

Question 24

The counterparty of someone buying a futures contract on the Chicago Board of Trade is&#10;A) the Chicago Board of Trade.&#10;B) a hedger.&#10;C) a speculator.&#10;D) a trader.

Accepted Answer

The answer of The counterparty of someone buying a futures...

Question 25

In 2016,individual investors for the first time&#10;A) made up more than 10% of the volume of daily trading of oil futures on the Chicago Mercantile Exchange.&#10;B) were prohibited from trading in oil futures.&#10;C) were allowed to trade in oil futures.&#10;D) surpassed high-income investors in the volume of trading of oil futures on the Chicago Mercantile Exchange.

Accepted Answer

The answer of In 2016,individual investors for the first time&#10;A)...

Question 26

The buyer of a futures contract&#10;A) assumes the short position.&#10;B) assumes the long position.&#10;C) may not sell the contract without the permission of the original seller.&#10;D) has the obligation to deliver the underlying financial instrument at the specified future date.

Accepted Answer

The answer of The buyer of a futures contract&#10;A) assumes...

Question 27

Forward transactions&#10;A) provide substantial liquidity.&#10;B) entail small information costs.&#10;C) provide risk sharing.&#10;D) provide reduced tax payments.

Accepted Answer

The answer of Forward transactions&#10;A) provide substantial liquidity.&#10;B) entail small...

Question 28

What are the information costs associated with forward contracts?

Accepted Answer

The answer of What are the information costs associated with...

Question 29

A common estimate of individuals who actively trade stocks or derivatives is that&#10;A) an equal number earn a profit as suffer a loss.&#10;B) more than 75% either break even or earn a profit.&#10;C) twice as many suffer losses as earn profits.&#10;D) less than 5% are able to break even.

Accepted Answer

The answer of A common estimate of individuals who actively...

Question 30

A futures contract is&#10;A) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date at a currently agreed-upon price.&#10;B) an agreement that specifies the delivery of a commodity or financial instrument at an agreed-upon future date, with the price to be negotiated at the time of delivery.&#10;C) an agreement that specifies the delivery of a commodity or financial instrument at a currently agreed-upon price, with date of delivery to be negotiated subsequently.&#10;D) an agreement that specifies the delivery of a commodity or financial instrument, with the price and date of delivery to be negotiated subsequently.

Accepted Answer

The answer of A futures contract is&#10;A) an agreement that...

Question 31

If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period,futures market investors must expect that&#10;A) Treasury bond prices will be higher in the future.&#10;B) Treasury bond yields will be higher in the future.&#10;C) Treasury bond yields will be lower in the future.&#10;D) futures prices will rise again at the end of the period.

Accepted Answer

The answer of If you look at the financial page...

Question 32

Which of the following statements regarding futures is TRUE?&#10;A) Trading futures contracts on agricultural and mineral commodities makes up a majority of all trading.&#10;B) Trading in financial futures involves more transactions than trading in commodity futures.&#10;C) Futures trading is allowed only for financial assets.&#10;D) Futures trading is allowed only for commodities.

Accepted Answer

The answer of Which of the following statements regarding futures...

Question 33

When talking about forward contracts,the date on which the contracted delivery must take place is called the&#10;A) settlement date.&#10;B) counterparty date.&#10;C) forward date.&#10;D) spot date.

Accepted Answer

The answer of When talking about forward contracts,the date on...

Question 34

The person on the other side of a transaction is referred to as the&#10;A) derivator.&#10;B) counterparty.&#10;C) hedger.&#10;D) speculator.

Accepted Answer

The answer of The person on the other side of...

Question 35

The existence of counterparty risk&#10;A) has no effect on the contracting parties.&#10;B) is disallowed under current government regulations.&#10;C) results in information costs for buyers and sellers when analyzing the potential creditworthiness of potential trading partners.&#10;D) reduces the risk introduced by forward contracts.

Accepted Answer

The answer of The existence of counterparty risk&#10;A) has no...

Question 36

The buyer of a futures contract&#10;A) assumes the short position.&#10;B) has the obligation to deliver the underlying financial instrument at the specified date.&#10;C) has the obligation to receive the underlying financial instrument at the specified future date.&#10;D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Accepted Answer

The answer of The buyer of a futures contract&#10;A) assumes...

Question 37

The seller of a futures contract&#10;A) assumes the long position.&#10;B) has the obligation to deliver the underlying financial instrument at the specified date.&#10;C) has the obligation to receive the underlying financial instrument at the specified future date.&#10;D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Accepted Answer

The answer of The seller of a futures contract&#10;A) assumes...

Question 38

Forward contracts&#10;A) are highly liquid.&#10;B) entail small information costs.&#10;C) provide little risk sharing.&#10;D) are subject to default risk.

Accepted Answer

The answer of Forward contracts&#10;A) are highly liquid.&#10;B) entail small...

Question 39

In recent decades&#10;A) trading in financial futures declined in importance relative to trading in agricultural and mineral commodities futures.&#10;B) trading in financial futures increased in importance relative to trading in agricultural and mineral commodities futures.&#10;C) trading in agricultural and commodities futures was discontinued.&#10;D) trading in financial futures was discontinued.

Accepted Answer

The answer of In recent decades&#10;A) trading in financial futures...

Question 40

Standardization of derivative contracts&#10;A) increases their liquidity.&#10;B) is the rule with respect to contracts whose underlying asset is a financial security, but not for contracts whose underlying asset is a commodity.&#10;C) is the rule with respect to contracts whose underlying asset is a commodity, but not for contracts whose underlying asset is a financial asset.&#10;D) has been proposed many times by financial analysts, but has not yet been carried out by the SEC.

Accepted Answer

The answer of Standardization of derivative contracts&#10;A) increases their liquidity.&#10;B)...

Question 41

Futures trading has traditionally been conducted by&#10;A) the New York Stock Exchange.&#10;B) the Chicago Board of Trade and the New York Mercantile Exchange.&#10;C) the London Stock Exchange.&#10;D) the Omaha Grain Exchange.

Accepted Answer

The answer of Futures trading has traditionally been conducted by&#10;A)...

Question 42

A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by&#10;A) buying futures contracts on Treasury bills.&#10;B) selling futures contracts on Treasury bills.&#10;C) buying call options on Treasury bills.&#10;D) increasing the amount of money which it lends.

Accepted Answer

The answer of A lender who is worried that its...

Question 43

Futures trading practices in the United States are regulated by&#10;A) the Chicago Board of Trade.&#10;B) the Chicago Mercantile Exchange.&#10;C) the Commodities Futures Trading Commission.&#10;D) the Board of Futures Trading.

Accepted Answer

The answer of Futures trading practices in the United States...

Question 44

Financial futures contracts are regulated by&#10;A) the Commodity Futures Trading Commission.&#10;B) the Federal Trade Commission.&#10;C) the Interstate Commerce Commission.&#10;D) the Options and Futures Commission.

Accepted Answer

The answer of Financial futures contracts are regulated by&#10;A) the...

Question 45

The terms of futures contracts traded in the United States are&#10;A) standardized as to amount or value, but not as to settlement dates.&#10;B) standardized as to settlement dates, but not as to amount or value.&#10;C) not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller.&#10;D) standardized as to amount or value and as to settlement dates.

Accepted Answer

The answer of The terms of futures contracts traded in...

Question 46

If the price of a futures contract increases,then&#10;A) the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract.&#10;B) the exchange will collect the amount of the increase from the buyer of the contract and transfer it to the account of the seller of the contract.&#10;C) the exchange will collect the amount of the increase from both the buyer and the seller and place it in an escrow account until the delivery date.&#10;D) the additional funds will not be required from either the buyer or the seller until the delivery date.

Accepted Answer

The answer of If the price of a futures contract...

Question 47

On the day of delivery&#10;A) the spot price will equal the futures price.&#10;B) the spot price will be greater than the futures price by an amount equal to the current interest rate times the futures price.&#10;C) the futures price will be greater than the spot price by an amount equal to the current interest rate times the spot price.&#10;D) there is no necessary relation between the spot price and the futures price.

Accepted Answer

The answer of On the day of delivery&#10;A) the spot...

Question 48

If you buy a futures contract for U.S.Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected,you will have&#10;A) lost money on your long position.&#10;B) gained money on your long position.&#10;C) lost money on your short position.&#10;D) gained money on your short position.

Accepted Answer

The answer of If you buy a futures contract for...

Question 49

Which of the following financial futures contracts are traded in the United States?&#10;A) interest rates&#10;B) stock indexes&#10;C) currencies&#10;D) all of the above

Accepted Answer

The answer of Which of the following financial futures contracts...

Question 50

The futures price&#10;A) reflects traders' expectations of the spot price on the day of delivery.&#10;B) is always above the spot price on the day of delivery.&#10;C) is always below the spot price on the day of delivery.&#10;D) is always equal to the spot price at every point in time.

Accepted Answer

The answer of The futures price&#10;A) reflects traders' expectations of...

Question 51

If you sell a futures contract for U.S.Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected,you will have&#10;A) lost money on your long position.&#10;B) gained money on your long position.&#10;C) lost money on your short position.&#10;D) gained money on your short position.

Accepted Answer

The answer of If you sell a futures contract for...

Question 52

The initial deposit required by a buyer or seller of a futures contract is known as&#10;A) credit.&#10;B) margin requirement.&#10;C) debit.&#10;D) marking.

Accepted Answer

The answer of The initial deposit required by a buyer...

Question 53

As the time of delivery in a futures contract gets closer&#10;A) the futures price gets closer to the spot price.&#10;B) the futures price generally rises further above the spot price.&#10;C) the futures price generally falls further below the spot price.&#10;D) the futures and spot prices remain the same as they were when the contract was first created.

Accepted Answer

The answer of As the time of delivery in a...

Question 54

The role of the Commodity Futures Trading Commission is to&#10;A) set the prices of futures contracts.&#10;B) operate the Chicago Mercantile Exchange.&#10;C) operate the Chicago Board of Trade.&#10;D) monitor potential price manipulation in futures trading.

Accepted Answer

The answer of The role of the Commodity Futures Trading...

Question 55

Marking to market involves&#10;A) changing the futures price to the spot price each day.&#10;B) engaging in arbitrage so as to reduce the risk involved with futures contracts.&#10;C) crediting or debiting the margin account based on the net change in the value of the futures contract.&#10;D) updating the futures price after the market closes each day.

Accepted Answer

The answer of Marking to market involves&#10;A) changing the futures...

Question 56

Marking to market refers to&#10;A) the determination of the prices of options contracts by the interaction of demand and supply.&#10;B) the determination of the prices of futures contracts by the interaction of demand and supply.&#10;C) the settlement of gains and losses on futures contracts each day.&#10;D) the settlement of gains and losses on forward contracts each day.

Accepted Answer

The answer of Marking to market refers to&#10;A) the determination...

Question 57

Which of the following statements about the presence of speculators in futures markets is correct?&#10;A) Their main objective is to reduce their exposure to risk.&#10;B) They aid hedgers by increasing the liquidity in futures markets.&#10;C) They make it difficult for hedgers to find someone to take the opposite side of their positions.&#10;D) Once a futures market participant is known to be a speculator, he or she is no longer allowed to participate in the market.

Accepted Answer

The answer of Which of the following statements about the...

Question 58

A speculator who believes strongly that interest rates will fall would be likely to&#10;A) buy futures contracts on Treasury bills.&#10;B) sell futures contracts on Treasury bills.&#10;C) sell Treasury bonds in the spot market.&#10;D) decrease now the amount of money which he lends.

Accepted Answer

The answer of A speculator who believes strongly that interest...

Question 59

A speculator who believes strongly that interest rates will rise would be likely to&#10;A) buy futures contracts on Treasury bills.&#10;B) sell futures contracts on Treasury bills.&#10;C) buy Treasury bonds in the spot market.&#10;D) increase now the amount of money which he lends.

Accepted Answer

The answer of A speculator who believes strongly that interest...

Question 60

Which of the following is NOT an advantage of a futures contract over a forward contract?&#10;A) reduced counterparty risk&#10;B) increased flexibility&#10;C) lower information cost&#10;D) increased liquidity

Accepted Answer

The answer of Which of the following is NOT an...

Question 61

Southwest Airlines relies on jet fuel to operate its planes.If it chooses to hedge against future changes in fuel prices,what positions (long or short)will it take in the spot and futures markets?

Accepted Answer

The answer of Southwest Airlines relies on jet fuel to...

Question 62

All of the following are roles of an exchange EXCEPT&#10;A) instituting margin requirements on futures contracts.&#10;B) marking to market at the end of each day.&#10;C) eliminating the need for buyers and sellers of futures contracts to be concerned about the creditworthiness of each other.&#10;D) reducing the default risk involving forward contracts.

Accepted Answer

The answer of All of the following are roles of...

Question 63

Why do futures have lower information costs and higher liquidity than forward contracts?

Accepted Answer

The answer of Why do futures have lower information costs...

Question 64

One difference between futures and options contracts is&#10;A) funds change hands daily in the case of options but not with futures.&#10;B) funds change hands daily in the case of futures, but not with options.&#10;C) in the case of futures, funds only change hands when they are exercised.&#10;D) futures are designed to reduce risk while options are not.

Accepted Answer

The answer of One difference between futures and options contracts...

Deck 7: Derivatives and Derivative Markets