Derivatives Markets, 3e (McDonald)
Chapter 1 Introduction to Derivatives
1.1 Multiple Choice
1) Which of the following is not a derivative instrument?
A) Contract to sell corn
B) Option agreement to buy land
C) Installment sales agreement
D) Mortgage backed security
Answer: C
2) Who from the following list would be considered a speculator by entering into a futures
or options contract on commodities?
A) Farmer
B) Corn delivery truck driver
C) Food manufacturer
D) None of the above
Answer: B
3) A mutual fund is engaged in the short term and temporary purchase of index futures, for
purposes of minimizing its cash exposures. Which “use” most closely explains their
actions?
A) Risk management
B) Speculation
C) Reduced transaction costs
D) Regulatory arbitrage
Answer: C
4) During the growing season, a corn farmer sells short corn futures contracts in an amount
equal to her crop. If upon harvesting and selling her crop she maintains the contracts, she
is then considered a(n):
A) Hedger
B) Speculator
C) Arbitrager
D) None of the above
Answer: B
5) All of the following are financially engineered products, except:
A) Mortgage
B) Mortgage backed security
C) Interest only
D) Principal only
Answer: A
6) Select the family member who is offering the most diversification to the rest of the
family.
A) Dad works for General Motors
B) Mom works for Goodyear
C) Daughter works for Jiffy Lube
D) Son works for Eli Lilly & Company
Answer: D
7) What is the cost of 100 shares of Jiffy, Inc. stock given that the bid-ask prices are
$31.25 – $32.00 and a $15.00 commission per transaction exists?
A) $3215
B) $3140
C) $3125
D) $3200
Answer: A
8) Assume that you purchase 100 shares of Jiffy, Inc. common stock at the bid-ask prices
