Derivatives - Derivative Markets and Instruments

Derivatives are similar to insurance in that both:

• have an indefinite life span.

• allow for the transfer of risk from one party to another.

• allow for the transformation of the underlying risk itself.

The clearing and settlement process of an exchange-traded

derivatives market:

• provides a credit guarantee.

• provides transparency and flexibility.

• takes longer than that of most securities exchanges.

An analyst using a one-period binomial model calculates a probability-weighted average of an option's values following an up-move or a down-move. According to this model, this average is most likely:

• equal to the option's value today.

• less to the option's value today.

• greater to the option's value today.

In contrast to contingent claims, forward contracts:

• have their prices chosen by the participants.

• could end in default by either party.

• can be exercised by physical or cash delivery.

Which of the following statements explains a characteristic of futures price

limits? Price limits:

• help the clearinghouse manage its credit exposure.

• can typically be expanded intra-day

  by willing traders.

• establish a band around the final trade of the previous day.

Which of the following statements describes an aspect of margin accounts for

futures?

• The maintenance margin is always less than the initial margin.

• The initial margin required is typically at least 10% of the futures price.

• A margin call requires a deposit sufficient to raise the account balance to the

  maintenance margin.

At the initiation of a forward contract and a futures contract with identical terms, their prices are most likely to be different if:

• the spot rate is highly volatile.

• the forward contract is marked to market daily.

• short-term interest rates are negatively correlated with futures prices

A plain vanilla interest rate swap is also known as:

• a basis swap.

• a fixed-for-floating

  swap.

• an overnight indexed swap.

In a declining interest rate environment, compared with a CMO’s Class A

tranche, its Class C tranche will be repaid:

• earlier.

• at the same pace.

• later.

Which of the following is most likely the underlying of a plain vanilla interest

rate swap?

• 180-day Libor

• 10-year US Treasury bond

• Bloomberg Barclay’s US Aggregate Bond Index