Q&A Hero

Q: Swaps differ from futures and options in all of the following ways EXCEPT: A) intended to reduce the risk faced by participants. B) more flexibility. C) more privacy. D) less regulation.

Q: Fiscal policymakers may actually welcome some inflation for all of the following reasons except: A. it potentially raises tax revenues.B. it reduces the real value of the national debt allowing governments to "default" on a portion of their debt.C. interest payments tend to be fixed so the real interest payments are reduced.D. it weakens the independence of the central bank.

Q: One benefit of a swap compared to futures and options is that they A) promote liquidity. B) reduce the risk for both the buyer and seller. C) can be better tailored to meet the needs of market participants. D) can involve financial instruments and not just commodities.

Q: For fiscal policymakers, one of the results of an independent central bank is: A. to finance government spending the Treasury has to order more currency from the central bank.B. fiscal policymakers always have to borrow to increase spending.C. fiscal policymakers cannot borrow unless the Federal Reserve prints more money.D. increased government spending has to be financed with either higher taxes or increased government borrowing.

Q: A swap is A) another name for a put option. B) another name for a call option. C) an agreement between two or more persons to exchange sets of cash flows over some future period. D) the name for the replacement of a futures contract by an options contract.

Q: Which of the following statements is most true concerning economic policy in the U.S.? A. Monetary policymakers tend to have a long view while fiscal policymakers tend to ignore the long-run inflationary ramifications of their actions.B. Fiscal policymakers tend to focus on inflation and unemployment while monetary policymakers focus most of their attention on the money supply and the exchange rate.C. Fiscal policymakers tend to focus more on pleasing their constituents and so are willing to sacrifice the short run for the long run.D. Monetary policy independence is enshrined in the U.S. Constitution.

Q: Suppose you purchase a call option with a strike price of $85 for an options price of $10 How much profit will you earn if you exercise it when the price is $100?

Q: One thing that is true about economic policy in the U.S. is: A. fiscal and monetary policy never conflict.B. monetary and fiscal policy need not, but may conflict.C. monetary policy ultimately controls fiscal policy since the Fed controls the money supply.D. fiscal policy ultimately controls monetary policy since Congress can control the Fed's budget.

Q: What does it mean to "cover a short"?

Q: The ability to control inflation expectations is most closely related to a central bank's: A. transparency.B. credibility.C. accountability.D. willingness to communicate.

Q: The price at which an option may be exercised is called the A) market price. B) equilibrium price. C) strike price. D) fixed price.

Q: Whenever central bankers face more than one goal, the policy framework requires: A. the central bank to always focus on inflation first.B. central bankers to focus on all goals, no matter what.C. economic growth to be the top priority.D. central bankers to make their priorities clear.

Q: In a put options contract, the A) seller has the obligation to receive the instrument at a specified time. B) buyer has the obligation to deliver the instrument at a specified time. C) buyer has the obligation to receive the instrument at a specified time. D) seller has the obligation to deliver the instrument at a specified time.

Q: One problem for the Federal Reserve regarding setting policy stems from the fact that: A. there are multiple goals that may be inconsistent with each other.B. there are more policy instruments than goals.C. Congress sets very tight goal ranges that the central bankers must hit.D. the membership of its governing board changes so often.

Q: In a call options contract, the A) seller has the obligation to deliver the instrument at a specified time. B) buyer has the obligation to receive the instrument at a specified time. C) seller may choose whether or not to deliver the instrument at a specified time. D) buyer will choose to exercise his option only if the value of the underlying security falls.

Q: One use of a monetary policy framework is to clarify all of the following except: A. the likely response when policy goals are in conflict with one another.B. the goal that is currently receiving the most attention.C. how goals will be measured.D. why zero inflation is not desirable.

Q: In comparing futures contracts with options contracts, we can say that A) in a futures contract, the buyer and seller have symmetric rights, whereas in an options contract, the buyer and seller have asymmetric rights. B) in a futures contract, the buyer and seller have asymmetric rights, whereas in an options contract, the buyer and seller have symmetric rights. C) in both futures and options contracts, the buyer and seller have symmetric rights. D) in both futures and options contracts, the buyer and seller have asymmetric rights.

Q: One reason for having a monetary policy framework is: A. it makes clear what specific goals the central bankers are pursuing.B. it provides leeway for central bankers to change their goals without communicating the change and disrupting financial markets.C. it provides central bankers the secrecy needed to perform their jobs effectively.D. it can make goal setting vague enough so that the central bankers can always claim success.

Q: One difference between futures and options contracts is A) funds change hands daily in the case of options but not with futures. B) funds change hands daily in the case of futures, but not with options. C) in the case of futures funds only change hands when they are exercised. D) futures are designed to reduce risk while options are not.

Q: The monetary policy framework is: A. the Law that created the Federal Reserve System.B. the idea that central banks should be interconnected across countries.C. a way to prioritize and implement the central bank's objectives when they are in conflict.D. a growing belief that there should be one central bank headquartered at the World Bank.

Q: An options contract A) confers the rights to buy or sell an underlying asset at a predetermined price by a predetermined time. B) is another name for a futures contract. C) may be written for debt instruments, but not equities. D) may be written for equities, but not for debt instruments.

Q: Which of the following statements is most accurate? A. Central bank statements in developed countries are similar both in length and in the speed with which policy changes are announced.B. Central bank statements in developed countries differ both in length and in the speed with which policy changes are announced.C. Central bank statements in developed countries are similar in length but differ in the speed with which policy changes are announced.D. Central bank statements in developed countries differ in length but are similar in the speed with which policy changes are announced.

Q: How do exchanges seek to reduce default risk in the futures market?

Q: One reason given for more central bankers releasing its decisions publicly is: A. for monetary policy to work, people must be taken by surprise.B. most people do not understand monetary policy so it really doesn't do any harm to release the decisions publicly.C. so that central banks across the world can coordinate their policies.D. monetary policy is more effective when households and businesses can understand and anticipate it.

Q: Southwest Airlines relies on jet fuel to operate its planes. If it chooses to hedge against future changes in fuel prices, what positions (long or short) will it take in the spot and futures markets?

Q: The Federal Reserve's policy regarding announcing its policy decisions has: A. always been to announce it immediately; that was part of the original Federal Reserve Act of 1913.B. only recently gone to immediate announcement; until 1994 these policy decisions were secret.C. been to release the decisions immediately since its early failure at preventing the Great Depression.D. changed so that now the Fed does not release its decisions publicly.

Q: Why must the spot price equal the futures price on the settlement date?

Q: Today, most central banks announce their policy actions: A. one year after the policy is put in place.B. almost immediately.C. within a 3 to 5 year "window".D. usually six months after the policy is put in place.

Q: Why do futures have lower information costs and higher liquidity than forward contracts?

Q: In the United States, the Federal Reserve is asked to: A. deliver on a specific inflation target set by Congress.B. meet an explicit target for economic growth.C. meet a specific target for unemployment each year.D. deliver price stability as one of a number of objectives.

Q: Why may some investors prefer forward contracts to futures?

Q: Setting an explicit numerical inflation target is most associated with the goal(s) of: A. transparency.B. accountability.C. both transparency and accountability.D. neither transparency nor accountability; it's about moral hazard.

Q: Which of the following statements about the presence of speculators in futures markets is correct? A) Their main objective is to reduce their exposure to risk. B) They aid hedgers by increasing the liquidity in futures markets. C) They make it difficult for hedgers to find someone to take the opposite side of their positions. D) Once a futures market participant is known to be a speculator he or she is no longer allowed to participate in the market.

Q: The central bank for the euro area tries to achieve accountability and transparency through a: A. standard numerical objective for inflation over the medium term.B. specific target for unemployment and economic growth.C. following the monetary policy guidance of the European Parliament.D. specific target for the dollar euro exchange rate.

Q: If the price of a futures contract increases, then A) the exchange will collect the amount of the increase from the seller of the contract and transfer it to the account of the buyer of the contract. B) the exchange will collect the amount of the increase from the buyer of the contract and transfer it to the account of the seller of the contract. C) the exchange will collect the amount of the increase from both the buyer and the seller and place it in escrow until the delivery date. D) the additional funds will be required from either the buyer or the seller until the delivery date.

Q: In the United Kingdom accountability and transparency for its central bank is achieved by setting: A. a numerical target for unemployment each year.B. a numerical target for economic growth.C. numerical targets for economic growth and the exchange rate.D. an explicit numerical target for inflation.

Q: Futures trading practices in the United States are regulated by A) the Chicago Board of Trade. B) the Chicago Mercantile Exchange. C) the Commodities Futures Trading Commission. D) the Board of Futures Trading.

Q: The means for assuring accountability and transparency: A. may differ across the central banks of different countries.B. are the same for all successful central banks.C. involve setting specific numerical targets so there is no confusion as to what the goal is.D. are opposite to each other; increasing one means decreasing the other.

Q: The terms of futures contracts traded in the United States are A) standardized as to amount or value, but not as to settlement dates. B) standardized as to settlement dates, but not as to amount or value. C) not standardized, but are determined entirely on the basis of the agreement entered into by the buyer and seller. D) standardized as to amount or value and as to settlement dates.

Q: To say monetary policy is transparent implies: A. that anyone could figure out what the correct policy should be.B. monetary policy should not be so difficult that most people couldn't understand it.C. policymakers offer plausible explanations for their decisions along with supporting data.D. that when faced with the same problem, policymakers will always react the same way.

Q: Marking to market refers to A) the determination of the prices of options contracts by the interaction of demand and supply. B) the determination of the prices of futures contracts by the interaction of demand and supply. C) the settlement of gains and losses on futures contracts each day. D) the settlement of gains and losses on forward contracts each day.

Q: In a survey of forecasters toward the end of the financial crisis of 2007-2009, forecast inflation rates for the next decade in the United States were: A. 0%.B. 2%.C. 4%.D. 7%.

Q: If you sell a futures contract for U.S. Treasury bills and on the delivery date the interest rate of T-bills is higher than you expected, you will have A) lost money on your long position. B) gained money on your long position. C) lost money on your short position. D) gained money on your short position.

Q: During the financial crisis of 2007-2009 the U.S. Federal Reserve used its powers in all but which of the following ways: A. lending to nonbanks.B. accepting very illiquid collateral against its loans.C. lowered bank reserve requirements.D. lowered its policy rate to zero.

Q: If you buy a futures contract for U.S. Treasury bills and on the delivery date the interest rate on T-bills is lower than you expected, you will have A) lost money on your long position. B) gained money on your long position. C) lost money on your short position. D) gained money on your short position.

Q: Central bank accountability means: A. politicians will establish goals and central bankers will report on their progress.B. central bankers are not accountable to any elected officials.C. central bankers are only accountable to the banks in their respective countries.D. central bankers must hold press conferences to explain their monetary policy views.

Q: On the day of delivery A) the spot price will equal the futures price. B) the spot price will be greater than the futures price by an amount equal to the current interest rate times the futures price. C) the futures price will be greater than the spot price by an amount equal to the current interest rate times the spot price. D) there is no necessary relation between the spot price and the futures price.

Q: In the United States, one problem with central bank independence is: A. it is almost impossible to obtain because Congress controls the budget of the Federal Reserve.B. in a representative democracy, monetary policymakers must be held accountable to the public.C. central bank independence has not produced favorable results.D. the central bank can control policy, but the U.S. Treasury issues currency.

Q: As the time of delivery in a futures contract gets closer A) the futures price gets closer to the spot price. B) the futures price generally rises further above the spot price. C) the futures price generally falls further below the spot price. D) the futures and spot prices remain the same as they were when the contract was first created.

Q: Most central banks of industrialized countries have monetary policy formed by: A. an individual, usually the minister of finance.B. their version of Congress.C. a committee made up of members of their central bank.D. an individual, usually the person heading the central bank at the time.

Q: Which of the following is NOT an advantage of a futures contract over a forward contract? A) reduced counterparty risk B) increased flexibility C) lower information cost D) increased liquidity

Q: In the United States, monetary policy is formed by: A. an individual advised by a close group of people.B. committee.C. the President and approved by Congress.D. the Chairman of the Federal Reserve and can only be overturned by the presidents of the Regional Federal Reserve Banks.

Q: The futures price A) reflects traders' expectations of the spot price on the day of delivery. B) is always above the spot price on the day of delivery. C) is always below the spot price on the day of delivery. D) is always equal to the spot price at every point in time.

Q: Empirical research seems to verify that: A. countries that have less independent central banks experience lower rates of inflation.B. countries that have high rates of inflation seem to have central banks with low levels of independence.C. there is no relationship between the independence of central banks and rates of inflation.D. the rate of inflation seems to vary directly with the amount of central bank independence.

Q: Marking to market involves A) changing the futures price to the spot price each day. B) engaging in arbitrage so as to reduce the risk involved with futures contracts. C) crediting or debiting the margin account based on the net change in the value of the futures contract. D) updating the futures price after the market closes each day.

Q: Compared to an independent central bank, elected officials are likely to: A. favor long-run stability over short-term prosperity.B. sacrifice short-term growth to keep future inflation low.C. choose monetary policies that are overly accommodative.D. prefer interest rates to vary more often.

Q: The initial deposit required by a buyer or seller of a futures contract is known as A) credit. B) margin requirement. C) debit. D) marking.

Q: One argument for an independent central bank is: A. successful monetary policy requires a long time horizon usually well beyond the next election of most public officials.B. without independence competent people would not take a position in a central bank.C. the central bank usually hires more competent individuals than the Treasury department or other finance ministries.D. central bankers have a short-run focus that usually corrects problems faster.

Q: The role of the Commodity Futures Trading Commission is to A) set the prices of futures contracts. B) operate the Chicago Mercantile Exchange. C) operate the Chicago Board of Trade. D) monitor potential price manipulation in futures trading.

Q: The interest rate decisions made by the Federal Open Market Committee: A. can be overridden by the President.B. can be overridden by the Secretary of the Treasury.C. can be overridden by the U.S. Senate by a two-thirds majority.D. cannot be overridden by anyone outside of the Federal Reserve.

Q: Financial futures contracts are regulated by A) the Commodity Futures Trading Commission. B) the Federal Trade Commission. C) the Interstate Commerce Commission. D) the Options and Futures Commission.

Q: The operational components required for truly independent central banks include: A. a budget controlled by Congress.B. the ability to have policies reversed.C. monetary policies that cannot be reversed by anyone outside of the central bank.D. the chairperson of the bank being answerable only to the President.

Q: Which of the following financial futures contracts are traded in the United States? A) Interest rates B) Stock indexes C) Currencies D) All of the above

Q: To be independent, a central bank must have: A. its policies overturned only by the president.B. control of its own budget.C. the board members appointed for very short terms.D. the chairperson serve as a member of the President's cabinet.

Q: Futures trading has traditionally been dominated by A) the New York Stock Exchange. B) the Chicago Board of Trade and the New York Mercantile Exchange. C) the London Stock Exchange. D) the Omaha Grain Exchange.

Q: The idea that central banks should be independent of political pressure is an idea that: A. has been around since there were central banks.B. is relatively new.C. every central bank was founded upon.D. became quite popular in the early 1900s.

Q: The seller of a futures contract A) assumes the long position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Q: There is a strong consensus among economists that monetary policy is more effective when it is formed: A. by an individual rather than a committee.B. in secrecy without the reasoning behind it being revealed for many years.C. to keep financial markets guessing.D. independently of political pressure.

Q: The seller of a futures contract A) assumes the short position. B) assumes the long position. C) has the obligation to receive the underlying financial instrument at the specified future date. D) is expecting the price of the underlying financial instrument to rise.

Q: Most economists agree that a well-designed central bank would: A. be independent of political pressure.B. make its policy actions difficult to interpret.C. be accountable only to other banks.D. be run by one key policy maker.

Q: The buyer of a futures contract A) assumes the short position. B) has the obligation to deliver the underlying financial instrument at the specified date. C) has the obligation to receive the underlying financial instrument at the specified future date. D) may, at his or her option, deliver or receive the underlying financial instrument at the specified date.

Q: Successful monetary policy relies most on: A. having an ample supply of highly qualified people.B. luck.C. the institutional environment.D. knowledgeable citizens who know how to react to the policy.

Q: The buyer of a futures contract A) assumes the short position. B) assumes the long position. C) may not sell the contract without the permission of the original seller. D) has the obligation to deliver the underlying financial instrument at the specified future date.

Q: The 1990s saw inflation fall and real growth increase in the U.S. and in many other countries. This is partially attributed to all of the following except: A. technological innovation.B. redesign of many central banks.C. central banks became better at their jobs.D. central banks focused more on exchange rates in a global environment.

Q: Explain how a bubble can develop in the market for an asset.

Q: Which of the following would give the most importance to the goal of exchange rate stability? A. Large, closed economiesB. The U.S. and Japan and other developed countriesC. Emerging market countries where exports and imports are central to the structure of the economyD. Europe

Q: Behavioral economics can best be described as A) the study of situations in which people's choices do not appear to be economically rational. B) the study of human economic behavior. C) the basis for efficient markets. D) the study of how the economy affects human behavior.

Q: Exchange-rate stability is likely to be a more important goal for the central banks of: A. emerging market economies than the central bank of the U.S.B. the U.S. and Japan than most small developing countries.C. countries where exports and imports make up a small total of all economic activity.D. large, closed economies.

Q: Noise traders A) pursue trading strategies based on inflated view of their ability to understand the significance of a piece of news. B) make use of inside information. C) reduce the amount of risk in the market. D) help to ensure that asset prices reflect the fundamental values of the securities being traded.

Q: Central banks are in a position to control risk in the economy because they: A. control the unemployment rate.B. control the economy's real growth rate.C. control short-term interest rates.D. can change taxes.