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Exam 10: Derivative Securities Markets

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Question 1

Multiple Choice

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Of the following,the most recent derivative security innovations are

A) foreign currency futures.
B) interest rate futures.
C) stock index futures.
D) stock options.
E) credit derivatives.

F) A) and E)
G) None of the above

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Question 2

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The purchaser of a T-bond futures contract priced at 101-16 at the time of sale agrees to deliver $100,000 face value Treasury bonds in exchange for receiving $101,500 at contract maturity.

A) True
B) False

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Question 3

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A stock is priced at $27. An American call option on this stock with a $25 strike must be worth at least how much? Numerically show why.

A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.

A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a

A clearinghouse backs the buyer's and seller's position in a forward contract.

Measured by the amount outstanding,the largest type of derivative market in the world is the

In a futures contract,if funds in the margin account fall below the maintenance margin requirement,a margin call is issued.

A U.S. firm has a European subsidiary that earns euros. The subsidiary has borrowed dollars at a floating rate of interest. What kind of risk does the subsidiary have? What kind of swap could be used to limit the subsidiary's risk? Be specific.

By convention,a swap buyer on an interest rate swap agrees to

An interest rate floor is designed to protect an institution from I. falling interest rates. II. falling bond prices. III. increased credit risk on loans. IV. swap counterparty credit risk.

You have taken a stock option position and,if the stock's price drops,you will get a level gain no matter how far prices fall,but you could go bankrupt if the stock's price rises. You have________________________________.

A bank with short-term floating-rate assets funded by long-term fixed-rate liabilities could hedge this risk by I. buying a T-bond futures contract. II. buying options on a T-bond futures contract. III. entering into a swap agreement to pay a fixed rate and receive a variable rate. IV. entering into a swap agreement to pay a variable rate and receive a fixed rate.

My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans,the bank could I. enter into a swap to pay fixed and receive variable. II. enter into a swap to pay variable and receive fixed. III. buy an interest rate floor. IV. buy an interest rate cap.

An investor has unrealized gains in 100 shares of Amazin stock for which he does not wish to pay taxes. However,he is now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?

New futures contracts must be approved by

An increase in which of the following would increase the price of a call option on common stock,ceteris paribus? I. Stock price II. Stock price volatility III. Interest rates IV. Exercise price

Buying a call at the money call option and writing a put at the money put option are two ways to make money when prices rise. When would each be the preferable strategy?

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 set today is called a forward agreement.

Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.