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Multiple Choice Quiz
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1
The purpose of derivatives is to:
A)Increase the risk so the return is larger.
B)Eliminate risk for both parties in the transaction.
C)Postpone the risk for both parties in the transaction.
D)Transfer the risk from one person to another.
2
Credit default swaps are credit derivatives that:
A)Present high levels of risk and should only be used by the wealthy.
B)Allow lenders to insure themselves against the risk that a borrower will default.
C)Should only be used by people seeking high returns from low risk.
D)Do not require collateral to be posted by either the buyer or the seller of the insurance.
3
The long position in a futures contract is the party that will:
A)Benefit from decreases in the price of the underlying asset.
B)Agree to make delivery of a commodity or financial instrument at a future date.
C)Benefit from increases in the price of the underlying asset.
D)Accept the greater share of the risk.
4
As the time of settlement gets closer:
A)The price of the futures contract will diverge from the price of the underlying asset.
B)The price of the futures contract will always be above the price of the underlying asset.
C)The price of the underlying asset and the future's price will show no correlation at all.
D)The price of the futures contract will move in lockstep with the price of the underlying asset.
5
Sue buys a futures contract for U.S. Treasury bonds and on the settlement date the interest rate on U.S. Treasury bonds is higher than Sue expected. Sue will have:
A)Gained money on her short position.
B)Gained money on her long position.
C)Lost money on her long position.
D)Lost money on her short position.
6
An arbitrageur is someone who:
A)Always takes the long position in a futures contract.
B)Always takes the short position in a futures contract.
C)Seeks the high returns that come from the high risk inherent in futures markets.
D)Simultaneously buys and sells financial instruments to benefit from temporary price differences.
7
The right to buy a given quantity of an underlying asset at a predetermined price on or before a specific date is called a(n):
A)Put option.
B)Option writer.
C)Call option.
D)Arbitrage contract.
8
The strike price of an option is:
A)The market price at the time the option is written.
B)The market price at the time the option is exercised.
C)The price at which the option holder has the right to buy or sell.
D)Always above the market price.
9
With a put option, the option holder:
A)Has the right to buy the asset.
B)Can buy or sell the asset, it is their option.
C)Has the right to sell the asset.
D)Can buy the asset but only on the date specified.
10
A put option described as in-the-money would find:
A)The market price of the stock above the strike price.
B)The strike price is above the market price of the stock.
C)The market and strike prices are the same.
D)The option has been exercised.
11
Interest-rate swaps are:
A)Exchanges of equity securities for debt securities.
B)Agreements between two parties to exchange periodic interest-rate payments over some future period.
C)Agreements involving swapping of option contracts.
D)Agreements that allow both parties to convert floating interest rates to fixed interest rates.
12
Standardization of derivative contracts:
A)Result in increased risk for the parties involved.
B)Makes them more difficult to understand and therefore leads to increased misuse.
C)Makes the premiums involved with these contracts increase.
D)Leads to greater liquidity and lower risk.
13
There's a call option written for 100 shares of GM stock for $85.00 a share, prior to the third Friday of October 2013: The option writer:
A)Has the option but not the requirement of selling 100 shares of GM for $85.00.
B)Will sell 100 shares of GM for $85.00 on the third Friday of October 2009.
C)Has the option to back out of this contract prior to the third Friday of October 2009.
D)Is required to post margin.
14
Credit default swaps contributed to the financial crisis of 2007-2009 by:
A)Making it easier for sellers of insurance to assume and conceal risk.
B)Allowing buyers to recognize who bears the credit risk on a given security.
C)Identifying those who took concentrated positions on one side of a trade.
D)Requiring no collateral from buyers or sellers.
15
There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel. If the market price of wheat increases to $3.00 per bushel:
A)The buyer (long position) needs to transfer $50 to the seller (short position).
B)The seller (short position) needs to transfer $50 to the buyer (long position).
C)Nothing happens since with a futures contract all payments are made at the settlement date.
D)Nothing happens since marked to market adjustments only take place when the market price falls below the contract price.







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