Derivative Markets Quiz

Which of the following is a characteristic of both a forward contract and a contingent claim?

• The derivative contract has a positive value at contract initiation

• The payoff of the derivative contract is dependent on the payoff of an underlying asset

• Each party of the derivative contract is required to engage in a transaction at a later point in time

As compared to exchange-traded derivative markets, over-the-counter derivative markets are typically more:

• liquid.

• flexible.

• transparent.

In a credit default swap, the party that receives a series of cash payments in return for promising to pay compensation for credit losses resulting from a third party’s default is most likely the:

• clearinghouse.

• seller of the swap.

• buyer of the swap.

An investor makes the following statements: Which of the statements is correct? Statement 1: swaps are contingent claim. Statement 2: swaps are characterized by a series of cash flows.

• Statement 1 only

• Statement 2 only

• Both Statement 1 and Statement 2

Consider a put option selling for $4 in which the exercise price is $58. What is the profit for a put buyer if the price of the underlying at expiration is $57?

• –$3

• $1

• $3

An investor buys a call for $24.70 that has a strike price of $650. If the payoff at expiration for this call is $47.60, the price of the underlying at expiration is closest to:

• $602.40.

• $672.90.

• $697.60.

A put option has a strike price of $20.50. The option premium is $1.00. If the price of the underlying at expiration is $21.50, the put option is:

• in the money.

• at the money.

• out of the money.

In contrast to a contingent claim, a forward commitment creates counterparty risk for:

• the long position only.

• the short position only.

• both the long and the short positions.

At maturity, the buyer faces the counterparty credit risk of the seller in:

• a profitable long forward position only.

• an in-the-money long call option position only.

• both a profitable long forward position and an in-the-money long call option position.

A transaction setup to absorb the variable cash flow of a floating-rate asset can be described as a:

• fair value hedge.

• cash flow hedge.

• net investment hedge.