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Chapter 10

Chapter 10

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Published by: skwagwok on Feb 13, 2010
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Chapter 10 Derivative Securities Markets
True/False Questions
1.Credit derivatives generally provide a means for lenders to hedge against an increasein a borrower's default risk on a loan.Answer: True Page: 285 Level: Easy2.Forward contracts are marked to market daily.Answer: False Page: 286 Level: Easy3.Futures or option exchange members who take positions on contracts for only a fewmoments are called scalpers.Answer: True Page: 291 Level: Easy4.The seller of a T-bond futures contract priced at 101-16 at the time of sale agrees todeliver $100,000 face value Treasury bonds in exchange for receiving $101,500 atcontract maturity.Answer: True Page: 292-293 Level: Medium5.A negotiated non-standardized agreement between a buyer and seller (with no third party involvement) to exchange an asset for cash at some future date, with the price settoday is called a forward agreement.Answer: True Page: 286-287 Level: Easy6.Marking to market of futures contracts is the process of realizing gains and losses eachday as the futures contract changes in price.Answer: True Page: 287 Level: Easy7.European style options are options that are traded on the Eurex exchange.Answer: False Page: 285 Level: Easy8.In a futures contract if funds in the margin account fall below the maintenance marginrequirement, a margin call is issued.Answer: True Page: 288 Level: Easy
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9.You would expect the price quote for a put option to be at least $10 if the put had anexercise price of $40 and the underlying stock was selling for $50.Answer: False Page: 299 Level: Medium10.A clearinghouse backs the buyer's and seller's position in an forward contract.Answer: False Page: 292 Level: Easy11.American options can only be exercised at maturity.Answer: False Page: 299 Level: Easy12.If you think that interest rates are likely to rise substantially over the next several yearsyou might sell a T-bond futures contract or buy an interest rate cap to take advantageof your expectations.Answer: True Page: 294-295, 312 Level: Medium13.Writing a put option results in a potentially limited gain and a potentially unlimitedloss.Answer: True Page: 298 Level: Medium14.The buyer of a put option on stock benefits if the underlying stock price rises.Answer: False Page: 298 Level: Easy15.An in the money American call option increases in value as expiration approaches, butan out of the money American call option decreases in value as expiration approaches.Answer: False Page: 299-300 Level: Medium
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Multiple Choice Questions
16.Of the following, the most recent derivative security innovations areA)Foreign currency futuresB)Interest rate futuresC)Stock index futuresD)Stock optionsE)Credit derivativesAnswer: E Page: 285 Level: Easy17.By convention, a swap buyer on an interest rate swap agrees toA)Periodically pay a fixed rate of interest and receive a floating rate of interestB)Periodically pay a floating rate of interest and receive a fixed rate of interestC)Swap both principle and interest at contract maturityD)Back both sides of the swap agreementE)Act as the dealer in the swap agreementAnswer: A Page: 308 Level: Medium18.An increase in which of the following would increase the price of a call option oncommon stock, ceteris paribus?I.Stock priceII.Stock price volatilityIII.Interest ratesIV.Exercise priceA)II onlyB)II and IV onlyC)I, II and III onlyD)I, III and IV onlyE)I, II, III and IVAnswer: C Page: 299-300 Level: Difficult19.Which of the following is true?A)Forward contracts have no default risk B)Futures contracts require an initial margin requirement be paidC)Forward contracts are marked to market dailyD)Forward contract buyers and sellers do not know who the counterparty isE)Futures contracts are only traded over the counter Answer: B Page: 287-288 Level: Medium
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