Deck 13: Risk Management With Financial Derivatives

Question 1

Financial derivatives include ________.

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

Answer 1

C

Question 2

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 2

A

Question 3

Financial derivatives include ________.

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

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 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

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

Question 13

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 14

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 15

What are the pros and cons of forward contracts?

Question 16

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

Question 17

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 18

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

Question 19

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 20

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 21

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 22

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 23

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 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

Futures markets have grown rapidly because futures ________.

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

Question 26

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

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

Question 27

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 28

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 29

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

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

Question 30

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 31

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 32

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 33

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 34

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 35

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 36

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 37

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 38

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 39

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

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

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

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 42

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 43

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 44

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 45

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 46

Where are financial futures traded? Describe that market.

Question 47

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 48

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 49

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 50

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 51

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 52

Options on futures contracts are referred to as ________.

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

Question 53

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 54

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 55

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 56

Options on individual stocks are referred to as ________.

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

Question 57

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 58

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 59

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

Question 60

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 61

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

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

Question 62

if you buy an option to sell Canada futures at 115, and at expiration the market price is 110, ________.

A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised

Question 63

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 64

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 120, you will ________ the option in order to make a profit of $________.

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

Question 65

An increase in the exercise price, all other things held constant, will ________ the premium on call options.

A) increase
B) decrease
C) increase or decrease
D) Not enough information is given.

Question 66

If you buy an option to sell Canada futures at 110, and at expiration the market price is 115, ________.

A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised

Question 67

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 123, you will ________ the option in order to make a profit of $________.

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

Question 68

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 69

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 70

If you buy an option to buy Canada futures at 115, and at expiration the market price is 110, ________.

A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised

Question 71

What are options? What are their differences from futures contracts?

Question 72

An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium.

A) increase
B) decrease
C) increase or decrease
D) Not enough information is given.

Question 73

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 117, you will ________ the option in order to make a profit of $________.

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

Question 74

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 75

Why have options on financial futures become the most widely traded option contracts?

Question 76

if you buy an option to buy Canada futures at 110, and at expiration the market price is 115, ________.

A) the call will be exercised
B) the put will be exercised
C) the call will not be exercised
D) the put will not be exercised

Question 77

The main advantage of using options on futures contracts rather than the futures contracts themselves is that ________.

A) interest rate risk is controlled while preserving the possibility of gains
B) interest rate risk is controlled, while removing the possibility of losses
C) interest rate risk is not controlled, but the possibility of gains is preserved
D) interest rate risk is not controlled, but the possibility of gains is lost

Question 78

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

Question 79

The main reason to buy an option on a futures contract rather than buying the futures contract is ________.

A) to reduce transaction cost
B) to preserve the possibility for gains
C) to limit losses
D) to remove the possibility for gains

Question 80

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