Question 1

Stock index futures make it possible to completely offset upward or downward movements in the Dow-Jones Industrial Average, but not in the Standard & Poor's 500 Stock Index.

Accepted Answer

Stock index futures can be used to hedge against movements in both the Dow-Jones Industrial Average and the Standard & Poor's 500 Stock Index, not just one or the other.

Question 2

The seller of a stock index futures contract is betting on a bull (rising) stock market.

Accepted Answer

The seller of a stock index futures contract is actually betting that the market will decline, as they agree to sell the index at a set price in the future, hoping it will be higher than the market price at that time.

Question 3

Futures contracts are daily "marked to market"
which means each day the futures exchange clearinghouse sets the price at which they will be traded.

Accepted Answer

The answer of Futures contracts are daily "marked to market"
which...

Question 4

The writer of a call option gains when the market value of the futures contract or security named in the option rises above the strike price.

Accepted Answer

The writer (seller) of a call option incurs a loss when the market value of the underlying asset rises above the strike price, as the buyer of the call option will likely exercise their right to buy the asset at the lower strike price, forcing the seller to potentially buy the asset at the higher market price to fulfill the contract.

Question 5

The International Monetary Market (IMM) was the first futures market to open in Europe.

Accepted Answer

The International Monetary Market (IMM) was actually established in 1972 as a division of the Chicago Mercantile Exchange (CME) in the United States, not in Europe.

Question 6

The LIBOR futures contract trades in $3 million units at the Chicago Mercantile Exchange.

Accepted Answer

The LIBOR futures contract trades in $3 million units at the Chicago Mercantile Exchange.

Question 7

Barings Brothers collapsed in 1995 due to massive losses from trading derivatives instruments.

Accepted Answer

Barings Bank, one of the oldest and most prestigious banks in the UK, collapsed in 1995 due to unauthorized derivative trading by one of its employees, Nick Leeson, who racked up losses amounting to $1.4 billion.

Question 8

As the global financial system becomes "smaller"
through technological advances, alliances and mergers among the world's leading securities exchanges are likely to continue.

Accepted Answer

Technological advances and the globalization of financial markets facilitate easier and more efficient cross-border transactions, encouraging alliances and mergers among leading securities exchanges to leverage these advancements, enhance market access, and improve competitiveness.

Question 9

Derivatives continue to gain popularity, with the outstanding value in 2006 at more than $280 trillion.

Accepted Answer

The outstanding value of derivatives did indeed exceed $280 trillion in 2006, reflecting their growing popularity and widespread use in global financial markets for hedging, speculation, and arbitrage purposes.

Question 10

Hedging is a low-cost method of transferring the risk of unanticipated changes in asset prices or interest rates from one investor or institution to another.

Accepted Answer

Hedging involves transferring risk, which can be a low-cost method compared to other risk management strategies.

Question 11

As the delivery date specified in the futures contract draws nearer, the gap or basis between the futures and spot prices for the same asset narrows.

Accepted Answer

This phenomenon occurs because as the delivery date approaches, the futures price and the spot price tend to converge, reducing the basis, which is the difference between the futures price and the spot price. This convergence is due to the alignment of supply and demand factors for the futures contract and the underlying asset as the delivery date nears.

Question 12

The Europeans, through firms such as EUREX, are moving into derivatives markets that traditionally have been the province of the US Chicago Board of Trade, (CBOT) and the Chicago Mercantile Exchange CME).

Accepted Answer

European firms like EUREX have indeed expanded into derivatives markets, traditionally dominated by US institutions such as the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME), offering competitive trading platforms and products.

Question 13

During a period of economic expansion, according to your text,
A) Debt security prices typically rise
B) Interest rates tend to fall
C) Long-term interest rates increase faster than short-term interest rates
D) Interest rates typically rise
E) None of the above

Accepted Answer

During a period of economic expansion, interest rates typically rise due to increased demand for borrowing and the central bank's efforts to control inflation.

Question 14

If projected money supply growth exceeds projected GNP growth, interest rates are likely to:
A) Rise
B) Fall
C) Remain stable unless inflation (the Fisher effect) intervenes
D) Remain unchanged unless the business cycle turns downward with slower GNP growth
E) None of the above

Accepted Answer

When money supply growth exceeds GNP growth, there is more money available relative to the output of goods and services, which typically leads to lower interest rates as there is more money available for lending.

Question 15

A swap can be effectively hedged against interest-rate risk by:
A) Selling out to another party
B) Entering into another swap agreement that is the mirror image of the first swap
C) Setting interest-sensitive assets equal to interest-sensitive liabilities
D) Setting asset duration equal to liability duration
E) None of the above

Accepted Answer

Entering into another swap agreement that is the mirror image of the first swap effectively offsets the interest-rate risk of the original swap, as the cash flows from the second swap will counterbalance those of the first.

Question 16

Swaps are used to protect against ____ risk, but they do not automatically protect the two parties from ____ risk.
A) Interest-rate, default
B) Default, liquidity
C) Liquidity, interest rate
D) Call, default
E) Forecasting, principal

Accepted Answer

Swaps, such as interest rate swaps, are financial instruments used to hedge against interest rate risk by exchanging future interest rate payments. However, they do not inherently protect against default risk, which is the risk that one party fails to fulfill their contractual obligations.

Question 17

If market interest rates rise, the value of a financial futures contract will:
A) Rise
B) Fall
C) Remain constant because the value is determined by prices in the future
D) The change in value depends on the maturity of the futures contract
E) None of the above

Accepted Answer

The answer of If market interest rates rise, the value...

Question 18

The ____ suggests that an increase in the growth rate in the money supply results in lower interest rates in
The short-run.
A) Fisher effect
B) Harrod-Keynes effect
C) GAP effect
D) Money-supply expectations effect
E) Money-supply liquidity effect

Accepted Answer

The Money-supply liquidity effect suggests that an increase in the growth rate of the money supply will lead to lower interest rates in the short run, as the increased supply of money makes it more available for borrowing, thus reducing the cost of borrowing (interest rates).

Question 19

In an IAR swap what amount is adjusted as market interest rates move?
A) The long-term fixed interest rate
B) The short-term reference interest rate
C) The notional principal
D) Both a and c are adjusted
E) None of the above

Accepted Answer

The answer of In an IAR swap what amount is...

Question 20

In the late 1990's, Japanese government bond yields dropped to the lowest level in modern history.
Reasons for this include:
A) Japan was experiencing a prolonged national recession
B) Savers eschew stocks, instead bidding up bond prices
C) Business owners had little demand for credit
D) All of the above
E) Choices A and C only

Accepted Answer

All of the choices provided are correct reasons for the drop in Japanese government bond yields in the late 1990s. Japan was indeed experiencing a prolonged recession, savers were avoiding stocks and thus increasing demand for bonds, and there was a low demand for credit among business owners.

Quiz 9: Interest-Rate Forecasting and Hedging: Swaps, Financial Futures, and Options

Stock index futures make it possible to completely offset upward or downward movements in the Dow-Jones Industrial Average, but not in the Standard & Poor's 500 Stock Index.

The seller of a stock index futures contract is betting on a bull (rising) stock market.

Futures contracts are daily "marked to market" which means each day the futures exchange clearinghouse sets the price at which they will be traded.

The writer of a call option gains when the market value of the futures contract or security named in the option rises above the strike price.

The International Monetary Market (IMM) was the first futures market to open in Europe.

The LIBOR futures contract trades in $3 million units at the Chicago Mercantile Exchange.

Barings Brothers collapsed in 1995 due to massive losses from trading derivatives instruments.

As the global financial system becomes "smaller" through technological advances, alliances and mergers among the world's leading securities exchanges are likely to continue.

Derivatives continue to gain popularity, with the outstanding value in 2006 at more than $280 trillion.

Hedging is a low-cost method of transferring the risk of unanticipated changes in asset prices or interest rates from one investor or institution to another.

As the delivery date specified in the futures contract draws nearer, the gap or basis between the futures and spot prices for the same asset narrows.

The Europeans, through firms such as EUREX, are moving into derivatives markets that traditionally have been the province of the US Chicago Board of Trade, (CBOT) and the Chicago Mercantile Exchange CME).

During a period of economic expansion, according to your text,

If projected money supply growth exceeds projected GNP growth, interest rates are likely to:

A swap can be effectively hedged against interest-rate risk by:

Swaps are used to protect against risk, but they do not automatically protect the two parties from risk.

If market interest rates rise, the value of a financial futures contract will:

The ____ suggests that an increase in the growth rate in the money supply results in lower interest rates in The short-run.

In an IAR swap what amount is adjusted as market interest rates move?

In the late 1990's, Japanese government bond yields dropped to the lowest level in modern history. Reasons for this include: