Deck 13: Risk Management With Financial Derivatives

Question 1

A short position requires that the investor ________.

A)sell securities in the future
B)buy securities in the future
C)hedge in the future
D)close out his position in the future

Answer 1

A

Question 2

A long position requires that the investor ________.

A)sell securities in the future
B)buy securities in the future
C)hedge in the future
D)close out his position in the future

Answer 2

B

Question 3

If you buy in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

A)loss; 5000
B)loss; 5
C)profit; 5000
D)profit; 5

Answer 3

A

Question 4

If you sell in March a bond future contract for 97 that matures on June 30 of the same year, and at the maturity date the same future sells for 93, you have a ________ of $________.

A)loss; 4000
B)loss; 4
C)profit; 4000
D)profit; 4

Question 5

A contract that requires the investor to buy securities on a future date is called a ________.

A)short position
B)long position
C)hedge
D)cross

Question 6

A contract that requires the investor to sell securities on a future date is called a ________.

A)short position
B)long position
C)hedge
D)micro hedge

Question 7

If you sell in February a bond future contract for 120 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

A)loss; 10000
B)loss; 10
C)profit; 10000
D)profit; 10

Question 8

If you buy in March a bond future contract for 97 that matures on June 30 of the same year, and at the maturity date the same future sells for 93, you have a ________ of $________.

A)loss; 4000
B)loss; 4
C)profit; 4000
D)profit; 4

Question 9

If you sell in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

A)loss; 5000
B)loss; 5
C)profit; 5000
D)profit; 5

Question 10

Financial derivatives include ________.

A)stocks
B)bonds
C)forward contracts
D)foreign exchange

Question 11

If you buy in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

A)loss; 15000
B)loss; 15
C)profit; 15000
D)profit; 15

Question 12

If you buy in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

A)loss; 20000
B)loss; 20
C)profit; 20000
D)profit; 20

Question 13

Forward contracts do not suffer from the problem of ________.

A)a lack of liquidity
B)a lack of flexibility
C)the difficulty of finding a counterparty
D)default risk

Question 14

Futures contracts are regularly traded on the ________.

A)Montreal Exchange
B)Toronto Stock Exchange
C)American Stock Exchange
D)Chicago Board of Options Exchange

Question 15

What are the pros and cons of forward contracts?

Question 16

If you buy in March a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 135, you have a ________ of $________.

A)loss; 10000
B)loss; 10
C)profit; 10000
D)profit; 10

Question 17

If you buy in February a bond future contract for 120 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

A)loss; 10000
B)loss; 10
C)profit; 10000
D)profit; 10

Question 18

Explain the terms hedge, long position and short position in the context of managing financial institutions' risk.

Question 19

Financial derivatives include ________.

A)stocks
B)bonds
C)futures
D)foreign exchange

Question 20

If you buy in February a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 105, you have a ________ of $________.

A)loss; 20000
B)loss; 20
C)profit; 20000
D)profit; 20

Question 21

The number of contracts outstanding in a particular financial future is the ________.

A)demand coefficient
B)open interest
C)index level
D)outstanding balance

Question 22

If you sell in February a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 105, you have a ________ of $________.

A)loss; 20000
B)loss; 20
C)profit; 20000
D)profit; 20

Question 23

When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a ________.

A)macro hedge
B)micro hedge
C)cross hedge
D)futures hedge

Question 24

If you bought a long contract on financial futures, you hope that interest rates ________.

A)rise
B)fall
C)are stable
D)fluctuate

Question 25

If you sold a short futures contract, you will hope that bond prices ________.

A)rise
B)fall
C)are stable
D)fluctuate

Question 26

Futures markets have grown rapidly because futures ________.

A)are standardized
B)have higher default risk
C)are illiquid
D)are more flexible

Question 27

Which of the following features of futures contracts were not designed to increase liquidity?

A)Standardized contracts
B)Traded up until maturity
C)Not tied to one specific type of bond
D)Marked to market daily

Question 28

By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________.

A)$100,000 face value securities for $104,167
B)$96000 face value securities for $100,000
C)$100,000 face value securities for $96000
D)100,000 face value securities for $100,000

Question 29

If you sell in March a bond future contract for 110 that matures on June 30 of the same year, and at the maturity date the same future sells for 125, you have a ________ of $________.

A)loss; 15000
B)loss; 15
C)profit; 15000
D)profit; 15

Question 30

Futures differ from forwards because they are ________.

A)used to hedge portfolios
B)used to hedge individual securities
C)used in both financial and foreign exchange markets
D)standardized contracts

Question 31

When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a ________.

A)macro hedge
B)micro hedge
C)cross hedge
D)futures hedge

Question 32

Futures differ from forwards because they are ________.

A)used to hedge portfolios
B)used to hedge individual securities
C)used in both financial and foreign exchange markets
D)traded on an exchange

Question 33

If you sell in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

A)loss; 20000
B)loss; 20
C)profit; 20000
D)profit; 20

Question 34

The elimination of riskless profit opportunities in the futures market is referred to as ________.

A)speculation
B)hedging
C)arbitrage
D)open interest

Question 35

If you sold a short contract on financial futures, you hope interest rates ________.

A)rise
B)fall
C)are stable
D)fluctuate

Question 36

If you sell in March a bond future contract for 125 that matures on June 30 of the same year, and at the maturity date the same future sells for 135, you have a ________ of $________.

A)loss; 10000
B)loss; 10
C)profit; 10000
D)profit; 10

Question 37

By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver ________.

A)$100,000 face value securities for $115,000
B)$115,000 face value securities for $110,000
C)$100,000 face value securities for $100,000
D)$115,000 face value securities for $115,000

Question 38

By buying a long $100,000 futures contract for 115, you agree to pay ________.

A)$100,000 for $115,000 face value bonds
B)$115,000 for $100,000 face value bonds
C)$86956 for $100,000 face value bonds
D)$86956 for $115,000 face value bonds

Question 39

The advantage of forward contracts over futures contracts is that forward contracts ________.

A)are standardized
B)have lower default risk
C)are more flexible
D)have higher default risk

Question 40

Which of the following features of futures contracts were not designed to increase liquidity?

A)Standardized contracts
B)Traded up until maturity
C)Not tied to one specific type of bond
D)Can be closed with off setting trade

Question 41

Options are contracts that give the purchasers the ________.

A)option to buy or sell an underlying asset
B)the obligation to buy or sell an underlying asset
C)the right to hold an underlying asset
D)the right to switch payment streams

Question 42

If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by ________.

A)selling foreign exchange futures short
B)buying foreign exchange futures long
C)staying out of the exchange futures market
D)selling foreign exchange forward contracts short

Question 43

Explain using an example the statement that "at the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered."

Question 44

If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm should ________.

A)sell foreign exchange futures short
B)buy foreign exchange futures long
C)stay out of the exchange futures market
D)buy foreign exchange forward contracts long

Question 45

If you sell in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795, you have a ________ of $________.

A)loss; 1250
B)loss; 5
C)profit; 1250
D)profit; 5

Question 46

If a money manager believes stock prices will fall and knows that a block of funds will be received in the future, then he should ________.

A)sell stock index futures short
B)buy stock index futures long
C)stay out of the futures market
D)borrow and buy securities now

Question 47

The risk that occurs because stock prices fluctuate is called ________.

A)stock market risk
B)reinvestment risk
C)interest rate risk
D)default risk

Question 48

If you sell in April a stock index future contract on the S&P 500 index at the price of 1000 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 900, you have a ________ of $________.

A)loss; 25000
B)loss; 100
C)profit; 25000
D)profit; 100

Question 49

Who would be most likely to buy a long stock index future?

A)A mutual fund manager who believes the market will rise
B)A mutual fund manager who believes the market will fall
C)A mutual fund manager who believes the market will be stable
D)A mutual fund manager who does not believe in hedging

Question 50

If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________.

A)lose $12500
B)gain $12500
C)lose $50
D)gain $50

Question 51

What is an interest-rate futures contract? How does it differ from an interest-rate forward contract?

Question 52

if you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________.

A)lose $12500
B)gain $12500
C)lose $50
D)gain $50

Question 53

Which of the following is a likely reason for a money market fund manager to sell a stock index future short?

A)He believes the market will rise.
B)He wants to lock in current prices.
C)He wants to increase stock market risk.
D)He believes the market will be unchanged.

Question 54

If you buy in April a stock index future contract on the S&P 500 index at the price of 1050 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1047, you have a ________ of $________.

A)loss; 750
B)loss; 3
C)profit; 750
D)profit; 3

Question 55

If you buy in April a stock index future contract on the S&P 500 index at the price of 1000 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 900, you have a ________ of $________.

A)loss; 25000
B)loss; 100
C)profit; 25000
D)profit; 100

Question 56

If you sell in April a stock index future contract on the S&P 500 index at the price of 1050 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1047, you have a ________ of $________.

A)loss; 750
B)loss; 3
C)profit; 750
D)profit; 3

Question 57

If you buy in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795, you have a ________ of $________.

A)loss; 1250
B)loss; 5
C)profit; 1250
D)profit; 5

Question 58

If you buy in April a stock index future contract on the S&P 500 index at the price of 1200 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1000, you have a ________ of $________.

A)loss; 50000
B)loss; 200
C)profit; 50000
D)profit; 200

Question 59

If you sell in April a stock index future contract on the S&P 500 index at the price of 1200 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1000, you have a ________ of $________.

A)loss; 50000
B)loss; 200
C)profit; 50000
D)profit; 200

Question 60

Where are financial futures traded? Describe that market.

Question 61

An option that gives the owner the tight to sell a financial instrument at the exercise price within a specified period of time is a(n)________.

A)call option
B)put option
C)American option
D)European option

Question 62

The seller of an option has the ________.

A)right to buy or sell the underlying asset
B)the obligation to buy or sell the underlying asset
C)ability to reduce transaction risk
D)right to exchange one payment stream for another

Question 63

Options on individual stocks are referred to as ________.

A)stock options
B)futures options
C)American options
D)individual options

Question 64

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

A)premium
B)call
C)strike price
D)put

Question 65

The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________.

A)premium
B)interest rate
C)exercise price
D)call

Question 66

Options on futures contracts are referred to as ________.

A)stock options
B)futures options
C)American options
D)individual options

Question 67

A put option gives the owner ________.

A)the right to sell the underlying security
B)the obligation to sell the underlying security
C)the right to buy the underlying security
D)the obligation to buy the underlying security

Question 68

The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

A)obligation; right
B)right; obligation
C)obligation; obligation
D)right; right

Question 69

An option that can be exercised only at maturity is called a(n)________.

A)swap
B)stock option
C)European option
D)American option

Question 70

A put option gives the seller ________.

A)the right to sell the underlying security
B)the obligation to sell the underlying security
C)the right to buy the underlying security
D)the obligation to buy the underlying security

Question 71

An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a(n)________.

A)call option
B)put option
C)American option
D)European option

Question 72

If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 103, you will ________ the option and potentially make a profit of $________.

A)not exercise; 7000
B)not exercise; 7
C)exercise; 7000
D)exercise; 7

Question 73

A call option gives the owner ________.

A)the right to sell the underlying security
B)the obligation to sell the underlying security
C)the right to buy the underlying security
D)the obligation to buy the underlying security

Question 74

The main disadvantage of futures contracts as compared to options on futures contracts is that futures ________.

A)remove the possibility of gains
B)increase the transactions cost
C)are not as effective a hedge
D)do not remove the possibility of losses

Question 75

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could ________.

A)buy put options on financial futures
B)buy call options on financial futures
C)sell put options on financial futures
D)sell call options on financial futures

Question 76

A call option gives the seller ________.

A)the right to sell the underlying security
B)the obligation to sell the underlying security
C)the right to buy the underlying security
D)the obligation to buy the underlying security

Question 77

If you buy a European call option on Canada bonds with a strike price of 120 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option and potentially make a profit of $________.

A)not exercise; 3000
B)not exercise; 3
C)exercise; 3000
D)exercise; 3

Question 78

If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will ________ the option and potentially make a profit of $________.

A)not exercise; 5000
B)not exercise; 5
C)exercise; 5000
D)exercise; 5

Question 79

An option that can be exercised at any time up to maturity is called a(n)________.

A)swap
B)stock option
C)European option
D)American option

Question 80

All other things held constant, premiums on put options will increase when the ________.

A)exercise price falls
B)volatility of the underlying asset falls
C)term to maturity increases
D)term to maturity decreases