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Q:
How can swaps be used to create securities?
Q:
Explain the relationship between a swap and a forward contract.
Q:
When two parties agree to swap payments based on different currencies, this type of swap is called:a. Interest rate swap.b. Equity swap.c. Currency swap.d. Interest rate-equity swap.e. None of the above.
Q:
A floor is equivalent to:a. A package of call options.b. A package of put options.c. A package of forwards.d. A package of futures.e. None of the above.
Q:
A cap is equivalent to:a. A package of forwards.b. A package of call options.c. A package of put options.d. Complex options.e. None of the above.
Q:
The buyer of a floor benefits if the designated reference:a. Stays the same.b. Rises above the strike rate.c. Falls below the strike rate.d. None of the above.
Q:
The buyer of a cap benefits if the designated reference:a. Rises above the strike rate.b. Falls below the strike rate.c. Stays the same.d. None of the above.
Q:
A cap and a floor can be viewed simply as:a. A package of forwards.b. A package of options.c. A package of futures.d. A complex contract.e. None of the above.
Q:
In a cap or floor, the only party that is required to perform is the:a. Buyer.b. Seller.c. Asset/liability manager.d. Depository institution.e. None of the above.
Q:
In an interest rate cap or floor agreement, the predetermined level of the reference rate that is used to determine when and how much the seller must compensate the buyer is known as:a. The strike rate.b. Caption.c. Flotion.d. The swap rate.e. None of the above.
Q:
When the seller agrees to pay the buyer if a designated reference falls below a predetermined level, the agreement is called:a. A swap.b. A cap.c. A floor.d. The strike.e. None of the above.
Q:
When the seller agrees to pay the buyer if the designated reference exceeds a predetermined level, the agreement is referred to as:a. A cap.b. A floor.c. The strike.d. A swap.e. None of the above.
Q:
In a swap, two parties are exchanging payments. The risk that one party will fail to meet its obligation to make payments is called:a. Default risk.b. Counterparty risk.c. Credit risk.d. Price risk.e. None of the above.
Q:
Participants in financial markets use interest rate swaps to:a. Compensate the asset/liability manager for risk-taking.b. Alter the cash flow characteristics of their assets or liabilities.c. Capitalize on perceived capital market imperfections.d. b and c only.e. All of the above.
Q:
Swaps are beneficial because:a. They are more transactionally efficient instruments.b. They increase the liquidity in the swap market.c. They offer longer maturities than forward and futures contracts.d. All of the above.e. None of the above.
Q:
A swap can be thought of as a:a. Package of forward contracts.b. Package of futures contracts.c. Package of options.d. a and c only.e. None of the above.
Q:
When one party is exchanging a payment based on an interest rate and the other party based on the return of some equity index, the swap agreement is called:a. In interest rate swap.b. An equity swap.c. An interest rate-equity swap.d. An index swap.e. A currency swap.
Q:
In an interest rate swap, the counterparties swap payments in the same currency based on:a. Information on market interest rate movements.b. An interest rate.c. An index.d. Information on price movements in the market.e. None of the above.
Q:
The dollar amount of the payments exchanged in a swap agreement is based on some predetermined dollar principal, which is called:a. The principal.b. The notional amount.c. The maturity value.d. The par value.e. None of the above.
Q:
An agreement whereby two parties agree to exchange periodic payments is called:a. An option.b. A futures contract.c. A swap.d. Cap and floor agreements.e. None of the above.
Q:
What are the basic components of the option price?
Q:
Discuss the factors that influence the option price.
Q:
What are the major differences between a futures contract and an options contract?
Q:
The theoretical option price can be calculated using:a. The Black-Scholes option pricing model.b. The binomial option pricing model.c. Arbitrage arguments.d. All of the above.e. None of the above.
Q:
A put option can be used to hedge against:a. An increase in the price of the underlying instrument.b. A decrease in the price of the underlying instrument.c. A decrease in interest rates.d. All of the above.e. None of the above.
Q:
Hedging with futures lets a market participant lock in a price and thereby eliminates:a. Price risk.b. Basis risk.c. Credit risk.d. Liquidity risk.e. None of the above.
Q:
More complex OTC options are called:a. Bermuda options.b. Atlantic options.c. Exotic options.d. Plain vanilla options.e. All of the above.
Q:
The relationship between the call option price, the put option price, and the price of the underlying asset is knows as:a. Risk/return relationship.b. Put-call parity relationship.c. Binomial relationship.d. Arbitrage relationship.e. None of the above.
Q:
The longer the time to expiration, the:a. Greater the option price.b. Lower the option price.c. Lower the option's time value.d. b and c only.e. None of the above.
Q:
As the price of the underlying asset increases, the price of a:a. Call increase.b. Put decreases.c. Call decreases.d. a and b only.e. b and c only.
Q:
When an option has intrinsic value, it is said to be:a. In the money.b. Out-of-the money.c. At-the-money.d. Time dependent.e. None of the above.
Q:
On the expiration date, an option's time premium:a. Exceeds its intrinsic value.b. Equals zero.c. Is positive.d. Is negative.e. None of the above.
Q:
The option price is a reflection of the option's:a. Premium.b. Intrinsic value.c. Time value.d. b and c only.e. None of the above.
Q:
The writer of a call option is said to be in a:a. Long call position.b. Short call position.c. Long put position.d. Short put position.e. None of the above.
Q:
A major difference between options and futures is that:a. Options provide a symmetric risk/reward relationship.b. Futures provide a symmetric risk/reward relationship.c. Options provide an asymmetric risk/reward relationship.d. Futures provide an asymmetric risk/reward relationship.e. b and c only.
Q:
Options traded in the OTC market are known as:a. Standardized options.b. Dealer options.c. Tailor-made options.d. b and c only.e. Exchange-traded options.
Q:
Options may be traded either on organized exchanges, such as the Chicago Board Options Exchange, or in the:a. Over-the-counter market.b. Interbank market.c. Clearinghouse.d. a and b only.e. None of the above.
Q:
Options offer:a. Substantial upside return potential.b. Substantial downside risk protection.c. Unlimited gains and losses.d. a and b only.e. All of the above.
Q:
The maximum amount that an option buyer can lose is:a. Unlimited.b. Limited to the option price.c. The bid-ask spread.d. The initial margin.e. None of the above.
Q:
An option, which may be exercised only at the expiration date, is called:a. An American option.b. A European option.c. An OTC option.d. An exchange-traded option.e. None of the above.
Q:
The price at which the asset may be bought or sold is called the:a. Option price.b. Option premiumc. Exercise price.d. Strike price.e. c and d only.
Q:
The option premium is the:a. Price of the option.b. Cost of the option.c. Value of the option.d. All of the above.e. None of the above.
Q:
When an option grants the buyer the right to purchase the designated instrument from the writer, it is referred to as a:a. Call option.b. Put option.c. Long forwards.d. Long futures.e. None of the above.
Q:
Discuss the principles of hedging and explain the risks associated with hedging.
Q:
Explain the mark-to-market and margin requirements of a futures contract and use an example.
Q:
Compare and contrast futures and forwards.
Q:
Locals are brokers who:a. Buy and sell for their own account.b. Are professional risk takers.c. Add liquidity to the futures market.d. Play the same effective role as a market maker. e. All of the above.
Q:
Investors can use the cash or futures market to alter their risk exposure, which requires them to consider which of the following factors?a. Liquidity.b. Transactions costs.c. Taxes.d. Leveraging aspect of futures. e. All of the above.
Q:
The criticism of futures contracts that their introduction will increase the price volatility of the underlying asset in the cash market is referred to as:a. Asset volatility hypothesis.b. Speculation.c. Destabilization hypothesis.d. Hedging.e. None of the above.
Q:
The seller of a futures contract will realize a profit if the futures price:a. Increases.b. Decreases.c. Stays the same.d. None of the above.e. All of the above.
Q:
When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called a:a. Cross-hedge.b. Long hedge.c. Short hedge.d. Perfect hedge.e. None of the above.
Q:
The difference between the cash price and the futures price is called:a. Bid-ask spread.b. Income spread.c. Basis.d. Profit.e. None of the above.
Q:
At the end of each trading day, futures contracts are:a. Delivered.b. Marked-to-market.c. Liquidated.d. Closed out.e. None of the above.
Q:
When an investor takes a position in the market by buying a futures contract, the investor is said to be in a:a. Long position.b. Short position.c. Short futures.d. Hedge position.e. None of the above.
Q:
Which of the following statements is most correct?a. A forward contract, just like a futures contract, is an agreement for the future delivery of something at a specified price at the end of a designated period of time.b. A forward contact, just like a futures contract, is traded on an exchange floor.c. A forward contract differs from a futures contract in that is it usually nonstandardized.d. a and c only.e. All of the above.
Q:
The price of a futures contract is determined by:a. Supply and demand conditions.b. Open outcry of bids and offers in an auction market.c. The pit trader.d. Locals.e. None of the above.
Q:
Futures contracts are traded:a. In the interbank market.b. In the OTC market.c. On an organized exchange.d. Electronically.e. None of the above.
Q:
The minimum level by which an investor's equity position may fall as a result of unfavorable price movement before the investor is required to deposit additional margin is called:a. The initial margin.b. The maintenance margin.c. The variation margin.d. A and b only.e. None of the above.
Q:
When a position is first taken in a futures contract, the investor must deposit a minimum dollar amount per contract as specified by:a. The Federal Reserve.b. The pit trader.c. The exchange.d. An informal agreement between the parties involved.e. None of the above.
Q:
The role of the clearinghouse is to:a. Interpose itself as the buyer to every sale and the seller to every purchase.b. Guarantee fulfillment of the futures contract on the settlement date.c. Make it simple for parties to unwind their positions prior to the settlement date.d. All of the above.e. b and c only.
Q:
A party to a futures contract can liquidate the position by:a. Taking an offsetting position in the same contract.b. Waiting until the settlement date.c. Walking away from the futures contract.d. a and b only.e. All of the above.
Q:
The futures price is:a. The price paid for the futures contract.b. The price at which the parties in a futures contract agree to transact in the future.c. The present value of all expected future cash benefits.d. The cost of the futures contract today.e. None of the above.
Q:
A futures contract is a firm legal agreement between a buyer and a seller in which:a. The buyer agrees to take delivery of an asset at a specified price at the end of a designated period of time.b. The value of the futures contract is derived from the value of the underlying instrument.c. The seller agrees to make delivery of an asset at a specified price at the end of a designated period of time.d. a and c only.e. All of the above.
Q:
As the value of a futures contract is derived from the value of the underlying instrument, they are commonly called:a. Commodities.b. Arbitrage instruments.c. Derivative instruments.d. Secondary instruments.e. None of the above.
Q:
Financial futures can be classified as:a. Stock index futures.b. Interest rate futures.c. Commodity futures.d. Currency futures.e. a, b and d.
Q:
The basic economic function of futures markets is to provide an opportunity for market participants:a. To hedge against the risk of adverse price movements.b. To hedge against the risk of adverse interest rate changes.c. To hedge against the risk of adverse exchange rate changes.d. b and c only.e. All of the above.
Q:
What is beta and how can it be estimated?
Q:
Compare and contrast the SML, CML and market model.
Q:
State the assumptions, which underlie the capital market theory distinguishing between assumptions about investor behavior and assumptions about capital markets.
Q:
Which of the following economic factors have been identified to explain security returns according to the APT?a. Unanticipated changes in industrial production.b. Unanticipated changes in inflation.c. Unanticipated changes in interest rates.d. Unanticipated changes in the shape of the yield curve.e. All of the above.
Q:
An appealing feature of the APT model is that:a. It makes fewer assumptions about investor behavior and the market structure.b. Is simple to use.c. Is easier to implement.d. Is more accurate in estimating the expected rate of return of an asset.e. None of the above.
Q:
The APT model postulates that a security's expected return is influenced by:a. A single market index.b. A variety of factors.c. Market and nonmarket risks.d. All of the above.e. None of the above.
Q:
The multifactor CAPM is attractive because:a. It is simple to use.b. It recognized nonmarket risks.c. It is easier to implement.d. All of the above.e. None of the above.
Q:
The difference between the expected return in the market and the riskfree rate is called:a. The market risk premium.b. The market price of risk.c. The risk premium.d. The market sensitivity index.e. a and b.
Q:
The capital asset pricing model states that the expected return of a security is equal to the riskfree rate of return plus:a. Beta.b. A risk premium.c. The market risk premium.d. The market price of risk.e. None of the above.
Q:
The slope of the SML is measured by:a. Beta.b. The market risk premium.c. The risk premium.d. The riskfree rate.e. None of the above.
Q:
The security market line (SML) is a graphical depiction of:a. The market model.b. The capital asset pricing model.c. The capital market model.d. The market index.e. None of the above.
Q:
In estimating beta, practical problems arise, which are a function of:a. The length of time over which the return is calculated.b. The market index selected.c. The specific time period used.d. The number of observations. e. All of the above.
Q:
The capital asset pricing model assumes that the expected return of a security is determined by:a. Multifactor risk.b. The asset's beta only.c. Arbitrage risk.d. Extra-market sources of risk.e. None of the above.
Q:
The risk-return relationship for individual securities is called:a. The capital market line.b. The security market line.c. The market model.d. The fitted line.e. None of the above.