Financial Markets and Institutions, 8e (Mishkin)
Chapter 24 Hedging with Financial Derivatives
24.1 Multiple Choice
1) Financial derivatives include ________.
A) stocks
B) bonds
C) futures
D) none of the above
2) Financial derivatives include ________.
A) stocks
B) bonds
C) forward contracts
D) both A and B
3) Which of the following is not a financial derivative?
A) Stocks
B) Futures
C) Options
D) Forward contracts
4) A contract that calls for the investor to (possibly) buy securities on a future date is called a
________.
A) short contract
B) long contract
C) hedge
D) cross
5) A contract that calls for the investor to (possibly) sell securities on a future date is called a
________.
A) short contract
B) long contract
C) hedge
D) micro hedge
6) With a long contract, the investor (may)
A) sell securities in the future.
B) buy securities in the future.
C) hedge in the future.
D) close out his position in the future.
7) With a short contract, the investor (may)
A) sell securities in the future.
B) buy securities in the future.
C) hedge in the future.
D) close out his position in the future.
8) Which is not a problem of forward contracts?
A) A lack of liquidity
B) A lack of flexibility
C) The difficulty of finding a counterparty
D) Default risk
9) By selling short a futures contract of $100,000 at a price of 115, you are agreeing to deliver
________ face value securities for ________.
A) $100,000; $115,000
B) $115,000; $110,000
C) $100,000; $100,000
D) $115,000; $115,000
10) By selling short a futures contract of $100,000 at a price of 96, you are agreeing to deliver
________ face value securities for ________.
A) $100,000; $104,167
B) $96,000; $100,000
C) $100,000; $96,000
D) $100,000; $100,000
11) By buying a long $100,000 futures contract for 115, you agree to pay ________ for
________ face value securities.
A) $100,000; $115,000
B) $115,000; $100,000
C) $86,956; $100,000
D) $86,956; $115,000
12) If you sell a short contract on financial futures, you hope interest rates will ________.
A) rise
B) fall
C) not change
D) fluctuate
13) If you buy a long contract on financial futures, you hope interest rates will ________.
A) rise
B) fall
C) not change
D) fluctuate
14) If you sell a short futures contract, you hope that bond prices will ________.
A) rise
B) fall
C) not change
D) fluctuate
15) The elimination of riskless profit opportunities in the futures market is referred to as
________.
A) speculation
B) hedging
C) arbitrage
D) open interest
E) mark to market
16) Futures contracts are regularly traded on the
A) Chicago Board of Trade.
B) New York Stock Exchange.
C) American Stock Exchange.
D) Chicago Board Options Exchange.
17) Financial futures are regularly traded on all of the following except the
A) Chicago Board of Trade.
B) Chicago Mercantile Exchange.
C) New York Futures Exchange.
D) Chicago Commodity Markets Board.
18) The agency responsible for regulation of the futures exchanges and trading in financial
futures is the
A) Commodity Futures Trading Commission.
B) Securities and Exchange Commission.
C) Federal Trade Commission.
D) Futures Exchange Commission.
19) The purpose of the Commodity Futures Trading Commission is to do all of the following
except
A) oversee futures trading.
B) see that prices are not manipulated.
C) approve proposed futures contracts.
D) establish minimum prices for futures contracts.
20) The number of contracts outstanding in a particular financial future is the ________.
A) demand coefficient
B) open interest
C) index level
D) outstanding balance
21) The futures markets have grown rapidly in recent years because
A) interest rate volatility has increased.
B) financial managers are more risk averse.
C) of both A and B.
D) of neither A nor B.
22) The advantage of forward contracts over futures contracts is that forward contracts
A) are standardized.
B) have lower default risk.
C) are more liquid.
D) are none of the above.
23) The advantage of forward contracts over futures contracts is that forward contracts
A) are standardized.
B) have lower default risk.
C) are more flexible.
D) both A and B are true.
24) Futures markets have grown rapidly because futures contracts
A) are standardized.
B) have lower default risk.
C) are liquid.
D) are all of the above.
25) Futures differ from forwards because they are
A) used to hedge portfolios.
B) used to hedge individual securities.
C) used in both financial and foreign exchange markets.
D) standardized contracts.
26) Futures differ from forwards because they are
A) used to hedge portfolios.
B) used to hedge individual securities.
C) used in both financial and foreign exchange markets.
D) marked to market daily.
27) Which of the following features of Treasury bond futures contracts were not designed to
increase liquidity?
A) standardized contracts
B) traded up until maturity
C) not tied to one specific type of bond
D) marked to market daily
28) Which of the following features of Treasury bond futures contracts were not designed to
increase liquidity?
A) standardized contracts
B) traded up until maturity
C) not tied to one specific type of bond
D) can be closed with offsetting trade
29) When a financial institution hedges the interest-rate risk for a specific asset, the hedge is
called a ________.
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
30) When a financial institution is hedging interest-rate risk on its overall portfolio, the hedge is
a ________.
A) macro hedge
B) micro hedge
C) cross hedge
D) futures hedge
31) The risk that occurs because stock prices fluctuate is called ________.
A) stock market risk
B) reinvestment risk
C) interest-rate risk
D) default risk
32) The most widely traded stock index future is on the
A) Dow Jones 1000 index.
B) S&P 500 index.
C) NASDAQ index.
D) Dow Jones 30 index.
33) Who would be most likely to buy a long stock index future?
A) A mutual fund manager who believes the market will rise
B) A mutual fund manager who believes the market will fall
C) A mutual fund manager who believes the market will be stable
D) None of the above would be likely to purchase a futures contract
34) If you buy a futures contract on the S&P 500 Index at a price of 450 and the index rises to
500, you will ________.
A) lose $12,500
B) gain $12,500
C) lose $50
D) gain $50
35) If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to
500, you will ________.
A) lose $12,500
B) gain $12,500
C) lose $50
D) gain $50
36) Which of the following is a likely reason for a portfolio manager to sell a stock index future
short?
A) He believes the market will rise.
B) He wants to lock in current prices.
C) He wants to reduce stock market risk.
D) Both B and C are correct.
37) If a portfolio manager believes stock prices will fall and knows that a block of funds will be
received in the future, then he should
A) sell stock index futures short.
B) buy stock index futures long.
C) stay out of the futures market.
D) borrow and buy securities now.
38) If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the
firm should
A) sell foreign exchange futures short.
B) buy foreign exchange futures long.
C) stay out of the exchange futures market.
D) do none of the above.
39) If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign
exchange rate risk by
A) selling foreign exchange futures short.
B) buying foreign exchange futures long.
C) staying out of the exchange futures market.
D) doing none of the above.
40) Options are contracts that give the purchasers the
A) opportunity to buy or sell an underlying asset.
B) the obligation to buy or sell an underlying asset.
C) the right to hold an underlying asset.
D) the right to switch payment streams.
41) The price specified in an option contract at which the holder can buy or sell the underlying
asset is called the ________.
A) premium
B) call
C) strike price
D) put
42) The price specified in an option contract at which the holder can buy or sell the underlying
asset is called the ________.
A) premium
B) strike price
C) exercise price
D) both B and C of the above.
43) The seller of an option has the
A) right to buy or sell the underlying asset.
B) the obligation to buy or sell the underlying asset.
C) ability to reduce transaction risk.
D) right to exchange one payment stream for another.
44) The seller of an option has the ________ to buy or sell the underlying asset, while the
purchaser of an option has the ________ to buy or sell the asset.
A) obligation; right
B) right; obligation
C) obligation; obligation
D) right; right
45) An option that can be exercised at any time up to maturity is called a(n) ________.
A) swap
B) stock option
C) European option
D) American option
46) An option that can be exercised only at maturity is called a(n) ________.
A) swap
B) stock option
C) European option
D) American option
47) Options on individual stocks are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
48) Options on futures contracts are referred to as ________.
A) stock options
B) futures options
C) American options
D) individual options
49) The agency which regulates stock options is the
A) Securities and Exchange Commission.
B) Commodities Futures Trading Commission.
C) Federal Trade Commission.
D) Both A and B are true.
50) The agency which regulates futures options is the
A) Securities and Exchange Commission.
B) Commodities Futures Trading Commission.
C) Federal Trade Commission.
D) Both A and B are true.
51) An option that gives the owner the right to buy a financial instrument at the exercise price
within a specified period of time is a(n) ________.
A) call option
B) put option
C) American option
D) European option