Fin 384 Final -- Philpot Certification Review Exam Questions With Detailed Answers.

Derivative security - correct answer A security that derives its value from the value of some other underlying asset When the value of the underlying asset in a derivative security changes... - correct answer The value of the derivative security itself changes Cash market - correct answer The market for the actual underlying asset In the cash market, assets trade at their___? - correct answer Spot price Derivatives market - correct answer the market for the derivative security The major use of derivative securities is___? - correct answer Hedging Hedging - correct answer The use of derivatives in order to reduce or eliminate price risk Hedgers hold a position in the______ market? - correct answer Cash If you own the physical asset being traded you are ___ in the cash market? - correct answer Long If you do not own the physical asset being traded but will be purchasing it later, you are _____ in the cash market? - correct answer Short Speculation - correct answer The use of derivatives to take price risk with the hope of profit Speculators do NOT hold a position in the cash market. T/F? - correct answer True What are the four major types of derivative securities? - correct answer Forwards Futures Options Swaps Forward contract - correct answer A contract for the sale/purchase of an asset at a specified price with settlement taking place at a future date Forwards are often used with _____ and _____? - correct answer Foreign currencies Agricultural commodities Almost all derivative securities offer ____ settlement. - correct answer Cash Cash settlement - correct answer When the contract comes due, we don't need to buy/sell the actual asset; we only need to settle the difference in cash Futures contract - correct answer Same as forward contract except futures are standardized and trade on an exchange Forwards trade ____ and futures trade____? - correct answer OTC On exchange To successfully hedge, an investor would take an ______ position in the futures market from that held in the cash market. - correct answer Opposite A farmer predicts he will grow 350K bushels of beans in September, but is afraid the price will fall. The CBT offers a September beans contract that calls for delivery of 5K bushels in September. Right now (July) the specified futures price = $4.50 per bushel. How many contracts will the farmer short to protect against a loss? - correct answer 350,000 / 5000 = 70 September futures contracts at $4.50 per bushel Futures contracts are also traded based on _____ and _____ indexes. - correct answer T-bonds Stock Suppose I have a large diversified stock portfolio worth $30M. The average beta of the portfolio = 1.10. My positions in stocks would be____? I'm concerned about a possible short-term drop in the market. To hedge, I would take a _____ position in the S&P futures contract. Each contract is valued at the index value x $250. The S&P futures price = $2000. How many contracts need to be shorted? - correct answer Long Short 1.10[ $30M / (2000 X 250)] = 66 contracts Futures contracts are very popular with speculators because of _______? - correct answer Cash settlement A speculator who believes the underlying asset price will increase will go ___ in that asset's futures contract. - correct answer Long Margin - correct answer When a speculator is required to post a deposit (margin) against a futures position as a means of guaranteeing performance Marking to market - correct answer All gains/losses in value of the contract are added/subtracted from the margin account at the end of every day I predict the price of soybeans will rise, and I want to speculate. I go long in 1 contract (5000 bushels) at $4.50. What is the value of this position? Suppose the futures price rises from $4.50 to $4.52. What is the contract now worth? The gain/loss will be added/subtracted to/from the margin account - correct answer $4.50 x 5,000 = $22,500 $4.52 x 5,000= $22,600 Option - correct answer Gives the holder of the option the right but not the obligation to buy or sell an asset at a fixed price by a later date The holder of an option will exercise the option ONLY if its_____? - correct answer Advantageous Options are traded based on most assets that futures are plus ______? - correct answer Individual stocks Put option - correct answer Holder has the right but not obligation to sell an asset Call option - correct answer Holder has the right but not obligation to buy an asset Strike/Exercise Price - correct answer The stated price for the asset in the option. If an option is exercised, it will be bought/sold at the _______? - correct answer Strike price Expiration - correct answer The date at which an option expires. All options have expiration. Premium - correct answer The price paid for an option The XYZ March 85 call sells for $2.35. What is this option referencing? - correct answer Gives the holder the right but not obligation to buy 100 shares of XYZ stock for the strike price of $85. The premium for attaining this option is $2.35 per share Because options (like all other derivatives) are created securities, you do not need ___ an option in order to sell it. - correct answer Own The only risk associated with an option is the _____? This is because if an option is not advantageous, we need not exercise it. - correct answer Premium Buy call options to profit from possible price _____? - correct answer Increases Buy put options to profit from possible price____? - correct answer Decreases Sell call or put options to profit when _____? - correct answer No price change is expected Intrinsic value - correct answer The gain on the option if exercised now For calls, intrinsic value = ____? For puts, intrinsic value = ___? - correct answer Price of underlying asset (S) - Strike price (X) Strike Price (X) - Price of underlying asset (S) The intrinsic value can never be ______? - correct answer Negative. If negative, value = 0 If not stated, the premium for an option = ____? - correct answer Intrinsic value + time value Swap - correct answer A derivative security in which two parties agree to exchange series of future cash flows The two most common swaps are ____ and _____ swaps - correct answer Interest rate Currency Notional principal - correct answer The initial amount of the principal borrowed Balance of Payments (flow of funds) - correct answer Measures the cash flows that occur between different countries