Question 1

Put options give the buyer which of the following?
A)The right and obligation to sell a standardized contract of a financial asset or a futures agreement at a strike price set today.
B)The right but not the obligation to sell a standardized contract of a financial asset or a futures agreement at the strike price set today up to the expiration date on the contract.
C)The right to buy a standardized contract of a financial asset at a strike price set today.
D)None of the above is correct.

Accepted Answer

Put options give the buyer the right, but not obligation, to sell a standardized contract of a financial asset or futures agreement at the strike price set today up to the expiration date. The buyer can choose to exercise the option or let it expire worthless.

Question 2

Call options give the buyer which of the following?
A)the obligation to sell a financial asset at a strike price set today.
B)the right to sell a financial asset at a strike price set today.
C)the obligation to buy a financial asset at a strike price set today.
D)the right but not the obligation to buy a financial asset at a strike price set today up to the expiration date on the contract.

Accepted Answer

Call options give the buyer the right, but not the obligation, to buy a financial asset at a predetermined strike price before the contract's expiration date. This means that the buyer can choose to exercise their option to buy the asset if it is profitable for them to do so, or they can let the contract expire if it is not profitable.

Question 3

After purchasing a call option, the buyer will exercise the option only if
A)the price of the financial asset is less than the strike price.
B)the price of the financial asset is equal to the strike price.
C)the price of the financial asset is greater than the strike price.
D)the price of the financial asset is initially less than the strike price in the long run.

Accepted Answer

The buyer of a call option will exercise the option only if the price of the financial asset is greater than the strike price. The buyer will only make a profit if they can buy the asset at the agreed-upon strike price and then sell it for a higher price in the market. Therefore, they will not exercise the option if the price of the financial asset is less than or equal to the strike price. And the option’s long run effect is irrelevant to the buyer's decision to exercise the option.

Question 4

Futures markets can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief?
A)You could sell T-bills into the spot market now.
B)You could sell a futures contract on T-bills.
C)You could buy a futures contract on T-bills.
D)You could buy T-bills on the spot market in June.

Accepted Answer

Buying a futures contract on T-bills would be the best way to act on the belief that the spot price of T-bills will be higher by next June. This is because if the spot price does increase, the futures contract will increase in value, allowing the investor to profit. Selling T-bills into the spot market now or selling a futures contract on T-bills would not be profitable if the spot price increases. Buying T-bills on the spot market in June would result in paying the higher spot price, resulting in no profit.

Question 5

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.
A)You could sell a put option
B)You could buy a put option.
C)You could buy a call option.
D)You could sell a call option.

Accepted Answer

If you believe that the spot price of T-bills is going to be much higher by next June, the best choice would be to buy a call option. This would give you the right, but not the obligation, to buy T-bills at the strike price, which is the current market price. This means that you would be able to profit from the increase in the spot price of T-bills without having to actually purchase them outright. Selling a put option (choice A) or buying a put option (choice B) would only be profitable if the spot price of T-bills decreases, which is not consistent with your belief. Selling a call option (choice D) would obligate you to sell T-bills at the strike price if the spot price increases, which would result in a loss.

Question 6

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much lower by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.
A)You could sell a put option
B)You could buy a put option.
C)You could buy a call option.
D)You could sell a call option.

Accepted Answer

Buying a put option gives the holder the right to sell the underlying asset at a specified price within a specified time frame. If you believe the spot price of T-bills will decrease, buying a put option allows you to sell the T-bills at a higher price than the market price, thus capitalizing on the anticipated decrease.

Question 7

If I am to be receiving a large quantity of Japanese yen in 6 months, to hedge the risk that the exchange rate will change and eliminate my profit in dollars, I should
A)sell a futures contract in yen.
B)buy a futures contract in yen.
C)buy a T-bill futures contract.
D)only agree to accept dollars in the future.

Accepted Answer

Selling a futures contract in yen allows you to lock in the current exchange rate for the future date, effectively hedging against the risk of the yen weakening against the dollar, which would otherwise reduce the dollar value of the yen you will receive.

Question 8

The option premium is determined by which of the following?
A)the volatility of the price of the financial instrument
B)the difference between the strike and the spot price
C)the length of time until the expiration date on the option
D)All of the above are correct.

Accepted Answer

The option premium is determined by all three factors: the volatility of the price of the underlying financial instrument, the difference between the strike and the spot price, and the length of time until the expiration date on the option. Volatility measures how much the underlying asset's price fluctuates, which affects the likelihood of the option being profitable. The difference between the strike and spot prices determines how close the option is to being "in the money" and therefore affects the option's worth. Finally, the longer the time left until the option expires, the more time the option holder has to profit, which also affects the premium price.

Question 9

What is likely to happen if the futures price for Treasury bonds to be delivered in three months is above the spot price plus the carrying costs?
A)An arbitrageur will buy Treasury bonds in the spot market and sell a futures agreement.
B)An arbitrageur could sell Treasury bonds in the spot market while buying a futures agreement.
C)An arbitrageur could purchase Treasury bonds in the spot market while buying a futures agreement.
D)An arbitrageur could sell Treasury bonds in the spot market while selling a futures agreement.

Accepted Answer

If the futures price is above the spot price plus carrying costs, there is an opportunity for arbitrage. An arbitrageur can buy Treasury bonds in the spot market at the lower price, and sell a futures agreement at the higher price, profiting from the difference. This buying and selling activity will likely bring the futures price back in line with the spot price plus carrying costs.

Question 10

Standardized contracts between two parties to trade financial assets at a future date and in which the terms (including the price) of the transaction are determined today are referred to as financial
A)forward contracts.
B)futures contracts.
C)options.
D)swaps.

Accepted Answer

The definition provided is a clear description of futures contracts. While forward contracts are similar, they are not standardized and are typically tailored to the specific needs of the parties involved. Options and swaps are different types of financial contracts with different characteristics and outcomes.

Question 11

__________ are non-standardized transactions in which the terms, including price, are completed today for a transaction that will occur in the future.
A)Forward transactions
B)Financial futures
C)Futures contracts
D)Options on futures

Accepted Answer

Forward transactions are non-standardized agreements in which the terms, including price, are settled today for a transaction that will occur in the future. It is a private agreement between two parties and the terms of the contract can be customized according to the needs of the parties involved.

Question 12

Non-standardized contracts between two parties to trade assets at a future date and in which the terms (including the price) of the transaction are determined today are usually referred to as
A)forward contracts.
B)futures contracts.
C)options.
D)swaps.

Accepted Answer

Forward contracts are non-standardized contracts between two parties to trade assets at a future date and in which the terms of the transaction are determined today. Futures contracts, options, and swaps are all standardized contracts with specific terms and conditions already established.

Question 13

Which of the following is true with regards to financial forward agreements?
A)Financial forward agreements trade standardized quantities of financial instruments on specified dates in the future.
B)Financial forward agreements can be used to hedge risk but not to speculate.
C)Financial forward agreements in foreign exchange are arranged by large banks as a natural outgrowth of their foreign exchange operations.
D)Financial forward agreements that hedge interest rate risks entail little costs because offsetting partners are easy to find.

Accepted Answer

Financial forward agreements in foreign exchange are commonly arranged by large banks as they have the expertise and access to the market needed to facilitate such agreements. They allow parties to fix the exchange rate for a future transaction, reducing the risk of currency fluctuations.

Question 14

The __________ is the part of the exchange which takes on the responsibility of enforcing the contract after an agreement is struck.
A)trading floor
B)pit
C)clearinghouse
D)performance bond

Accepted Answer

The clearinghouse is responsible for guaranteeing the performance of all parties to a trade. Once the agreement is made, the clearinghouse becomes the buyer to every seller and the seller to every buyer, ensuring that all obligations are met.

Question 15

The __________ is the part of the exchange where authorized brokers gather to buy and sell for their customers.
A)options wing
B)pit
C)clearinghouse
D)performance bond

Accepted Answer

The pit is the physical area on the trading floor of an exchange where authorized brokers gather to buy and sell securities for their customers in an open-outcry auction system.

Question 16

__________ occurs when the futures price is bid up or down to the spot price plus carrying costs as the expiration date draws close.
A)Convergence
B)Hedging
C)Strike pricing
D)Program trading

Accepted Answer

Convergence occurs as the expiration date draws closer and futures prices adjust to the spot price plus carrying costs, eliminating any arbitrage opportunity. This is an important concept in the futures market as it ensures that prices are efficient and reflects the underlying asset's market value. Hedging is a risk management strategy that involves taking an offsetting position in a related asset to reduce the risk of price movements. Strike pricing is the price at which an option can be exercised. Program trading is a type of trading that involves the use of computer algorithms to execute trades quickly and efficiently. None of these choices relate to the definition given.

Question 17

Standardized agreements between two parties to trade financial assets on a future date in which the terms, including the price, are set today are called which of the following?
A)financial forward contracts
B)swaps
C)option contracts
D)financial futures contracts

Accepted Answer

Standardized agreements between two parties to trade financial assets on a future date in which the terms, including the price, are set today are called financial futures contracts. This is because futures contracts are agreements to buy or sell an asset on a specific future date at a specific price that is determined today. Financial forward contracts are similar, but the terms of the contract are not standardized and are unique to each agreement. Swaps involve exchanging cash flows between two parties, while option contracts give the buyer the right (but not the obligation) to buy or sell an asset at a specific price on a specific date.

Question 18

A disadvantage of forward contracts is that
A)there is a possibility that one party to the agreement may default.
B)sellers are prevented from hedging.
C)buyers are prevented from hedging.
D)sellers are prevented from speculating.

Accepted Answer

One of the main disadvantages of forward contracts is the possibility that one party may default, which can result in significant financial losses for the other party involved. This risk is not present in other types of derivatives, such as options and futures, which have built-in mechanisms to limit counterparty risk.

Question 19

Which of the following choices is not associated with financial futures?
A)the pit
B)premiums
C)the clearinghouse
D)arbitrageurs

Accepted Answer

The pit, clearinghouse, and arbitrageurs are all associated with financial futures. The pit is the physical location where traders buy and sell futures contracts using open outcry. The clearinghouse acts as an intermediary between buyers and sellers, ensuring that both parties fulfill their obligations. Arbitrageurs are traders who attempt to profit from price discrepancies in different markets. Premiums, on the other hand, refer to the amount paid for insurance, not financial futures trading.

Question 20

Which of the following choices is associated with financial futures?
A)the pit
B)arbitrageurs
C)the clearinghouse
D)All of the above are correct.

Accepted Answer

All of the choices are associated with financial futures.

A) "the pit" refers to the physical area on a trading floor where futures contracts are bought and sold through open outcry. 
B) Arbitrageurs are traders who seek to profit from price discrepancies between different markets or different instruments within the same market. 
C) The clearinghouse is an intermediary organization that guarantees the performance of futures contracts by ensuring that both parties fulfill their obligations.

Quiz 17: Forward, Futures, and Options Agreements

Put options give the buyer which of the following?

Call options give the buyer which of the following?

After purchasing a call option, the buyer will exercise the option only if

Futures markets can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief?

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much higher by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.

Options can be used for speculation. If you believe that the spot price of T-bills is going to be much lower by next June, which of the following would be the best way to act on this belief? For simplicity, assume that the strike price and the spot price are about equal.

If I am to be receiving a large quantity of Japanese yen in 6 months, to hedge the risk that the exchange rate will change and eliminate my profit in dollars, I should

The option premium is determined by which of the following?

What is likely to happen if the futures price for Treasury bonds to be delivered in three months is above the spot price plus the carrying costs?

Standardized contracts between two parties to trade financial assets at a future date and in which the terms (including the price) of the transaction are determined today are referred to as financial

__________ are non-standardized transactions in which the terms, including price, are completed today for a transaction that will occur in the future.

Non-standardized contracts between two parties to trade assets at a future date and in which the terms (including the price) of the transaction are determined today are usually referred to as

Which of the following is true with regards to financial forward agreements?

The __________ is the part of the exchange which takes on the responsibility of enforcing the contract after an agreement is struck.

The __________ is the part of the exchange where authorized brokers gather to buy and sell for their customers.

__________ occurs when the futures price is bid up or down to the spot price plus carrying costs as the expiration date draws close.

Standardized agreements between two parties to trade financial assets on a future date in which the terms, including the price, are set today are called which of the following?

A disadvantage of forward contracts is that

Which of the following choices is not associated with financial futures?

Which of the following choices is associated with financial futures?