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Q:
A. U.S. importer of English china would participate in which of the following foreign exchange transactions?
a. supply U.S. Dollars
b. demand British Pounds
c. supply British Pounds
d. demand Chinese Yuan
e. both a and b
Q:
A Mexican importer of computer parts from Canada would take which action in the foreign exchange markets?
a. supply Canadian dollars
b. demand pesos
c. demand Canadian dollars
d. demand U.S. dollars
e. none of the above
Q:
French importers of U.S. merchandise may be involved in foreign exchange markets
a. by demanding Euros in return for U.S. dollars.
b. by supplying Euros in return for U.S. dollars.
c. by demanding Japanese yen in return for dollars.
d. by supplying U.S. dollars in return for Euros.
e. both a and d
Q:
Which of the followingis NOT a factor associated with international trade not faced by domestic traders?
a. One party in the trade has to be concerned about foreign exchange risk.
b. No one legal authority has control over the transaction and legal remedies.
c. Credit information on opposite parties is often incomplete.
d. There is one currency involved.
Q:
Which of the following is NOT a reason that foreign exchange markets exist?
a. to provide for efficient capital exchange between governments.
b. to exchange purchasing power between trading partners with different local currencies.
c. to provide a means for passing the risk associated with changes in foreign exchange rates to professional risk-takers.
d. to accommodate credit extension and delayed payments for goods and services between countries.
Q:
Exchange rate risk is best described as
a. the cost of a unit of currency in terms of another.
b. the variability in the current accounts balance of the balance of payments.
c. the variability of investment returns or prices of goods and services caused by changes in the value of one currency versus another.
d. the difference between domestic and international interest rates.
Q:
A foreign exchange rate are best described as
a. the cost of a unit of foreign currency.
b. the current interest rates of varying countries.
c. the cost of a unit of one currency in terms of another currency.
d. the expected change in prices of international goods.
Q:
Speculative capital flows are investment in financial assets in money and capital market and the real assets based on prospects of real returns
Q:
A foreign currency will, on average, appreciate against the U.S. dollar at a percentage rate approximately equal to the amount by which its inflation rate exceeds that of the United States.
Q:
If an investor can obtain more of a Euro for a Dollar in the forward market than in the spot market, then Euro is said to be selling at a discount to the spot rate.
Q:
If merchandise imports exceed merchandise exports, the trade balance is in a surplus position.
Q:
In balance of payments accounting, a deficit in current accounts prompts an offsetting surplus in capital accounts.
Q:
A deficit in the trade balance of payments puts downward pressure on the exchange rate.
Q:
The demand for foreign exchange by an importer is a demand derived from a pending economic transaction.
Q:
If a U.S. exporter agrees to receive payment in 60 days in pounds, the British importer has assumed the exchange rate risk in the transaction.
Q:
A "flight of capital" from a country would tend to reduce the value of the country's currency relative to other countries.
Q:
Exports grow rapidly when foreign currencies depreciate relative to the dollar.
Q:
When the foreign demand for a country's goods and services increases, the demand for the foreign country's currency also increases.
Q:
If a Canadian dollar costs $0.83 in U.S. dollars, a U.S. dollar costs a Canadian $1.17 in Canadian dollars.
Q:
A Canadian dollar cost $0.84 in U.S. dollars and later costs $0.86. The U.S. dollar has depreciated relative to the Canadian dollar.
Q:
Governments encourage long-term foreign investment in their countries because it helps their balance of payments.
Q:
If a government buys its domestic currency from foreigners, its exchange rate will rise.
Q:
Eurobonds are bearer bonds and do not have to be registered, which makes them more marketable.
Q:
A strong dollar would make imports cheaper, and force domestic producers of goods with import substitutes to lower prices.
Q:
In the balance of payments, the difference between current account flows and capital account flows is shown as statistical discrepancy.
Q:
A weak U. S. dollar will lead to increased foreign demand for U.S goods.
Q:
A country's forward exchange rate will increase relative to its spot exchange rate when people expect it to have more inflation than other countries.
Q:
If interest rates are higher in Japan than in the United States, the cost of a yen per U.S. dollar in the spot market will be higher than in the forward market.
Q:
The value of an option varies directly witha. the price volatility of the underlying asset.b. the time to expiration.c. the level of interest rates.d. both a and b above.e. all of the above.
Q:
Suppose a stock is priced at $100 currently. You are bullish on the stock and are considering buying May calls with an exercise price of $95 and $105 respectively. The call with an exercise price $95 is priced at $8.50 and the 105 call is quoted at $2.75. Consider different price projection, what should you consider in deciding which to purchase if you do not plan on exercising prior to maturity?
Q:
A manager of a large stock portfolio has earned a respectable return by October, and would like to protect that return for the year. How might she guarantee a certain portfolio return with trades in derivative securities?
Q:
What role does the SEC have in regulating options markets? How does it differ from the role of CFTC?
Q:
What determines whether a buyer or a seller of a derivative security is a hedger or a speculator?
Q:
Explain how forward and futures markets differ.
Q:
Explain how a savings and loan manager could use futures or options to hedge against the possibility that interest rates will rise.
Q:
What is the regulator that approves newly issued futures contracts?
a. The Federal Reserve
b. The SEC
c. The CFTC
d. The NYSE
Q:
On the second Friday of March, the market closing price of Independence & Co. stock is $100. Its March options are about to expire. One of its puts is worth $10 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 _____.
a. 110, 95
b. 105, 95
c. 90, 105
d. 105, 90
Q:
The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon:
a. The difference in the durations of bank assets and liabilities.
b. The duration of the underlying security named in the futures contract.
c. The price of the futures contract.
d. All of the above.
Q:
A financial institution wishing to avoid higher borrowing costs would be most likely to use:
a. A short or selling hedge in futures.
b. A long or buying hedge in futures.
c. A call option on futures contracts.
d. b and c above.
Q:
You speculated stock price of Cino. Co. will move toward a certain direction and decided to taken an option position of this stock to make profit. For that position, if the stock's price drops you will get a level gain no matter how huge prices decrease. However, you could go bankrupt if the stock's price rises. What is your option position?
a. Bought a call option
b. Bought a put option
c. Written a put option
d. Written a call option
Q:
A European option is an option contract that allows the holder to
a. exercise the option only on the expiration date.
b. exercise the option on or before the expiration date.
c. exercise the option before but not on the expiration date.
d. exercise the option after the expiration date.
e. none of the above.
Q:
Which of the following terms is associated with futures as opposed to options?
a. exercise price
b. premium
c. marking-to-market
d. naked
Q:
You have a right to buy a security at a specific price on a specific date if you _______ on this security.
a. bought a forward contract
b. sold a futures contract
c. bought a put option
d. sold a call option
e. bought a call option
Q:
The value of a call option _______ and the value of a put option with the same price and expiration date _______ when the spot price of an underlying increases.
a. increases; increases
b. increases; falls
c. does not change; does not change
d. falls; increases
e. falls; falls
Q:
What action would the holder of a maturing call option take if an option which cost $300, had a strike price of $50, and the market value of the stock was $52?
a. let the option expire unexercised
b. exercise the option
c. request that the $300 be returned
d. none of the above
Q:
All of the following are risks associated with futures contracts except
a. margin risk.
b. basis risk.
c. default risk.
d. manipulation risk.
Q:
Which of the following is true about hedging using duration analysis?a. The institution may hedge its earnings and its net worth simultaneously.b. If market value weighted asset duration is greater than the liability counterpart, sell financial futures to "immunize."c. If market value weighted asset duration is greater than the liability counterpart, buy financial futures to "immunize."d. Maturity hedging provides the same hedging as duration hedging.
Q:
A bank which hedges its future funding costs in the T-bill futures market is
a. hedging perfectly.
b. accepting some basis risk.
c. speculating.
d. accepting some default risk in the futures position.
Q:
An insurance company can invest funds which are coming to the company in the future at today's interest rates by
a. selling calls on financial futures.
b. buying puts on financial futures.
c. buying financial futures.
d. selling financial futures.
e. taking no action.
Q:
A five-member federal regulatory commission which serves as the primary regulator of the futures market is the
a. Chicago Mercantile Exchange.
b. Federal Commodity Futures Commission.
c. Commodity Futures Trading Commission.
d. Chicago Board of Trade.
Q:
Daily changes in futures prices means one party (hedger or speculator) has gained while another lost money on the contract. How are the exchanges able to keep the "daily" loser in the contract and prevent default?
a. by the threat of bankruptcy
b. by daily margin calls if needed
c. by loans
d. by guarantees by third parties
Q:
A small commercial bank with rate sensitive assets greater than rate sensitive liabilities sells T-bill futures. The bank is
a. speculating.
b. hedging.
c. neither hedging nor speculating.
d. both hedging and speculating.
Q:
First National Bank recently purchased a T-bill futures contract to hedge a risk position at the bank. If the price of the futures contract is increasing,
a. First National is "gaining."
b. First National is "losing."
c. First National is neither "gaining" nor "losing."
d. First National's risk exposure is increasing.
e. both b and d
Q:
A bank with a high positive duration GAP wishing to hedge its interest rate risk might
a. sell financial futures.
b. purchase financial futures.
c. sell puts on financial futures.
d. both a and c
Q:
A(n) margin is deposited before entering into the futures contract; thereafter, the balance cannot fall below a(n) _______ margin.
a. initial; maintenance
b. initial; enforced
c. net; seller's
d. safe; double
e. first; second
Q:
A farmer growing wheat is in wheat and may hedge by _ wheat futures.
a. short; long
b. short; selling
c. long; buying
d. long; selling
Q:
Which is NOT a function of the CFTC?
a. to approve new futures contracts
b. to monitor enforcement of exchange rules
c. to make sure traders maintain their margin level
d. to investigate violations of laws
Q:
Which of the following statements is NOT true?
a. A swap is like a forward contract in that it guarantees the exchange of two items of value at some future point in time.
b. Only the net interest difference is swapped in an interest rate swap.
c. Swap parties always have the same level of credit risk.
d. Unlike in a forward contract, the exact terms of exchange of the swap will vary with changes in interest rates.
e. All of the above statements are true.
Q:
Who will lose if the price of an underlying asset falls?
a. the seller of a futures contract
b. the buyer of a put
c. the writer of a call
d. the buyer of a futures contract
e. both b and c
Q:
You hedged a $2,000,000 portfolio of stocks that you manage by selling eight S&P 500 futures contracts at 1,450. Each contract is worth $250 per index point. Recently, your portfolio lost 4% of its value, while the S&P 500 index declined to 1,400. What is your total (spot plus futures) gain (loss)?
a. $80,000
b. $20,000
c. ($20,000)
d. (80,000)
e. (180,000)
Q:
You manage a stock portfolio worth $3,000,000 that has a beta of 1.25. In order to hedge the portfolio, you decide to trade S&P 500 futures contracts. Each contract is worth $250 per index point. How many contracts do you need to buy or sell if the S&P 500 index is currently at 1,500?
a. sell 10 contracts
b. buy 10 contracts
c. sell 8 contracts
d. buy 8 contracts
e. buy 20 contracts
Q:
The price sensitivity rule
a. determines the number of futures contracts to trade.
b. states that a hedging futures position must have the same sensitivity to interest rate changes as the asset or portfolio whose value is being hedged.
c. requires determining the relative price variability of a futures contract and underlying assets given a change in interest rates.
d. all of the above.
Q:
The lowest amount of funds required to maintain a positions in a futures contract is called a(n) _______ margin.
a. initial
b. maintenance
c. minimum
d. enforced
e. futures
Q:
An agreement with the futures exchange to buy is a ______ position; to sell, a ________ position.
a. spot; futures
b. high; low
c. long; short
d. short; long
e. wide; narrow
Q:
A speculator sold one 10-year T-note futures contract for $100,000 of face value of T- notes at 99-04.5. He posted a $2,500 margin on his account. The contract's closing price at the end of the day is 98-24. What is the amount of funds on the speculator's account after marking-to-market?a. $2,500b. $3,305c. $2,891d. $3,500e. $2,109
Q:
A speculator sells one 10-year T-note futures contract for $100,000 of face value of T- notes at 98-14. Three month later, the contract expires at 101-10.5. How much did the speculator gain (lose)?a. $2,965b. ($2,965)c. $2,891d. ($2,891)e. $328
Q:
Unlike hedging with futures, hedging with options
a. locks in a particular price or rate of return for a hedger.
b. exposes a hedger to a risk of large losses.
c. allows a hedger to benefit from the upside potential of his spot position.
d. is free (i.e., creating the hedge is costless)
e. both b and c
Q:
A portfolio manager is concerned that the expected drop in interest rates is going to lower the yield on the $1,000,000 of T-Bill she plans to buy in 3 months. She can hedge this potential interest rate risk by
a. taking a short position in 3-month T-bill futures.
b. taking a long position in 3-month T-bill futures.
c. buying a call option on 3-month T-bill futures.
d. buying a put option on 3-month T-bill futures.
e. Either b or c would work.
Q:
An investor planning to buy IBM stock in 30 days can protect himself against price risk by
a. selling an IBM put option that matures in 30 days
b. buying an IBM call option that matures in 30 days
c. selling an IBM call option that matures in 30 days
d. buying an IBM put option that matures in 30 days
e. selling IBM stock short
Q:
If a corporation wanted to guarantee its long-term costs of financing an investment project, it could
a. sell T-bill futures for when the funds were needed.
b. buy T-bill futures for when the funds were needed.
c. sell T-bond futures for when the funds were needed.
d. buy T-bond futures for when the funds were needed.
Q:
Futures contracts differ from forward contracts in that
a. futures contracts are between the individual hedger and speculator.
b. futures contracts are personalized, unique contracts; forwards are standardized.
c. futures contracts are marked to market daily with changes in value added to or subtracted from the accounts of the buyer and the seller.
d. forward contracts always require a margin deposit.
e. all of the above
Q:
In a forward contract one party to the contract deals with
a. the futures exchange.
b. the stock exchange.
c. the counter-party of the forward contract.
d. the opposite swap party.
e. the hedger.
Q:
What is the relationship between spot market prices and forward market prices of a good or financial asset?
a. Spot prices represent expected forward prices.
b. Forward prices are always higher than spot prices.
c. Spot prices are always higher than forward prices.
d. Forward prices are expected future spot prices.
Q:
The forward price for an asset is
a. equal to the face value of the asset.
b. always higher than the current price of the asset.
c. the price that makes the forward contract have zero net present value.
d. adjusted downward to incorporate storage costs.
e. both c and d
Q:
A portfolio manager plans to buy three-month T-bills with the total face value of $1,000,000 in one month. The current price for three-month T-bills is $988,520. What is the fair forward price if the current effective annual risk-free rate over one month is 4%?
a. $950,500
b. $985,236
c. $988,520
d. $991,815
e. $1,028,061
Q:
The purchase of U.S. Treasury bonds for immediate delivery is a _______ market transaction.
a. stock
b. spot
c. futures
d. forward
e. swap
Q:
Futures contracts differ from forward contracts in all of the following ways except:
a. Forward contracts involve an intermediary or exchange.
b. Futures contracts are standardized; forward contracts are not.
c. Futures markets are more formal than forward markets.
d. Delivery is made most often in forward contracts.
Q:
An agreement between a business and a large money center bank to sell 10 million dollars of T-Bills in sixty days is called a
a. a call option.
b. a forward contract.
c. a put option.
d. a long futures position.
Q:
A hedger in the financial futures market
a. seeks a position in the spot market to offset the price risk, which exists in the futures market.
b. will purchase financial futures if holding financial assets in the spot market.
c. seeks to offset the price risk in its spot market position with the equal but opposite price risk of the futures position.
d. will always short financial futures to create a perfect hedge.
Q:
A hedger in the financial futures market
a. usually buys futures contracts.
b. usually sells futures contracts.
c. either buys or sells so that underlying asset gains/losses are directly related to futures contract gains/losses.
d. either buys or sells so that underlying asset gains/losses are inversely related to futures contract gains/losses.