Financial Derivatives Objectives Set 1

14/08/2020 1 By indiafreenotes

1) The payoffs for financial derivatives are linked to

(a) securities that will be issued in the future.

(b) the volatility of interest rates.

(c) Previously issued securities.

(d) government regulations specifying allowable rates of return.

(e) none of the above.

Answer: C

 

2) Financial derivatives include

(a) stocks.

(b) bonds.

(c) futures.

(d) none of the above.

Answer: C

 

3) Financial derivatives include

(a) stocks.

(b) bonds.

(c) forward contracts.

(d) both (a) and (b) are true.

Answer: C

 

4) Which of the following is not a financial derivative?

(a) Stock

(b) Futures

(c) Options

(d) Forward contracts

Answer: A

 

5) By hedging a portfolio, a bank manager

(a) reduces interest rate risk.

(b) increases reinvestment risk.

(c) increases exchange rate risk.

(d) increases the probability of gains.

Answer: A

 

6) Which of the following is a reason to hedge a portfolio?

(a) To increase the probability of gains.

(b) To limit exposure to risk.

(c) To profit from capital gains when interest rates fall.

(d) All of the above.

(e) Both (a) and (c) of the above.

Answer: B

 

7) Hedging risk for a long position is accomplished by

(a) taking another long position.

(b) taking a short position.

(c) taking additional long and short positions in equal amounts.

(d) taking a neutral position.

(e) none of the above.

Answer: B

 

8) Hedging risk for a short position is accomplished by

(a) Taking a long position.

(b) taking another short position.

(c) taking additional long and short positions in equal amounts.

(d) taking a neutral position.

(e) none of the above.

Answer: A

 

9) A contract that requires the investor to buy securities on a future date is called a

(a) short contract.

(b) Long contract.

(c) hedge.

(d) cross.

Answer: B

 

10) A long contract 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: B

 

11) A person who agrees to buy an asset at a future date has gone

(a) long.

(b) short.

(c) back.

(d) ahead.

(e) even.

Answer: A

 

12) A short contract 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: A

 

13) A contract that requires the investor to sell securities on a future date is called a

(a) short contract.

(b) long contract.

(c) hedge.

(d) micro hedge.

Answer: A

 

14) If a bank manager chooses to hedge his portfolio of treasury securities by selling futures contracts, he

(a) gives up the opportunity for gains.

(b) removes the chance of loss.

(c) increases the probability of a gain.

(d) Both (a) and (b) are true.

Answer: D

 

15) To say that the forward market lacks liquidity means that

(a) forward contracts usually result in losses.

(b) forward contracts cannot be turned into cash.

(c) It may be difficult to make the transaction.

(d) forward contracts cannot be sold for cash.

(e) none of the above.

Answer: C

 

16) A disadvantage of a forward contract is that

(a) it may be difficult to locate a counterpart.

(b) the forward market suffers from lack of liquidity.

(c) these contracts have default risk.

(d) all of the above.

(e) both (a) and (c) of the above.

Answer: D

 

17) Forward contracts are risky because they

(a) are subject to lack of liquidity

(b) are subject to default risk.

(c) hedge a portfolio.

(d) both (a) and (b) are true.

Answer: D

 

18) The advantage of forward contracts over future contracts is that they

(a) are standardized.

(b) have lower default risk.

(c) are more liquid.

(d) none of the above.

Answer: D

 

19) The advantage of forward contracts over futures contracts is that they

(a) are standardized.

(b) have lower default risk.

(c) are more flexible.

(d) both (a) and (b) are true.

Answer: C

 

20) Forward contracts are of limited usefulness to financial institutions because

(a) of default risk.

(b) it is impossible to hedge risk.

(c) of lack of liquidity.

(d) all of the above.

(e) both (a) and (c) of the above.

Answer: E

 

21) Futures contracts are regularly traded on the

(a) Chicago Board of Trade.

(b) New York Stock Exchange.

(c) American Stock Exchange.

(d) Chicago Board of Options Exchange.

Answer: A

 

22) Hedging in the futures market

(a) eliminates the opportunity for gains.

(b) eliminates the opportunity for losses.

(c) increases the earnings potential of the portfolio.

(d) does all of the above.

(e) does both (a) and (b) of the above.

Answer: E

 

23) When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market

(a) suffers a loss.

(b) experiences a gain.

(c) has no change in its income.

(d) none of the above.

Answer: C

 

24) Futures markets have grown rapidly because futures

(a) are standardized.

(b) have lower default risk.

(c) are liquid.

(d) all of the above.

Answer: D

 

25) Parties who have bought a futures contract and thereby agreed to _____ (take delivery of) the bonds are said to have taken a ____ position.

(a) sell; short

(b) buy; short

(c) sell; long

(d) buy; long

Answer: D

 

26) Parties who have sold a futures contract and thereby agreed to _____ (deliver) the bonds are said to have taken a ____ position.

(a) Sell; Short

(b) buy; short

(c) sell; long

(d) buy; long

Answer: A

 

27) 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.

Answer: A

 

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) $96,000 face value securities for $100,000.

(c) $100,000 face value securities for $96,000.

(d) $96,000 face value securities for $104,167.

Answer: C

 

29) 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) $86,956 for $100,000 face value bonds.

(d) $86,956 for $115,000 face value bonds.

Answer: B

 

30) On the expiration date of a futures contract, the price of the contract

(a) always equals the purchase price of the contract.

(b) always equals the average price over the life of the contract.

(c) always equals the price of the underlying asset.

(d) always equals the average of the purchase price and the price of underlying asset.

(e) cannot be determined.

Answer: C

 

31) The price of a futures contract at the expiration date of the contract

(a) equals the price of the underlying asset.

(b) equals the price of the counterparty.

(c) equals the hedge position.

(d) equals the value of the hedged asset.

(e) none of the above.

Answer: A

 

32) Elimination of riskless profit opportunities in the futures market is

(a) hedging.

(b) arbitrage.

(c) speculation.

(d) underwriting.

(e) diversification.

Answer: B

 

33) If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106

(a) your profit is $4000.

(b) your loss is $4000.

(c) your profit is $6000.

(d) your loss is $6000.

(e) your profit is $10,000.

Answer: B

 

34) If you purchase a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108

(a) your profit is $3000.

(b) your loss is $3000.

(c) your profit is $8000.

(d) your loss is $8000.

(e) your profit is $5000.

Answer: A

 

35) If you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106

(a) your profit is $4000.

(b) your loss is $4000.

(c) your profit is $6000.

(d) your loss is $6000.

(e) your profit is $10,000.

Answer: A

 

36) If you sell a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108

(a) your profit is $3000.

(b) your loss is $3000.

(c) your profit is $8000.

(d) your loss is $8000.

(e) your profit is $5000.

Answer: B

 

37) If you sold a short contract on financial futures you hope interest rates

(a) rise.

(b) fall.

(c) are stable.

(d) fluctuate.

Answer: A

 

38) If you sold a short futures contract you will hope that interest rates

(a) rise.

(b) fall.

(c) are stable.

(d) fluctuate.

Answer: A

 

39) If you bought a long contract on financial futures you hope that interest rates

(a) rise.

(b) fall.

(c) are stable.

(d) fluctuate.

Answer: B

 

40) If you bought a long futures contract you hope that bond prices

(a) rise.

(b) fall.

(c) are stable.

(d) fluctuate.

Answer: A

 

41) If you sold a short futures contract you will hope that bond prices

(a) rise.

(b) fall.

(c) are stable.

(d) fluctuate.

Answer: B

 

42) To hedge the interest rate risk on $4 million of Treasury bonds with $100,000 futures contracts, you would need to purchase

(a) 4 contracts.

(b) 20 contracts.

(c) 25 contracts.

(d) 40 contracts.

(e) 400 contracts.

Answer: D

 

43) If you sell twenty-five $100,000 futures contracts to hedge holdings of a Treasury security, the value of the Treasury securities you are holding is

(a) $250,000.

(b) $1,000,000.

(c) $2,500,000.

(d) $5,000,000.

(e) $25,000,000.

Answer: C

 

44) Assume you are holding Treasury securities and have sold futures to hedge against interest rate risk. If interest rates rise

(a) The increase in the value of the securities equals the decrease in the value of the futures contracts.

(b) The decrease in the value of the securities equals the increase in the value of the futures contracts.

(c) The increase ion the value of the securities exceeds the decrease in the values of the futures contracts.

(d) both the securities and the futures contracts increase in value.

(e) both the securities and the futures contracts decrease in value

Answer: B

 

45) Assume you are holding Treasury securities and have sold futures to hedge against interest rate risk. If interest rates fall

(a) The increase in the value of the securities equals the decrease in the value of the futures contracts.

(b) the decrease in the value of the securities equals the increase in the value of the futures contracts.

(c) the increase in the value of the securities exceeds the decrease in the values of the futures contracts.

(d) both the securities and the futures contracts increase in value.

(e) both the securities and the futures contracts decrease in value.

Answer: A

 

46) 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.

Answer: B

 

47) 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

Answer: A

 

48) The number of futures contracts outstanding is called

(a) liquidity

(b) volume

(c) float

(d) Open interest

(e) turnover

Answer: D

 

49) 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

Answer: D

 

50) 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

Answer: D

 

51) 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) a standardized contract

Answer: D

 

52) 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) marked to market daily.

Answer: D

 

53) The advantage of futures contracts relative to forward contracts is that futures contracts

(a) are standardized, making it easier to match parties, thereby increasing liquidity.

(b) specify that more than one bond is eligible for delivery, making it harder for someone to corner the market and squeeze traders.

(c) cannot be traded prior to the delivery date, thereby increasing market liquidity.

(d) all of the above.

(e) both (a) and (b) of the above.

Answer: E

 

54) If a firm is due to be paid in deutsche marks 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) none of the above.

Answer: A

 

55) 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) none of the above

Answer: B

 

56) If a firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk the firm should _____ foreign exchange futures _____.

(a) Sell; Short

(b) buy; long

(c) sell; long

(d) buy; short

Answer: A

 

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

(a) selling; short

(b) Buying; Long

(c) buying; short

(d) selling; long

Answer: B

 

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.

Answer: A

 

59) The price specified on an option that the holder can buy or sell the underlying asset is called the

(a) premium

(b) call

(c) Strike price

(d) put

Answer: C

 

60) The price specified on an option that the holder can buy or sell the underlying asset is called the

(a) premium.

(b) strike price.

(c) exercise price.

(d) Both (b) and (c) are true.

Answer: D