Deck 1: Introduction to Derivatives

Question 1

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

Answer 1

D

Question 2

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(n):

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

Answer 2

B

Question 3

All of the following are financially engineered products,except:

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

Answer 3

A

Question 4

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

Question 5

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 6

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 7

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

Question 8

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 9

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 10

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

Question 11

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

Question 12

What would cause the spread between the market rate of interest and the repo rate to be small?

Question 13

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

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

Question 14

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 15

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%,what is 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 16

According to trading volume data tabulated by the Wall Street Journal for April 15,2010,which index futures contact experienced the highest total open interest?

A) DJ Industrial Average
B) S&P 500 Index
C) Mini S&P 500
D) Mini Nasdaq 100

Question 17

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

Question 18

Discuss the origins of derivatives in terms of risk reduction using the concept of evolution to integrate the additional uses of derivatives into the discussion.Conclude by asking students to list methods by which third parties could make fees by interjecting themselves into the process.

Question 19

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