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Derivatives Problem

Derivatives are financial contracts whose values are derived from the values of underlying assets. Hedging risks involves engaging in transactions that offset risk, while keeping unemployment high does not. A financial futures contract is a standardized agreement to deliver a specified financial instrument at a specified price and date. Interest rate futures specify face values like $100,000 for T-bill futures. Buying T-bill futures contracts predicts interest rates will increase, while selling predicts they will decrease. Unexpected inflation increases downward pressure on bond prices and futures prices. More government borrowing signals downward pressure on both. A put option is in the money when the underlying asset price is below the exercise price, while a call option is out of the money in that situation.

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42 views3 pages

Derivatives Problem

Derivatives are financial contracts whose values are derived from the values of underlying assets. Hedging risks involves engaging in transactions that offset risk, while keeping unemployment high does not. A financial futures contract is a standardized agreement to deliver a specified financial instrument at a specified price and date. Interest rate futures specify face values like $100,000 for T-bill futures. Buying T-bill futures contracts predicts interest rates will increase, while selling predicts they will decrease. Unexpected inflation increases downward pressure on bond prices and futures prices. More government borrowing signals downward pressure on both. A put option is in the money when the underlying asset price is below the exercise price, while a call option is out of the money in that situation.

Uploaded by

Tho Tho
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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DERIVATIVES M/C

● Which are derivatives?


A.< A financial contracts whose values are derived from the values of underlying assets>
B. A financial contracts whose values are derived from the regulations of the government>
C. Loans from commercial banks>
D. Loans from other non-bank institutions>

● Hedging risks do not involve in:


A.< engaging in a financial transaction that offsets a long position by taking a short position>
B.< engaging in a financial transaction that offsets a short position by taking a long position>
C.< keeping the unemployment rate at a high level>
D.< financial transactions that can reduce or eliminate risk>

● The financial futures contract is:


A.< consumer installment debt>
B.< unsecured debt>
C.< unrestricted debt>
D.< a standardized agreement to deliver or to receive a specified amount of a specified financial
instrument at a specified price and date>

● ____ are contracts on debt securities.


A.< restrictive barrier > B.< interest rate futures>
C.< restrictive claimnant> D.< stock index futures>

● Interest rate futures specify a face value of underlying securities such as:
A.< $1,000,000 for T-bill futures and $100,000 for Treasury bond futures>
B.< $1,000,000 for T-bill futures and $1,000,000 for Treasury bond futures>
C.< $100,000 for T-bill futures and $10,000 for Treasury bond futures>
D.< $100,000 for T-bill futures and $100,000 for Treasury bond futures>

● Jim _____ a T-bills futures contracts as he expects the interest rate will _____ next month to
speculate from future movements of the market.
A.< purchases; decrease> B.< sells; decrease>
C.< purchases; increase> D.< sells; not change>

● Amanda _____ a T-bills futures contracts as she expects the interest rate will _____ next
month to speculate from future movements of the market.
A.< purchases; not change> B.< sells; increase>
C.< purchases; increase> D.< sells; not change>

● Unexpected increases in the consumer price index and producer price index can place _____
pressure on bond prices and also _____ pressure on Treasury bond futures prices
A.< downward; downward > B.< upward; upward>
C.< upward; downward> D.< downward; upward>
● ____ government borrowing can signal _____ pressure on bond prices and ____ on Treasury
bond futures prices
A.< More; downward; downward>
B.< More; upward; downward>
C.< More; downward; upward>
D.< More; upward; upward>

● Assume that an investor buys a Treasury bonds futures contract. The price of the contract was
90-00 in October. Next month, he sells same contract in order to close out the position. At this
time, the futures contract specifies the price as 92-16. The nominal profit he will get is:
92_16/32-90,000= 2500
A.< $21,600 > B.< $2,500>
C.< $25,000> D.< $2,160>

● Assume that an investor sells a Treasury bonds futures contract. The price of the contract was
90-00 in October. Next month, he buys same contract in order to close out the position. At this
time, the futures contract specifies the price as 92-10. The nominal loss he will get is:
A.< $21,000> B.< $23,120>
C.< $2,100> D.< $2,312>

● ABC Company purchases S&P 500 index futures. The futures price on the S&P 500 index with a
December settlement date is 1500. The value of an S&P500 futures contract is $250 times the
index. Assume that, on the settlement date, the index rise to 1750, then nominal profit could be:
(1750-1500) × 250= 62500
A.< $62,500> B.< $250>
C.< $625,000 > D.< $2,500>

● A put option is said to be “in the money” when:


A.< market price of underlying assets is equal the exercise price>
B.< market price of underlying assets is below the exercise price>
C.< market price of underlying assets exceeds the exercise price>
D.< no correct answer.

● A call option is said to be “out of the money” when:


A.< market price of underlying assets is equal the exercise price>
B.< market price of underlying assets is below the exercise price>
C.< market price of underlying assets exceeds the exercise price>
D.< no correct answer.>

● An investor buys a call option on ABC Company stock with an exercise price of $157 for a
premium of $5 per share. Before expiration date, the stock price rises to $181. In this case, the
investor should:
A.< Exercise the option and then sell shares at market price and net gain could be $19/share>
B.< Exercise the option and then sell shares at market price and net gain could be $24/share>
C.< Exercise the option and then sell shares at market price and net gain could be $29/share>
D.< Exercise the option and then sell shares at market price and net gain could be $5/share>
● An investor buys a call option on ABC Company stock with an exercise price of $157 for a
premium of $5 per share. Before expiration date, the stock price rises to $161. In this case, the
investor should:
A.< Exercise the option and then sell shares at market price and net loss could be $1/share >
B.< Exercise the option and then sell shares at market price and net gain could be $1/share>
C.< Exercise the option and then sell shares at market price and net gain could be $4/share>
D.< Let the option expire>

● An investor buys a put option on ABC Company stock with an exercise price of $135 for a
premium of $6 per share. Before expiration date, the stock price increases to $147. In this case,
the investor should:
A.< Purchases the stock and exercises the option to realize a net gain of $ 12/share>
B.< Purchases the stock and exercises the option to realize a net gain of $ 6/share>
C.< Purchases the stock and exercises the option to realize a net gain of $ 18/share>
D.< Let the option expire>

● An investor buys a put option on ABC Company stock with an exercise price of $112 for a
premium of $3 per share. Before expiration date, the stock price decreases to $104. In this case,
the investor should:
A.< Purchases the stock and exercises the option to realize a net gain of $ 8/share>
B.< Purchases the stock and exercises the option to realize a net gain of $ 3/share>
C.< Purchases the stock and exercises the option to realize a net gain of $ 5/share >
D.< Let the option expire>

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