 |
| 1 | |
The acquisition of derivatives, as a part of an individual's portfolio: |
| | A) | will always lower the risk associated with the portfolio. |
| | B) | will always increase the risk associated with the portfolio. |
| | C) | may reduce the risk associated with the portfolio. |
| | D) | has no effect on the risk associated with the portfolio. |
|
|
|
| 2 | |
The value of a derivative is based upon: |
| | A) | the value of an underlying asset. |
| | B) | the general level of the Dow Jones Industrial Average. |
| | C) | price controls established by commodity trading boards. |
| | D) | None of the above is correct. |
|
|
|
| 3 | |
A person takes a long position in a futures contract when he or she agrees to _____ a commodity or a financial instrument at a specified future date. |
| | A) | sell |
| | B) | buy |
| | C) | both buy and sell an equal amount of a commodity |
| | D) | first sell then buy |
|
|
|
| 4 | |
Consider a futures contract for the purchase of 100 bushels of wheat at $3.00 per bushel. If the market price of wheat increases to $2.75 per bushel: |
| | A) | the seller (short position) needs to transfer $25 to the buyer (long position). |
| | B) | the buyer (long position) needs to transfer $25 to the seller (short position). |
| | C) | the seller (long position) needs to transfer $25 to the buyer (short position). |
| | D) | the buyer (short position) needs to transfer $25 to the seller (long position). |
|
|
|
| 5 | |
Consider a utility company that produces electricity by burning natural gas. It may hedge against the risk of price changes in the natural gas market by: |
| | A) | taking a short position in the market for natural gas. |
| | B) | taking a long position in the market for natural gas. |
| | C) | doing nothing since changes in natural gas prices impose no risk to this utility. |
| | D) | None of the above is correct. |
|
|
|
| 6 | |
A person with a short position receives an increase in his or her margin account when the price of the commodity _______. |
| | A) | rises |
| | B) | falls |
| | C) | remains unchanged |
| | D) | changes in either direction |
|
|
|
| 7 | |
Futures markets may be used for speculating or for hedging. The difference between these strategies is: |
| | A) | that speculators attempt to reduce their risk while hedgers increase their risk in an attempt to receive higher returns. |
| | B) | that hedgers attempt to reduce their risk while speculators increase their risk in an attempt to receive higher returns. |
| | C) | nonexistent; both hedgers and speculators attempt to reduce their risk. |
| | D) | nonexistent; both hedgers and speculators increase their risk in an attempt to receive higher returns. |
|
|
|
| 8 | |
Julie buys a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on U.S. Treasury bonds is lower than she had expected. Julie will have: |
| | A) | gained money on her short position. |
| | B) | lost money on her long position. |
| | C) | gained money on her long position. |
| | D) | lost money on her short position. |
|
|
|
| 9 | |
Profitable speculation in futures markets will cause the price of a commodity to: |
| | A) | become more stable over time. |
| | B) | become less stable over time. |
| | C) | increase in all time periods. |
| | D) | decrease in all time periods. |
|
|
|
| 10 | |
As a result of arbitrage, the price of the futures contract at its settlement date will: |
| | A) | exceed the price of the underlying asset. |
| | B) | be less than the price of the underlying asset. |
| | C) | equal the price of the underlying asset. |
| | D) | have no relationship to the price of the underlying asset. |
|
|
|
| 11 | |
Joe writes a put option for 500 shares of Microsoft stock at $90 prior to February 15, 2009. As a result of this transaction, Joe has: |
| | A) | the option to sell 500 shares of Microsoft stock at any time until February 15, 2009 if this benefits him. |
| | B) | the option to buy 500 shares of Microsoft stock at any time until February 15, 2009 if this benefits him. |
| | C) | the obligation to sell 500 shares 500 shares of Microsoft stock at any time until February 15, 2009 if the option holder exercises this option. |
| | D) | the obligation to buy 500 shares 500 shares of Microsoft stock at any time until February 15, 2009 if the option holder exercises this option. |
|
|
|
| 12 | |
If a call option is described as being at the money, this indicates that the: |
| | A) | market price of the stock is above the strike price. |
| | B) | market price of the stock is below the strike price. |
| | C) | market price of the stock equals the strike price. |
| | D) | option has been exercised. |
|
|
|
| 13 | |
If a put option is described as being in the money, this indicates that the: |
| | A) | market price of the stock is above the strike price. |
| | B) | market price of the stock is below the strike price. |
| | C) | market price of the stock equals the strike price. |
| | D) | option has been exercised. |
|
|
|
| 14 | |
The part of the option price that reflects its value if it is immediately exercised is the option's ______ while the part that reflects the potential future benefit from holding the option is called the ________. |
| | A) | extrinsic value; intrinsic value |
| | B) | intrinsic value; external value |
| | C) | intrinsic value; time value of the option |
| | D) | time value of the option; intrinsic value |
|
|
|
| 15 | |
Assume that we have a stock currently worth $150. We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $150. 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 time value of the option? |
| | A) | $30 |
| | B) | $0 |
| | C) | $15 |
| | D) | $150 |
|
|
|
| 16 | |
As an option approaches its maturity date, its price will converge to: |
| | A) | the time value of the option. |
| | B) | its intrinsic value. |
| | C) | the price of the underlying asset. |
| | D) | the market interest rate. |
|
|
|
| 17 | |
Which of the following may be used to reduce or transfer risk? |
| | A) | futures contracts |
| | B) | put options |
| | C) | call options |
| | D) | All of the above are correct. |
| | E) | None of the above is correct. |
|
|
|
| 18 | |
The option writer is: |
| | A) | the buyer of an option. |
| | B) | a clearinghouse for options contracts. |
| | C) | the seller of an option. |
| | D) | the broker that ensures that the option will be exercised. |
|
|
|
| 19 | |
An individual selling a commodity or financial instrument can reduce risk by buying a _______ option. |
| | A) | call |
| | B) | put |
| | C) | clearinghouse |
| | D) | sweep |
|
|
|
| 20 | |
An increase in the market price of the underlying asset will cause the price of a call option to: |
| | A) | rise. |
| | B) | fall. |
| | C) | remain unchanged. |
| | D) | change in an unpredictable manner. |
|
|
|
| 21 | |
An increase in the volatility in the price of the underlying asset will cause the price of a put option to: |
| | A) | rise. |
| | B) | fall. |
| | C) | remain unchanged. |
| | D) | change in an unpredictable manner. |
|
|
|
| 22 | |
Financial institutions and the government may reduce interest-rate risk by: |
| | A) | engaging in interest-rate swaps. |
| | B) | not altering the interest rates that they receive and/or pay when market interest rates change. |
| | C) | Either of the above strategies. |
| | D) | Neither of the above strategies. |
|
|
.