Chapter 09 – Derivatives: Futures, Options, and Swaps
Multiple Choice Questions
1. Derivatives are financial instruments that:
D. Represents the outright purchase of a bond.
2. The value of a derivative is determined by:
A. The Federal Reserve.
3. In a derivative transaction:
A. The dollar amount of the transaction increases as the contract date approaches.
Chapter 09 – Derivatives: Futures, Options, and Swaps
4. The purpose of derivatives is to:
A. Increase the risk so the return is larger.
5. Forward contracts are:
D. Easily resold.
6. The short position in a futures contract is the party that will:
D. Benefit from increases in price of the underlying asset.
Chapter 09 – Derivatives: Futures, Options, and Swaps
7. The long position in a futures contract is the party that will:
A. Benefit from decreases in the price of the underlying asset.
8. With a futures contract:
D. The risk is eliminated for both parties.
9. The key difference between a forward and a futures contract is:
D. The amount of time involved.
Chapter 09 – Derivatives: Futures, Options, and Swaps
10. The clearing corporation’s main role in the futures market is to:
D. All of the above.
11. The process of marking to market:
D. Usually requires margin accounts to be adjusted weekly by the clearing corporation.
12. Marking to market is a process that:
D. Buyers and sellers can request for an additional fee when the contract is created.
Chapter 09 – Derivatives: Futures, Options, and Swaps
13. There is a futures contract for the purchase of 100 bushels of wheat at $2.50 per bushel. If
the market price of wheat increases to $3.00 per bushel:
D. Nothing happens since marked to market adjustments only take place when the market
price falls below the contract price.
14. There is a futures contract for the purchase of 1000 bushels of corn at $3.00 per bushel. If
the market price of corn falls to $2.50:
D. Nothing happened since no funds are transferred until the settlement date.
15. A U.S. Treasury bond dealer who sells a futures contract for U.S. Treasury bonds is:
D. Should see the value of the futures contract increase as bond prices rise.
Chapter 09 – Derivatives: Futures, Options, and Swaps
16. A pension fund manager who plans on purchasing bonds in the future:
A. Wants to insure against the price of bonds falling.
17. A baker of bread has a long-term fixed-price contract to supply bread. Which of the
following would NOT reduce her risk?
A. Taking the long position in wheat futures contract.
18. A wheat farmer who must purchase his inputs now but will sell his wheat at a market price
at a future date:
A. Faces a market risk that cannot be offset.
Chapter 09 – Derivatives: Futures, Options, and Swaps
19. Users of commodities are:
A. Usually not participants in futures contracts.
20. Speculators differ from hedgers in the sense that:
D. Speculators are hedgers, there isn’t any difference.
21. One argument why farmers in poor countries remain poor is:
A. They know very little about farming techniques needed for the crop they are growing.
Chapter 09 – Derivatives: Futures, Options, and Swaps
22. Futures markets and derivatives contribute to economic growth by:
D. Forcing people to accept the risk their decisions create.
23. On the settlement date of a futures contract:
A. The future’s price is always above the price of the underlying asset.
24. As the time of settlement gets closer:
Chapter 09 – Derivatives: Futures, Options, and Swaps
25. Tom buys a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is lower than Tom expected. Tom will have:
D. Gained money on his short position.
26. Sue sells a futures contract for U.S. Treasury bonds and on the settlement date the interest
rate on U.S. Treasury bonds is lower than Sue expected. Sue will have:
A. Lost money on her short position.
27. Tom buys a futures contract for U.S. Treasury bonds and on the settlement date the
interest rate on U.S. Treasury bonds is higher than Tom expected. Tom will have:
A. Gained money on his short position.
Chapter 09 – Derivatives: Futures, Options, and Swaps
28. Sue buys a futures contract for U.S. Treasury bonds and on the settlement date the interest
rate on U.S. Treasury bonds is higher than Sue expected. Sue will have:
A. Gained money on her short position.
29. If market participants believe the corn crop is likely to be unusually large:
D. It will be impossible to find someone to take the long position in a futures contract.
30. An arbitrageur is someone who:
Chapter 09 – Derivatives: Futures, Options, and Swaps
31. If a futures contract for U.S. Treasury bonds increases by “12” in the financial page
listings, the value of the contract increased by:
A. $120.00
32. If a futures contract for U.S. Treasury bonds decreases by “17” in the financial page
listings, the price of the contract decreased by:
D. $1700.00
D. Dollars; it stands for $111.15 but a dash is used instead of a period.
Chapter 09 – Derivatives: Futures, Options, and Swaps
34. The user of a commodity who is trying to insure against the price of the commodity rising
would:
D. Want to hedge by selling a futures contract.
35. An individual who neither uses nor produces a commodity but sells a futures contract for
the asset is:
D. Using arbitrage to earn profits without taking a risk.
36. An individual who neither uses nor produces a commodity but buys a futures contract for
the asset is:
D. Is hedging and transferring risk.
Chapter 09 – Derivatives: Futures, Options, and Swaps
37. The option holder is:
A. The seller of an option.
38. The option writer is:
D. The individual who obtains the rights.
39. The right to buy a given quantity of an underlying asset at a predetermined price on or
before a specific date is called a(n):
Chapter 09 – Derivatives: Futures, Options, and Swaps
D. An option where all rights are granted to the seller of the option.
41. The strike price of an option is:
A. The market price at the time the option is written.
42. With a call option, the option holder:
D. Can buy the asset but only on the date specified.
Chapter 09 – Derivatives: Futures, Options, and Swaps
43. With a put option, the option holder:
A. Has the right to buy the asset.
44. There’s a call option written for 100 shares of GM stock for $85.00 a share, prior to the
third Friday of October 2006: The option writer:
A. Has the option but not the requirement of selling 100 shares of GM for $85.00.
45. There’s a call option written for 100 shares of GM stock for $85.00 a share, prior to the
third Friday of October 2006: The option writer:
D. Does not have to post margin while the option holder does.
Chapter 09 – Derivatives: Futures, Options, and Swaps
46. With a call option that is described as in the money:
A. The market price of the stock is below the strike price.
D. The option has been exercised.
48. A call option described as at the money would find:
Chapter 09 – Derivatives: Futures, Options, and Swaps
49. A put option described as out of the money would find:
D. The option has expired.
50. A call option described as out of the money would find:
51. The main difference between European and American options is:
D. European options cannot be resold.
Chapter 09 – Derivatives: Futures, Options, and Swaps
52. One key difference between options contracts and futures contracts is:
A. In a futures contract, one part has more rights than the other.
53. Which of the following statements is true?
A. Call options can be sold prior to expiration but put options cannot.
54. The seller of a put option is transferring the risk:
D. This statement is incorrect since only sellers of call options are transferring risk.
Chapter 09 – Derivatives: Futures, Options, and Swaps
55. Someone who purchases a call option is really buying insurance to protect against:
A. The stock not being available when they want to purchase it.
56. Comparing an option to a futures contract it would be correct to say:
D. Neither involves risk; they are tools to eliminate risk.
57. An investor who purchases a call option is:
D. Limited in both gains and losses.
Chapter 09 – Derivatives: Futures, Options, and Swaps
58. Options are popular because of all of the following EXCEPT:
59. An individual who speculates by selling a call option wants to bet that:
A. The market price of the underlying asset will rise.
60. An individual who speculates by selling a put option wants to:
D. Buy the underlying asset in the future.