ECO 316 Week 2 Chapter 9 Derivative Securities and Derivative Markets

In this work of ECO 316 Week 2 Chapter 9 Derivative Securities and Derivative Markets you will find the next info:

9.1 Multiple Choice Questions
1) In derivative markets, trade takes place in
2) The improper use of derivatives was blamed in part for all of the following EXCEPT
3) Derivative instruments are
4) Spot transactions
5) Forward transactions
6) Forward transactions would be useful to
7) Forward transactions originated in the market for
8) If a wheat crop turns out to be unusually large,
9) If the orange crop turns out to be unusually small,
10) Using forward transactions allows
11) Fluctuations in the price of the underlying security or commodity during the life of forward transactions
12) Forward transactions
13) Forward transactions
14) Forward contracts are often illiquid because
15) Forward contracts
16) The most important derivative instruments are
17) A futures contract is
18) Currently,
19) Between 1981 and the early 2000s,
20) The buyer of a futures contract
21) The buyer of a futures contract
22) The seller of a futures contract
23) The seller of a futures contract
24) Futures trading has traditionally been dominated by
25) Which of the following financial futures contracts are traded in the United States?
26) Financial futures contracts are regulated by
27) The role of the Commodity Futures Trading Commission is to
28) The futures price
29) The elimination of riskless profit opportunities is known as
30) The initial deposit required by a buyer or seller of a futures contract is known as
31) Marking to market involves
32) All of the following are roles of a clearinghouse EXCEPT
33) Clearinghouses help to reduce default risk by
34) The futures price
35) If market participants believe that the wheat crop is likely to be unusually small,
36) As the time of delivery in a futures contract gets closer
37) On the day of delivery
38) 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
39) 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
40) Marking to market refers to
41) One difference between futures and options contracts is
42) If the price of a futures contract increases, then
43) If a futures contract for U.S. Treasury bonds increases by "15" in the financial page listings, the value of the contract increased by
44) 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
45) Hedgers are primarily interested in
46) Speculators are primarily interested in
47) Profits from speculation arise because of
48) Which of the following statements about the presence of speculators in futures markets is correct?
49) Which of the following is NOT a way that hedgers can benefit by participating in financial futures markets?
50) Savers and borrowers began to make greater use of derivative markets during the 1980s because of the
51) 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
52) A speculator who believes strongly that interest rates will rise would be likely to
53) A speculator who believes strongly that interest rates will fall would be likely to
54) The futures hedge
55) Basis risk refers to the risk
56) An options contract
57) In comparing futures contracts with options contracts, we can say that
58) In a call options contract, the
59) In a put options contract, the
60) The price at which an option may be exercised is called the
61) In an options contract, another name for the strike price is the
62) The period over which a call or put option exists is
63) The fee charged by the seller of an option is referred to as the
64) Options on securities are regulated by the
65) If you look at the financial page listings for options contracts and find that prices on call options on Treasury bonds are rising over a particular time period, options market investors must expect that
66) The intrinsic value of an option
67) As an option nears its expiration date, the size of the premium approaches
68) A stock option is said to be "out of the money" if:
69) Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is
70) A call option is said to be in the money if
71) A put option is said to be in the money if
72) Which of the following factors would tend to increase the size of the premium on an options contract?
73) The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as
74) 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 without eliminating the chance to profit from a decline in the cost of funds by
75) The choice between futures and options
76) An option buyer
77) Speculators in futures and options markets
78) In a covered option,
79) Index arbitrage refers to
80) The big decline in share prices on the York Stock Exchange that occurred in October 1987
81) Orange County lost a great deal of money during 1994 because
82) Standardization of derivative contracts
83) The terms of futures contracts traded in the United States are
84) Futures trading practices in the United States are regulated by
85) Futures contracts are traded
86) A swap is
87) One benefit of a swap compared to futures and options is that they
88) Swaps differ from futures and options in all of the following ways EXCEPT:
89) A shortcoming of swaps that has led to the participation of large firms and financial institutions is
90) An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as
91) An advantage of a swap over futures and options is that
92) A total return swap involves transferring both
93) A key reason that firms and financial institutions might participate in an interest rate swap is
9.2 Essay Questions
1) Explain how each of the following might make use of the futures market.
(a) A lender who is worried that its cost of funds might rise during the term of a loan it has made
(b) A speculator who believes strongly that interest rates will rise
2) Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.
3) Suppose you purchase a call option to buy IBM common stock at $35 per share in September. The current price of IBM is 37 and the option premium is 4. What is the intrinsic value of the option? As the expiration date on the option approaches, what will happen to the size of the option premium?
4) Suppose that the futures index for the S&P 500 for delivery one year from now is selling for $960,000, whereas the stocks are selling for $900,000. If the one-year Treasury bill rate is 5%, is it possible to use index arbitrage to make a profit?

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