PRINCIPLE OF FINANCE - CHAP 3 - DERIVATIVES

A hedger in the financial futures market

• usually buys futures contracts.

• usually sells futures contracts.

• either buys or sells so that underlying asset gains/losses are directly related to futures contract gains/losses.

• either buys or sells so that underlying asset gains/losses are inversely related to futures contract gains/losses.

A hedger in the financial futures market

• seeks a position in the spot market to offset the price risk, which exists in the futures market.

• will purchase financial futures if holding financial assets in the spot market.

• seeks to offset the price risk in its spot market position with the nearly equal but opposite price risk of the futures position.

• will always short financial futures to perfect the hedge.

The purchase of one million dollars of Treasury Bonds, delivered in 60 days, from a government securities dealer is:

• a call.

• a swap.

• a forward contract.

• a put.

An agreement between a business and a large money center bank to sell 10 million dollars of T-Bills in sixty days is called a

• a call option.

• a forward contract.

• a put option.

• a long futures position.

Futures contracts differ from forward contracts in all of the following ways except:

• Forward contracts involve an intermediary or exchange.

• Futures contracts are standardized; forward contracts are not.

• Futures markets are more formal than forward markets.

• Delivery is made most often in forward contracts.

The purchase of U.S. Treasury bonds for immediate delivery is a _______ market transaction.

• stock

• spot

• futures

• forward

What is the relationship between spot market prices and forward market prices of a good or financial asset?

• Spot prices represent expected forward prices.

• Forward prices are always higher than spot prices.

• Spot prices are always higher than forward prices.

• Forward prices are expected future spot prices.

In a forward contract one party to the contract deals with

• the futures exchange.

• the counter-party of the forward contract.

• the opposite swap party.

• the hedger.

Futures contracts differ from forward contracts in that

• futures contracts are between the individual hedger and speculator.

• futures contracts are personalized, unique contracts; forwards are standardized.

• futures contracts are marked to market daily with changes in value added or subtracted from buyer and seller.

• forward contracts always require a margin deposit.

A portfolio manager is concerned that the expected drop in interest rates is going to lower the yield on the $1,000,000 of T-Bill she plans to buy in 3 months. She can hedge this potential interest rate risk by:

• Taking a short position in 3-month T-bill futures contract.

• Taking a long position in 3-month T-bill futures contract.

• She cannot hedge her situation in the futures market.

• none of the above