In this work of ECO 316 Week 2 Chapter 9 Derivative Securities and Derivative Markets you will find the next info:

9.1 Multiple Choice Questions

1) In derivative markets, trade takes place in

2) The improper use of derivatives was blamed in part for all of the following EXCEPT

3) Derivative instruments are

4) Spot transactions

5) Forward transactions

6) Forward transactions would be useful to

7) Forward transactions originated in the market for

8) If a wheat crop turns out to be unusually large,

9) If the orange crop turns out to be unusually small,

10) Using forward transactions allows

11) Fluctuations in the price of the underlying security or commodity during the life of forward transactions

12) Forward transactions

13) Forward transactions

14) Forward contracts are often illiquid because

15) Forward contracts

16) The most important derivative instruments are

17) A futures contract is

18) Currently,

19) Between 1981 and the early 2000s,

20) The buyer of a futures contract

21) The buyer of a futures contract

22) The seller of a futures contract

23) The seller of a futures contract

24) Futures trading has traditionally been dominated by

25) Which of the following financial futures contracts are traded in the United States?

26) Financial futures contracts are regulated by

27) The role of the Commodity Futures Trading Commission is to

28) The futures price

29) The elimination of riskless profit opportunities is known as

30) The initial deposit required by a buyer or seller of a futures contract is known as

31) Marking to market involves

32) All of the following are roles of a clearinghouse EXCEPT

33) Clearinghouses help to reduce default risk by

34) The futures price

35) If market participants believe that the wheat crop is likely to be unusually small,

36) As the time of delivery in a futures contract gets closer

37) On the day of delivery

38) If you buy a futures contract for U.S. Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected, you will have

39) If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have

40) Marking to market refers to

41) One difference between futures and options contracts is

42) If the price of a futures contract increases, then

43) If a futures contract for U.S. Treasury bonds increases by “15” in the financial page listings, the value of the contract increased by

44) If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that

45) Hedgers are primarily interested in

46) Speculators are primarily interested in

47) Profits from speculation arise because of

48) Which of the following statements about the presence of speculators in futures markets is correct?

49) Which of the following is NOT a way that hedgers can benefit by participating in financial futures markets?

50) Savers and borrowers began to make greater use of derivative markets during the 1980s because of the

51) A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise by

52) A speculator who believes strongly that interest rates will rise would be likely to

53) A speculator who believes strongly that interest rates will fall would be likely to

54) The futures hedge

55) Basis risk refers to the risk

56) An options contract

57) In comparing futures contracts with options contracts, we can say that

58) In a call options contract, the

59) In a put options contract, the

60) The price at which an option may be exercised is called the

61) In an options contract, another name for the strike price is the

62) The period over which a call or put option exists is

63) The fee charged by the seller of an option is referred to as the

64) Options on securities are regulated by the

65) If you look at the financial page listings for options contracts and find that prices on call options on Treasury bonds are rising over a particular time period, options market investors must expect that

66) The intrinsic value of an option

67) As an option nears its expiration date, the size of the premium approaches

68) A stock option is said to be “out of the money” if:

69) Suppose that Acme Widget is currently selling for $100 per share and you own a call option to buy Acme Widget at $75 per share. The intrinsic value of your option is

70) A call option is said to be in the money if

71) A put option is said to be in the money if

72) Which of the following factors would tend to increase the size of the premium on an options contract?

73) The mathematicians and economists who have been hired by Wall Street firms to build mathematical models to aid the pricing of derivatives are generally referred to as

74) A lender who is worried that its cost of funds might rise during the term of a loan it has made can hedge against this rise without eliminating the chance to profit from a decline in the cost of funds by

75) The choice between futures and options

76) An option buyer

77) Speculators in futures and options markets

78) In a covered option,

79) Index arbitrage refers to

80) The big decline in share prices on the York Stock Exchange that occurred in October 1987

81) Orange County lost a great deal of money during 1994 because

82) Standardization of derivative contracts

83) The terms of futures contracts traded in the United States are

84) Futures trading practices in the United States are regulated by

85) Futures contracts are traded

86) A swap is

87) One benefit of a swap compared to futures and options is that they

88) Swaps differ from futures and options in all of the following ways EXCEPT:

89) A shortcoming of swaps that has led to the participation of large firms and financial institutions is

90) An interest rate swap involving the exchange of floating-rate obligations for fixed-rate obligations is known as

91) An advantage of a swap over futures and options is that

92) A total return swap involves transferring both

93) A key reason that firms and financial institutions might participate in an interest rate swap is

9.2 Essay Questions

1) Explain how each of the following might make use of the futures market.

(a) A lender who is worried that its cost of funds might rise during the term of a loan it has made

(b) A speculator who believes strongly that interest rates will rise

2) Compare the rights and obligations of buyers and sellers of futures contracts with the rights of buyers and sellers of options contracts.

3) Suppose you purchase a call option to buy IBM common stock at $35 per share in September. The current price of IBM is 37 and the option premium is 4. What is the intrinsic value of the option? As the expiration date on the option approaches, what will happen to the size of the option premium?

4) Suppose that the futures index for the S&P 500 for delivery one year from now is selling for $960,000, whereas the stocks are selling for $900,000. If the one-year Treasury bill rate is 5%, is it possible to use index arbitrage to make a profit?