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Multiple Choice



1

Derivatives are financial instruments that:
A)Present low levels of risk and are used by people who otherwise couldn't purchase the financial assets.
B)When used correctly can actually lower risk.
C)Should only be used by people seeking high returns from high risk.
D)a and b
2

The value of a derivative contract is ultimately determined by:
A)The value of the underlying asset.
B)SEC regulation.
C)The Federal Reserve
D)The risk-free rate of return.
3

The short position in a futures contract represents the party that will:
A)Accept the risk.
B)Ultimately suffer the loss.
C)Deliver a commodity or financial instrument to the buyer at a future date.
D)Benefit from increases in price of the underlying asset.
4

We have a futures contract for the purchase of 100 bushes of wheat at $2.50 per bushel. If the market price of wheat increases to $3.00 per bushel:
A)The seller (short position) needs to transfer $50 to the buyer (long position).
B)Nothing happens since with a futures contract all payments are made at the settlement date.
C)Nothing happens since market to market adjustments only take place when the market price falls below the contract price.
D)None of the above.
5

A farmer who must purchase his inputs now but will sell his corn at a market price at a future date:
A)Faces a market risk that cannot be offset.
B)Is a good example of what the chapter refers to as a speculator.
C)Would hedge by taking the short position in a corn futures contract.
D)Would hedge by taking the long position in a corn futures contract.
6

Speculators differ from hedgers in the sense that:
A)Speculators do not like risk.
B)Hedgers seek to transfer risk.
C)Speculators are hedgers, there isn't any difference.
D)Speculators seek to profit from risk.
E)b and d
7

Tom sells a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on U.S. Treasury bonds is higher than Tom expected. Tom will have:
A)Gained money on his short position.
B)Lost money on his long position.
C)Gained money on his long position.
D)Lost money on his short position.
8

An arbitrageur is someone who:
A)Always takes the long position in a futures contract.
B)Simultaneously buy and sell financial instruments to benefit from temporary price differences.
C)Seeks the high returns that come from the high risk inherent in futures markets.
D)Always takes the short position in a futures contract.
E)Makes it more difficult for prices to adjust.
9

There's a call option written for 100 shares of GM stock for $75.00 a share, prior to the third Friday of November 2006: The option writer:
A)Has the requirement to sell 100 shares of GM for $75 a share on or before the third Friday of November 2006 if the option holder wants to exercise the option.
B)Has the option to sell 100 shares of GM for $75 a share on or before the third Friday of November 2006.
C)Can cancel the option before the third Friday of November 2006.
D)None of the above.
10

A put option described as at the money would find:
A)The market price of the stock is above the strike price.
B)The market price of the stock is below the strike price.
C)The market price of the stock equals the strike price.
D)The option has been exercised.
11

The two parts that make up an option's price are:
A)Extrinsic value and the option premium.
B)The intrinsic value and the option premium.
C)The commission and the option premium.
D)The price of the underlying asset and the option premium.
12

Assume we have a stock currently worth $100. We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $100. If the stock can rise or fall by $30 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the option premium:
A)$30
B)$0
C)$15
D)$100
13

At expiration, the value of an option:
A)Is zero.
B)Is greater than the intrinsic value.
C)Is equal to the intrinsic value.
D)Is less than the intrinsic value.
E)None of the above.
14

The option holder is:
A)The buyer of an option.
B)Another name for the clearinghouse used in futures contracts.
C)The seller of an option.
D)The person who initiates the option.
15

The primary risk(s) in swaps is:
A)One of the parties will default.
B)Interest rates will not change.
C)They are highly liquid and the market price will change.
D)All of the above.





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