Q&A Hero

Q: Thrifts suffered problems in the 1970s as A) market interest rates rose above the rates thrifts could pay on deposits and savings accounts. B) thrift customers moved their funds from thrifts to money market mutual funds. C) government regulators severely limited the scope of activities that thrifts could undertake to grow their way out of trouble. D) all of the above occurred. E) only A and B of the above occurred.

Q: Thrifts A) fueled the home-building boom from 1934-1978. B) suffered in the 1970s as inflation rose above deposit interest rate ceilings. C) have grown in importance in attracting deposits relative to commercial banks since 1980. D) are all of the above. E) are only A and B of the above.

Q: Savings and loans associations A) initially were allowed to attract funds by offering savings accounts that paid a slightly higher interest rate than that offered by commercial banks. B) held about 85 percent of their total assets as mortgages prior to the Great Depression. C) did not weather the Great Depression well, as thousands of S&Ls failed in the 1930s. D) are all of the above. E) are only A and B of the above.

Q: Savings and loan associations A) were established by Congress to encourage home ownership. B) initially were not permitted to accept demand deposits. C) held about 85 percent of their assets in the form of mortgages prior to the Great Depression. D) are all of the above. E) are only A and B of the above.

Q: Which of the following statements concerning the mutual form of ownership of savings banks are true? A) The mutual form of ownership accentuates the principal-agent problem that exists in corporations. B) More capital is available, contributing to the safety of mutual savings banks compared to other banking organizations. C) Managers of mutual savings banks are more risk averse than in the corporate form, because the value of their ownership does not increase if the firm does well. D) All of the above are true. E) Only A and B of the above are true.

Q: Which of the following statements about mutual savings banks are true? A) There are currently under 200 mutual savings banks in the United States. B) Most mutual savings banks are federally chartered. C) Both A and B of the above are true. D) None of the above are true.

Q: Savings banks A) were first established in Scotland and England. B) were established to encourage saving by the poor. C) were very conservative with their funds, placing most of them in commercial banks. D) are all of the above. E) are only A and B of the above.

Q: The use of financial derivatives by financial institutions to hedge can decrease risk. However, they can also increase risk. Which of the following examples illustrates this? A) Financial derivatives allow financial institutions to increase their leverage. B) Some institutions such huge amounts of derivatives that the amounts exceed capital. C) All of the above are valid examples. D) None of the above are valid examples.

Q: The biggest danger of financial derivatives occurs A) when notional amounts exceed a bank's capital. B) when financial market prices and rates are highly volatile. C) in the trading activities of financial institutions. D) in the large amount of credit exposure.

Q: A valid concern about financial derivatives is that A) they allow financial institutions to increase their leverage. B) they are too sophisticated because they are so complicated. C) the notional amounts can greatly exceed a financial institution's capital. D) all of the above are valid concerns. E) none of the above are valid concerns.

Q: Intermediaries are active in the swap markets because A) they increase liquidity. B) they reduce default risk. C) they reduce search cost. D) all of the above are true.

Q: As compared to a default on the notional principle, a default on a swap A) is more costly. B) is about as costly. C) is less costly. D) may cost more or less than default on the notional principle.

Q: The disadvantage of swaps is that A) they lack liquidity. B) it is difficult to arrange for a counterparty. C) they suffer from default risk. D) they are all of the above.

Q: One advantage of using swaps to eliminate interest-rate risk is that swaps A) are less costly than futures. B) are less costly than rearranging balance sheets. C) are more liquid than futures. D) have better accounting treatment than options.

Q: If a bank has a gap of -$10 million, it can reduce its interest-rate risk by A) paying a fixed rate on $10 million and receiving a floating rate on $10 million. B) paying a floating rate on $10 million and receiving a fixed rate on $10 million. C) selling $20 million fixed-rate assets. D) buying $20 million fixed-rate assets.

Q: If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to A) pay a fixed rate while receiving a floating rate. B) receive a fixed rate while paying a floating rate. C) both receive and pay a fixed rate. D) both receive and pay a floating rate.

Q: If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap which requires Second National to A) pay a fixed rate while receiving a floating rate. B) receive a fixed rate while paying a floating rate. C) both receive and pay a fixed rate. D) both receive and pay a floating rate.

Q: A swap that involves the exchange of one set of interest payments for another set of interest payments is called a(n) ________. A) interest-rate swap B) currency swap C) swaption D) notional swap

Q: A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is a(n) ________. A) interest-rate swap B) currency swap C) swaption D) notional swap

Q: A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________. A) cross hedge B) cross call option C) cross put option D) swap

Q: If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures. A) buy put B) buy call C) sell put D) sell call

Q: An increase in the exercise price, all other things held constant, will ________ the premium on call options. A) increase B) decrease C) not affect D) Not enough information is given.

Q: An increase in the volatility of the underlying asset, all other things held constant, will ________ the option premium. A) increase B) decrease C) not affect D) Not enough information is given.

Q: All other things held constant, premiums on both put and call options will increase when the A) exercise price increases. B) volatility of the underlying asset increases. C) term to maturity decreases. D) futures price increases.

Q: All other things held constant, premiums on call options will increase when the A) exercise price falls. B) volatility of the underlying asset falls. C) term to maturity decreases. D) futures price increases.

Q: All other things held constant, premiums on put options will increase when the A) exercise price increases. B) volatility of the underlying asset falls. C) term to maturity increases. D) A and C are both true.

Q: The main disadvantage of futures contracts as compared to options on futures contracts is that futures A) remove the possibility of gains. B) increase the transactions cost. C) are not as effective a hedge. D) do not remove the possibility of losses.

Q: The main reason to buy an option on a futures contract rather than the futures contract itself is A) to reduce transaction cost. B) to preserve the possibility for gains. C) to limit losses. D) to remove the possibility for gains.

Q: The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is A) controlled while preserving the possibility of gains. B) controlled while removing the possibility of losses. C) not controlled but the possibility of gains is preserved. D) not controlled but the possibility of gains is lost.

Q: If you buy an option to sell Treasury futures at 110, and at expiration the market price is 115, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised.

Q: If you buy an option to buy Treasury futures at 110, and at expiration the market price is 115, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised.

Q: If you buy an option to sell Treasury futures at 115, and at expiration the market price is 110, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised.

Q: If you buy an option to buy Treasury futures at 115, and at expiration the market price is 110, A) the call will be exercised. B) the put will be exercised. C) the call will not be exercised. D) the put will not be exercised.

Q: A put option gives the seller the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy

Q: A call option gives the seller the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy

Q: A put option gives the owner the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy

Q: A call option gives the owner the ________ to ________ the underlying security. A) right; sell B) obligation; sell C) right; buy D) obligation; buy

Q: An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a(n) ________. A) call option B) put option C) American option D) European option

Q: An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a(n) ________. A) call option B) put option C) American option D) European option

Q: The agency which regulates futures options is the A) Securities and Exchange Commission. B) Commodities Futures Trading Commission. C) Federal Trade Commission. D) Both A and B are true.

Q: The agency which regulates stock options is the A) Securities and Exchange Commission. B) Commodities Futures Trading Commission. C) Federal Trade Commission. D) Both A and B are true.

Q: Options on futures contracts are referred to as ________. A) stock options B) futures options C) American options D) individual options

Q: Options on individual stocks are referred to as ________. A) stock options B) futures options C) American options D) individual options

Q: An option that can be exercised only at maturity is called a(n) ________. A) swap B) stock option C) European option D) American option

Q: An option that can be exercised at any time up to maturity is called a(n) ________. A) swap B) stock option C) European option D) American option

Q: The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset. A) obligation; right B) right; obligation C) obligation; obligation D) right; right

Q: The seller of an option has the A) right to buy or sell the underlying asset. B) the obligation to buy or sell the underlying asset. C) ability to reduce transaction risk. D) right to exchange one payment stream for another.

Q: The price specified in an option contract at which 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 of the above.

Q: The price specified in an option contract at which the holder can buy or sell the underlying asset is called the ________. A) premium B) call C) strike price D) put

Q: Options are contracts that give the purchasers the A) opportunity 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.

Q: 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) doing none of the above.

Q: If a firm is due to be paid in euros 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) do none of the above.

Q: If a portfolio manager believes stock prices will fall and knows that a block of funds will be received in the future, then he should A) sell stock index futures short. B) buy stock index futures long. C) stay out of the futures market. D) borrow and buy securities now.

Q: Which of the following is a likely reason for a portfolio manager to sell a stock index future short? A) He believes the market will rise. B) He wants to lock in current prices. C) He wants to reduce stock market risk. D) Both B and C are correct.

Q: If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________. A) lose $12,500 B) gain $12,500 C) lose $50 D) gain $50

Q: If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________. A) lose $12,500 B) gain $12,500 C) lose $50 D) gain $50

Q: Who would be most likely to buy a long stock index future? A) a mutual fund manager who believes the market will rise B) a mutual fund manager who believes the market will fall C) a mutual fund manager who believes the market will be stable D) none of the above would be likely to purchase a futures contract

Q: The most widely traded stock index future is on the A) Dow Jones 1000 index. B) S&P 500 index. C) NASDAQ index. D) Dow Jones 30 index.

Q: The risk that occurs because stock prices fluctuate is called ________. A) stock market risk B) reinvestment risk C) interest-rate risk D) default risk

Q: When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is a ________. A) macro hedge B) micro hedge C) cross hedge D) futures hedge

Q: 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

Q: Which of the following features of Treasury bond 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 offsetting trade

Q: Which of the following features of Treasury bond 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

Q: 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.

Q: 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) standardized contracts.

Q: Futures markets have grown rapidly because futures contracts A) are standardized. B) have lower default risk. C) are liquid. D) are all of the above.

Q: The advantage of forward contracts over futures contracts is that forward contracts A) are standardized. B) have lower default risk. C) are more flexible. D) both A and B are true.

Q: The advantage of forward contracts over futures contracts is that forward contracts A) are standardized. B) have lower default risk. C) are more liquid. D) are none of the above.

Q: The futures markets have grown rapidly in recent years because A) interest rate volatility has increased. B) financial managers are more risk averse. C) of both A and B. D) of neither A nor B.

Q: The number of contracts outstanding in a particular financial future is the ________. A) demand coefficient B) open interest C) index level D) outstanding balance

Q: The purpose of the Commodity Futures Trading Commission is to do all of the following except A) oversee futures trading. B) see that prices are not manipulated. C) approve proposed futures contracts. D) establish minimum prices for futures contracts.

Q: The agency responsible for regulation of the futures exchanges and trading in financial futures is the A) Commodity Futures Trading Commission. B) Securities and Exchange Commission. C) Federal Trade Commission. D) Futures Exchange Commission.

Q: Financial futures are regularly traded on all of the following except the A) Chicago Board of Trade. B) Chicago Mercantile Exchange. C) New York Futures Exchange. D) Chicago Commodity Markets Board.

Q: Futures contracts are regularly traded on the A) Chicago Board of Trade. B) New York Stock Exchange. C) American Stock Exchange. D) Chicago Board Options Exchange.

Q: The elimination of riskless profit opportunities in the futures market is referred to as ________. A) speculation B) hedging C) arbitrage D) open interest E) mark to market

Q: If you sell a short futures contract, you hope that bond prices will ________. A) rise B) fall C) not change D) fluctuate

Q: If you buy a long contract on financial futures, you hope interest rates will ________. A) rise B) fall C) not change D) fluctuate

Q: If you sell a short contract on financial futures, you hope interest rates will ________. A) rise B) fall C) not change D) fluctuate

Q: By buying a long $100,000 futures contract for 115, you agree to pay ________ for ________ face value securities. A) $100,000; $115,000 B) $115,000; $100,000 C) $86,956; $100,000 D) $86,956; $115,000

Q: By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver ________ face value securities for ________. A) $100,000; $104,167 B) $96,000; $100,000 C) $100,000; $96,000 D) $100,000; $100,000