University of San Carlos - Main Campus ACCTG 509 Chapter 10  True/False Questions 1)Credit derivatives generally provide a means to hedge against an increase in default risk on a loan

University of San Carlos - Main Campus

ACCTG 509

Chapter 10

 True/False Questions

1)Credit derivatives generally provide a means to hedge against an increase in default risk on a loan.

2. Forward contracts are marked to market daily.

3. Futures or option exchange members who take positions on contracts for periods longer than a day are called floor brokers.

4. The seller 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.

5. A negotiated agreement between a buyer and seller (with no third party involvement) to exchange a non- standardized asset for cash at some future date, with the price set today is called a forward agreement.

6. An immediate delivery versus payment agreement is a spot agreement.  

7. Options on the S&P500 index are examples of European stock index options.

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

Page: 282 Level: Easy

9. You would expect the price quote for a put option to be at least $10 if the put had an exercise price of

$40 and the underlying stock was selling for $50.

10. A clearinghouse backs the buyer's and seller's position in an forward contract.
11. American options can only be exercised at maturity

12. The buyer of a call option immediately pays the premium to the call option writer.

13. Writing a put option results in a potentially limited gain and a potentially unlimited loss.

14. The buyer of a put option on stock benefits if the underlying stock price rises.

15. An in the money American call option increases in value as expiration approaches, but an out of the money American call option decreases in value as expiration approaches.

Multiple Choice Questions

16. The most recent derivative security innovations are
    1. Foreign currency futures
    2. Interest rate futures
    3. Stock index futures
    4. Stock options
    5. Credit derivatives

17. By convention, a swap buyer on an interest rate swap agrees to
    1. Periodically pay a fixed rate of interest and receive a floating rate of interest
    2. Periodically pay a floating rate of interest and receive a fixed rate of interest
    3. Swap both principle and interest at contract maturity
    4. Back both sides of the swap agreement
    5. Act as the dealer in the swap agreement  

18. An increase in which of the following would increase the price of a call option on common stock, ceteris paribus?

1. Stock price
2. Stock price volatility
3. Interest rates
4. Exercise price

1. II only
2. II and IV only
3. I, II and III only
4. I, III and IV only
5. I, II, III and IV

19. Which of the following is true?
    1. Forward contracts have no default risk
    2. Futures contracts require an initial margin requirement be paid
    3. Forward contracts are marked to market daily
    4. Forward contract buyers and sellers do not know who the counterparty is
    5. Futures contracts are only traded over the counter  

20. A professional futures trader who specializes in buying or selling futures contracts for multiple days or weeks is called
    1. Scalper
    2. Day trader
    3. Position trader
    4. Specialist
    5. Hedger

21. You have agreed to deliver the underlying commodity in 90 days. Today the underlying commodity price rises and you get a margin call. You must have
    1. A long position in a futures contract
    2. A short position in a futures contract
    3. Sold a forward contract
    4. Purchased a forward contract
    5. Purchased a call option on a futures contract

22. You find the following current quote for the June T-Bond contract: $100,000; Pts 32nd, of 100%

O p e n                                                   H i g h                                                   L o w                                                 S e t t l e

8 9 - 1 6                                                  8 9 - 1 6                                                 8 8 - 2 2                                                8 8 - 2 8

You went long in the contract at the open. Which of the following is/are true?

1. By the end of the day your margin account would be increased
2. 45,348 contracts were traded that day
3. You agreed to deliver in June $100,000 face value T-Bonds in exchange for $88,875
4. You agreed to purchase in June, $100,000 face value T-Bonds in exchange for $89,500

1. I, II and III only
2. I, II and IV only

3. I and III only
4. I and IV only

5. IV only

23. A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n).

1. 1. American call option

1. 2. European call option
   3. American put option

1. 4. European put option
   5. Knockout option

24. A higher level of which of the following variables would make a put option on common stock more valuable, ceteris paribus?

1. Stock price
2. Stock price volatility

1. II only
2. II and IV only

3. Interest rates
4. Exercise price

3. I, II and III only
4. I, III and IV only

5. I, II, III and IV

25. A speculator may write a call option on stock with an exercise price of $15 and earn a $3 premium if they thought

1. 1. The stock price would stay at or above

$15

1. 2. The stock volatility would increase
   3. The stock price would rise above $18  

1. 4. The stock price would stay at or below

$18

1. 5. Both A and B could be true

26. You have taken an option position and if prices drop you could go bankrupt, but if prices rise you might get a small gain. You have

1. 1. Bought a call option
   2. Bought a put option

1. 3. Written a call option
   4. Written a put option

1. 5. None of the above

27. You have taken an option position and if prices drop you could lose a fixed small amount of money, but if prices rise your gain rises with it, You have

1. 1. Bought a call option
   2. Bought a put option

1. 3. Written a call option
   4. Written a put option

1. 5. None of the above

28. In a bull market which option positions make money?

1. Buying a call
2. Writing a call

3. Buying a put
4. Writing a put

1. 1. I and II
   2. I and III

1. 3. I and IV
   4. II and III

1. 5. I and IV

29. The higher the exercise price the                   the value of a put and the                  the value of a call.

1. 1. Higher; higher
   2. Lower, lower

30. The largest type of derivative market in the world is the

3. Higher, lower
4. Lower, higher

1. 1. Futures market
   2. Forward market

1. 3. Swap market
   4. Options market

1. 5. Credit derivatives market

31. A stock has a spot price of $35. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $5. The exercise price of the put must be        and the exercise price of the call must be                                                                                                                  .

32. An agreement between two parties to exchange specified periodic cash flows in the future based on some underlying instrument or price is a/an

1. 1. Forward agreement
   2. Futures contract

 
Interest rate collar

1. 3. Option contract

1. 4. Swap contract

33. An investor has unrealized gains in 100 shares of Amazin stock upon which they do not wish to pay taxes. However, they are now bearish upon the stock for the short term. The stock is at 64 and he buys a put with a strike of 65 for $200. At expiration the stock is at $61. What is the net gain or loss on the entire stock/option portfolio.

A) $200.00

B) -$100.00

C) -$300.00

D) -$200.00

E) None of the above

Response: [($61 - $64) * 100] + (($65 - $61)*100) - $200

34. New futures contracts must be approved by

1. 1. The CFTC
   2. The SEC

1. 3. The Warren Commission

1. 4. The NYSE
   5. The Federal Reserve

35. A(n)                 is a succession of forward contracts on interest rates between two parties.

1. 1. Collar
   2. Interest rate swap

1. 3. Currency swap
   4. Swaption

1. 5. Credit swap

36. A bank with short term floating rate assets funded by long term fixed rate liabilities could hedge this risk by

1. Buying a T-bond futures contracts
2. Buying options on a T-bond futures contract
3. Enter into a swap agreement to pay a fixed rate and receive a variable rate
4. Enter into a swap agreement to pay a variable rate and receive a fixed rate

1. I and III only
2. I, II and IV only

3. II and IV only
4. III only

5. IV only

37. The swap market's primary direct government regulator is (the)

1. 1. SEC
   2. CFTC

 
NYSE

1. 3. WTO

1. 4. Nobody

38. A bank with long term fixed rate assets funded with short term rate sensitive liabilities could do which of the following to limit their interest rate risk?

1. Buy a cap
2. Buy an interest rate swap

1. I and II only
2. III only

3. I and IV only
4. II and III only

3. Buy a floor
4. Sell an interest rate swap

5. III and IV only

39. An interest rate floor is designed to protect an institution from