Financial Derivatives Chapter 1

A one-year forward contract is an agreement where .....

• One side has the right to buy an asset for a certain price in one year’s time.

• One side has the obligation to buy an asset for a certain price in one year’s time.

• One side has the obligation to buy an asset for a certain price at some time during the next year.

• One side has the obligation to buy an asset for the market price in one year’s time.

Which of the following best describes the term “spot price”?

• The price for immediate delivery

• The price for delivery at a future time

• The price of an asset that has been damaged

• The price of renting an asset

Which of the following is true about a long forward contract?

• The contract becomes more valuable as the price of the asset declines

• The contract becomes more valuable as the price of the asset rises

• The contract is worth zero if the price of the asset declines after the contract has been entered into

• The contract is worth zero if the price of the asset rises after the contract has been entered into

An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true?

• The investor has made a gain of $4,000

• The investor has made a loss of $4,000

• The investor has made a gain of $2,000

• The investor has made a loss of $2,000

Which of the following describes European options? 

• Sold in Europe

• Priced in Euros

• Exercisable only at maturity

• Calls (there are no European puts)

Which of the following is NOT true?

• 1. A call option gives the holder the right to buy an asset by a certain date for a certain price

• 1. A put option gives the holder the right to sell an asset by a certain date for a certain price

• 1. The holder of a call or put option must exercise the right to sell or buy an asset

• 1. The holder of a forward contract is obligated to buy or sell an asset

1. Which of the following is NOT true about call and put options?

• 1. An American option can be exercised at any time during its life

• 1. A European option can only be exercised only on the maturity date

• 1. Investors must pay an upfront price (the option premium) for an option contract

• 1. The price of a call option increases as the strike price increases

The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader’s net profit or loss is...

• Loss of $1,000

• Loss of $2,000

• Gain of $200

• Gain of $1000

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true?

• A forward contract can be used to lock in the exchange rate

• A forward contract will always give a better outcome than an option

• An option will always give a better outcome than a forward contract

• An option can be used to lock in the exchange rate

Which of the following best describes a central clearing party?

• It is a trader that works for an exchange

• It stands between two parties in the over-the-counter market

• It is a trader that works for a bank

• It helps facilitate futures trades