Question 1

If Carolyn plans to sell a financial security in the future, which of the following should she do to hedge the risk of a price decrease?

Accepted Answer

A)  buy a call option
B)  sell a call option
C)  buy a put option
D)  sell a put option

Question 2

Someone who makes a riskless profit by buying in one market and reselling in another market is called a/an__________

Accepted Answer

A)  arbitrageur.
B)  clearinghouse.
C)  program trader.
D)  market maker.

Question 3

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?

Accepted Answer

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. A

Question 4

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

Accepted Answer

A)  forward contracts.
B)  futures contracts.
C)  options.
D)  swaps.

Question 5

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

Accepted Answer

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.

Question 6

For a bank to make a profit from foreign exchange forward agreements, the difference between the asked price and the bid price must be

Accepted Answer

A)  zero.
B)  positive.
C)  negative.
D)  less than the rate of interest.

Question 7

Futures contracts were developed to

Accepted Answer

A)  increase the market share of commercial banks.
B)  reduce the risk of future price changes.
C)  prevent convergence.
D)  None of the above

Question 8

A performance bond

Accepted Answer

A)  is used to pay for futures agreements.
B)  insures that both the buyer and seller of a future agreement abide by the agreement.
C)  regulates futures agreements.
D)  is paid for only by the buyer.

Question 9

For a given options contract, the options premium will be larger

Accepted Answer

A)  the higher the strike price relative to the spot price for call options.
B)  the closer the expiration date.
C)  the higher the strike price relative to the spot price for put options.
D)  the lower the strike price relative to the spot price for put options.

Question 10

The amount paid by the buyer of an option to compensate the seller for accepting the risk of a loss with no possibility of a gain is called

Accepted Answer

A)  the strike price.
B)  an option premium.
C)  a risk premium.
D)  a margin requirement. B

Question 11

The strike price is which of the following?

Accepted Answer

A)  the price for immediate delivery of a financial asset
B)  the price agreed upon today for delivery in the future of a futures contract
C)  the price agreed upon today for a buyer to have the right to purchase the financial asset in a call option before the expiration date
D)  the same as the options premium

Question 12

A forward rate

Accepted Answer

A)  gravitates toward the expected future exchange rate for a particular currency.
B)  diverges away from the expected future exchange rate for a particular currency.
C)  is affected by inflation and interest rate differentials between two countries.
D)  Both a and c are correct.

Question 13

For a given options contract, the options premium will be smaller

Accepted Answer

A)  the lower the strike price relative to the spot price for call options.
B)  the farther away the expiration date.
C)  the lower the strike price relative to the spot price for put options.
D)  the higher the strike price relative to the spot price for put options.

Question 14

The term used for reducing risk in financial futures is which of the following?

Accepted Answer

A)  hedging
B)  convergence
C)  counter risk
D)  arbitragers

Question 15

The largest market in the world in terms of the volume of transactions is which of the following?

Accepted Answer

A)  stock market
B)  bond market
C)  foreign exchange market
D)  futures market C

Question 16

A margin requirement is the amount brokers must collect from which of the following?

Accepted Answer

A)  the clearinghouse
B)  all customers before a futures transaction can be executed
C)  the pit
D)  the seller of the futures agreement

Question 17

__________ are contracts that give the buyer or seller the right and obligation to purchase or sell a multiple of the value of a stock index at some specific date in the future at a price determined today.

Accepted Answer

A)  Financial futures
B)  Forward contracts
C)  Stock index futures
D)  Options on futures

Question 18

The spot rate is the exchange rate for foreign currency

Accepted Answer

A)  equilibrium between the short and long exchange rates.
B)  for immediate delivery.
C)  for delivery in less than one year.
D)  for delivery in one year or more.

Question 19

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

Accepted Answer

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.

Question 20

For any given options contract, the option premium will be larger

Accepted Answer

A)  the lower the strike price relative to the spot price for put options.
B)  the higher the strike price relative to the spot price for put options.
C)  the closer the expiration date.
D)  the higher the strike price relative to the spot price for call options.

Exam 17: Forward, Futures, and Options Agreements

If Carolyn plans to sell a financial security in the future, which of the following should she do to hedge the risk of a price decrease?

Correct AnswerverifiedShow Answer

Someone who makes a riskless profit by buying in one market and reselling in another market is called a/an__________

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For a bank to make a profit from foreign exchange forward agreements, the difference between the asked price and the bid price must be

Correct AnswerverifiedShow Answer

Futures contracts were developed to

Correct AnswerverifiedShow Answer

A performance bond

Correct AnswerverifiedShow Answer

For a given options contract, the options premium will be larger

Correct AnswerverifiedShow Answer

The amount paid by the buyer of an option to compensate the seller for accepting the risk of a loss with no possibility of a gain is called

Correct AnswerverifiedB

The strike price is which of the following?

Correct AnswerverifiedShow Answer

A forward rate

Correct AnswerverifiedShow Answer

For a given options contract, the options premium will be smaller

Correct AnswerverifiedShow Answer

The term used for reducing risk in financial futures is which of the following?

Correct AnswerverifiedShow Answer

The largest market in the world in terms of the volume of transactions is which of the following?

Correct AnswerverifiedC

A margin requirement is the amount brokers must collect from which of the following?

Correct AnswerverifiedShow Answer

__________ are contracts that give the buyer or seller the right and obligation to purchase or sell a multiple of the value of a stock index at some specific date in the future at a price determined today.

Correct AnswerverifiedShow Answer

The spot rate is the exchange rate for foreign currency

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For any given options contract, the option premium will be larger

Correct AnswerverifiedShow Answer

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A

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B

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C

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