Financial Markets and Institutions
Chapter Exam Questions
Course Introduction
This course provides a comprehensive overview of financial markets and institutions, exploring their critical roles in the global economy. Students will examine the structure, functions, and dynamics of major financial markets, such as money, capital, derivatives, and foreign exchange markets. The course also analyzes various financial institutions including commercial banks, investment banks, insurance companies, and mutual funds focusing on their functions, regulatory frameworks, risk management practices, and the ways they facilitate the flow of funds and resources within the economy. Current issues and trends, such as the impacts of globalization, technological innovation, and financial regulation, are integrated throughout to help students understand the evolving landscape of financial systems.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
Available Study Resources on Quizplus
16 Chapters
945 Verified Questions
945 Flashcards
Source URL: https://quizplus.com/study-set/3840
Page 2
Chapter 1: Introduction
Available Study Resources on Quizplus for this Chatper
40 Verified Questions
40 Flashcards
Source URL: https://quizplus.com/quiz/76573
Sample Questions
Q1) When the law of one price is violated in that the same good is selling for two different prices, an opportunity for what type of transaction is created?
A) return-to-equilibrium transaction
B) risk-assuming transaction
C) speculative transaction
D) arbitrage transaction
E) none of the above
Answer: D
Q2) A risk premium is the additional return investors expect for assuming risk.
A)True
B)False
Answer: True
Q3) Exchange-traded derivatives volume is less than one billion according to the Futures Industry magazine in 2010.
A)True
B)False Answer: False
To view all questions and flashcards with answers, click on the resource link above.
Page 3
Chapter 2: Structure of Options Markets
Available Study Resources on Quizplus for this Chatper
65 Verified Questions
65 Flashcards
Source URL: https://quizplus.com/quiz/76574
Sample Questions
Q1) Offsetting an over-the-counter option contract cancels both contracts.
A)True
B)False
Answer: False
Q2) The advantages of the over-the-counter options market include all of the following except
A) customized contracts
B) privately executed
C) freedom from government regulation
D) lower prices
E) none of the above
Answer: D
Q3) Index options have less volume than stock options.
A)True
B)False
Answer: False
Q4) All of the options on Microsoft comprise an option class.
A)True
B)False
Answer: True
To view all questions and flashcards with answers, click on the resource link above. Page 4
Chapter 3: Principles of Option Pricing
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76575
Sample Questions
Q1) Holding everything else constant, a longer-term European put is always worth more than a shorter-term European put.
A)True
B)False
Answer: False
Q2) Consider a portfolio consisting of a long call with an exercise price of X, a short position in a non-dividend paying stock at an initial price of S<sub>0</sub>, and the purchase of riskless bonds with a face value of X and maturing when the call expires. What should such a portfolio be worth?
A) C + P - X(1 + r)<sup>-T</sup>
B) C - S<sub>0</sub>
C) P - X
D) P + S<sub>0</sub> - X(1 + r)<sup>-T</sup>
E) none of the above
Answer: E
Q3) At expiration the call price must converge to the stock price.
A)True
B)False
Answer: False
To view all questions and flashcards with answers, click on the resource link above.
Page 5
Chapter 4: Option Pricing Models: The Binomial Model
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76576
Sample Questions
Q1) In the binomial model, if an option has no chance of expiring out-of-the-money, the hedge ratio will be
A) 0.5
B) infinite
C) 1
D) 0
E) none of the above
Q2) If a call is underpriced and you buy the call and sell short the stock, it is equivalent to investing money at more than the risk-free rate.
A)True
B)False
Q3) All of the following are practical applications of the binomial model except A) choices regarding real options
B) options regarding executive incentive plans
C) models in which the stock price can go up, down, or remain constant in the next period
D) embedded options within debt securities
E) none of the above
To view all questions and flashcards with answers, click on the resource link above.
6
Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76577
Sample Questions
Q1) Which of the following statements about the delta is not true?
A) it ranges from zero to one
B) it converges to zero or one at expiration
C) it is given by N(d1) in the Black-Scholes-Merton model
D) it changes slowly near expiration if the option is at-the-money
E) none of the above
Q2) The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.
A)True
B)False
Q3) When the risk-free rate is zero, the Black-Scholes formula converges to the intrinsic value.
A)True
B)False
Q4) What is the reason for executing a gamma hedge?
A) the volatility can change
B) the stock price can make a large move
C) the stock price moves are too small for a delta hedge to work
D) there is no true risk-free rate
E) none of the above
To view all questions and flashcards with answers, click on the resource link above. Page 7
Chapter 6: Basic Option Strategies
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76578
Sample Questions
Q1) The difference in profit from an actual put and a synthetic put is
A) X
B) S<sub>T</sub> - X
C) X - S<sub>T</sub>
D) S<sub>T</sub> + X(1 + r)<sup>-T</sup>
E) none of the above
Q2) Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price?
A) the breakeven is lower
B) the maximum loss is greater
C) the insurance is less costly
D) the insurance is more costly
E) none of the above
Q3) Early exercise imposes a risk to all but one of the following transactions.
A) a short call
B) a short put
C) a protective put
D) an uncovered call
E) none of the above
To view all questions and flashcards with answers, click on the resource link above.
Page 8
Chapter 7: Advanced Option Strategies
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76579
Sample Questions
Q1) Suppose you closed the spread 60 days later. What will be the profit if the stock price is still at $50?
A) $41
B) $198
C) $302
D) $102
E) none of the above
For questions 7 and 8, suppose an investor expects the stock price to remain at about $50 and decides to execute a butterfly spread using the June calls.
Q2) "Like the butterfly spread, the calendar spread is one in which the underlying instrument's ___________ is the major factor in its performance." The best word for the blank is which of the following?
A) volatility
B) expected rate of return
C) beta
D) correlation with the benchmark index
E) skewness
To view all questions and flashcards with answers, click on the resource link above.
Page 9
Chapter 8: Structure of Forward and Futures Markets
Available Study Resources on Quizplus for this Chatper
61 Verified Questions
61 Flashcards
Source URL: https://quizplus.com/quiz/76580
Sample Questions
Q1) Variation margin is which of the following?
A) the difference in margin between hedger and speculator
B) margin differences according to trading style
C) margin deposited as a result of marking-to-market
D) margin set by the variability of a futures price
E) none of the above
Q2) Options on futures contracts expire after the underlying futures contract expires.
A)True
B)False
Q3) This individual takes a futures contract position that is opposite to the position in the spot market in order to reduce risk
A) speculator
B) hedger
C) spreader
D) arbitrageur
E) trading advisor
Q4) There are no futures contracts on the Dow Jones Industrial Average.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76581
Sample Questions
Q1) If one buys an asset, sells a futures, and holds the position until expiration, it is equivalent to selling the asset at the original futures price.
A)True
B)False
Q2) The spot price plus the cost of carry equals
A) the convenience yield
B) the expected future spot price
C) the risk premium
D) the futures price
E) none of the above
Q3) Which of the following can explain a contango?
A) the interest rate exceeds the dividend yield
B) the cost of carry is negative
C) futures prices exceed forward prices
D) the market is at less than full carry
E) none of the above
Q4) Normal backwardation and contango are mutually exclusive conditions for a market.
A)True B)False
To view all questions and flashcards with answers, click on the resource link above. Page 11
Chapter 10: Futures Arbitrage Strategies
Available Study Resources on Quizplus for this Chatper
59 Verified Questions
59 Flashcards
Source URL: https://quizplus.com/quiz/76582
Sample Questions
Q1) On the basis of liquidity, the best futures contract for hedging short-term interest rates is
A) Treasury bills
B) the prime rate
C) commercial paper
D) Eurodollars
E) none of the above
Q2) Determine the amount by which a stock index futures is mispriced if the stock index is at 200, the futures is at 202.5, the risk-free rate is 6.45 percent, the dividend yield is 2.75 percent, and the contract expires in three months.
A) underpriced by 0.64
B) overpriced by 2.5
C) overpriced by 9.76
D) overpriced by 0.64
E) underpriced by 2.5
Q3) The timing option will lead to early delivery if the coupon rate is higher than the repo rate.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
Page 12
Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76583
Sample Questions
Q1) Since it states that systematic risk cannot be eliminated, modern portfolio theory does not allow for stock index futures contracts.
A)True
B)False
Q2) Based on the price sensitivity hedge ratio, if the yield beta increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.
A)True B)False
Q3) Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.
A) 16.27
B) 15.93
C) 7.42
D) 11.11
E) none of the above
To view all questions and flashcards with answers, click on the resource link above.
Page 13
Chapter 12: Swaps
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76584
Sample Questions
Q1) An interest rate swap with both sides paying a floating rate is called a
A) plain vanilla swap
B) two-way swap
C) floating swap
D) spread swap
E) basis swap
Q2) Pricing a currency swap means to find the fixed rates in the two currencies. These fixed rates are the same as the fixed rates on plain vanilla swaps in the respective currencies.
A)True
B)False
Q3) Like interest rate and currency swaps, equity swap payments are always positive.
A)True
B)False
Q4) Equity swaps can be used for all of the following except:
A) to synthetically buy stock
B) to synthetically sell stock
C) to convert dividends into capital gains
D) to synthetically re-align an equity portfolio
E) none of the above
Page 14
To view all questions and flashcards with answers, click on the resource link above.
Chapter 13: Interest Rate Forwards and Options
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76585
Sample Questions
Q1) Which of the following best describes an interest rate cap?
A) a cash-and-carry hedge
B) a series of forward contracts
C) a series of interest rate calls
D) a call option spread
E) none of the above
Q2) Which of the following is a limitation of using the Black model to price interest rate options?
A) the risk-free rate is not constant
B) the volatility is not constant
C) interest rates are not lognormally distributed
D) all of the above
E) none of the above
Q3) In a 12 x 18 FRA, the derivative expires in one year and the underlying matures in 18 months.
A)True B)False
Q4) FRAs, caps and floors are guaranteed against default.
A)True
B)False
Page 15
To view all questions and flashcards with answers, click on the resource link above.
Chapter 14: Advanced Derivatives and Strategies
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76586
Sample Questions
Q1) When pursuing portfolio insurance of a stock position, the minimum value of the portfolio is equal to
A) zero
B) strike price times the number of shares of stocks and puts held
C) strike price divided by the number of shares of stocks and puts held
D) stock price times the number of shares of stocks held
E) strike price times the initial value of the portfolio divided by the stock price minus the put price
Q2) An equity forward contract is
A) a forward contract on LIBOR secured by a stock as collateral
B) a futures contract on a stock index that is not marked-to-market
C) a call option on a stock with greater downside risk than an ordinary call
D) a forward contract whose payoff is determined by a stock or index
E) none of the above
Q3) Because a chooser option enables the holder to end up with either a put or a call, it is equivalent to a straddle.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above.
16
Chapter 15: Financial Risk Management Techniques and Appplications
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76587
Sample Questions
Q1) Which of the following techniques is a more appropriate risk management tool for a company in which asset value is not easily measurable?
A) stress risk
B) credit value at risk
C) market risk
D) delta at risk
E) cash flow at risk
Q2) Current credit risk is encountered is by only one party at a time in a swap.
A)True
B)False
Q3) Value at Risk estimates for portfolios must take into account the correlations among the various assets and liabilities in a portfolio.
A)True
B)False
Q4) Potential credit risk is encountered by only one party at a time in a swap.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 17
Chapter 16: Managing Risk in an Organization
Available Study Resources on Quizplus for this Chatper
60 Verified Questions
60 Flashcards
Source URL: https://quizplus.com/quiz/76588
Sample Questions
Q1) End users differ from dealers in that the latter engage in risk management transactions for the purpose of earning a profit off the spread between their buying and selling prices, while the former enter into transactions to manage specific risks.
A)True
B)False
Q2) Transactions that do not qualify as hedges must be accounting for as speculation and marked to market each period.
A)True
B)False
Q3) The purpose of IAS 39 is to prescribe standards for derivatives accounting for foreign currency transactions.
A)True
B)False
Q4) In a derivatives operations, back office personnel are in charge of front office personnel.
A)True
B)False
To view all questions and flashcards with answers, click on the resource link above. Page 18