Question 1 (1 point) Which of the following is considered to be a derivative? Qu

Question

Question 1 (1 point) Which of the following is considered to be a derivative?

Question 1 options:

Bonds

Mutual funds

Swaps

Equities

Question 2 (1 point) A stock market bubble can start due to

Question 2 options:

low interest rates.

high expected dividends.

high levels of lending.

all of the above.

Question 3 (1 point) An option that can be exercised on or before its maturity is known as a(n) _____.

Question 3 options:

American option

barrier option

European option

Swiss option

Question 4 (1 point) Which of the following is NOT a major problem with forward contracts?

Question 4 options:

It is often costly/difficult to find a willing counterparty.

The market for forward contracts is illiquid as they are not easily sold to other parties.

The market is highly regulated. One party usually has an incentive to break the agreement.

Question 5 (1 point) Ignoring borrowing costs, an investor who borrower half the funds to invest in an asset that rises from $200 to $300 makes an effective rate of return of

Question 5 options:

30%.

50%.

100%.

300%.

Question 6 (1 point) To help minimize the financial crisis of 2007-2009, the government has

Question 6 options:

lent money to replace private sector funds.

bailed out failing financial institutions.

lowered interest rates.

all of the above.

Question 7 (1 point During a housing bubble, people continue to buy houses because

Question 7 options:

they expect house price to continue to rise.

they are able to get loans at high interest rates.

the government guarantees house value won_t fall.

all of the above.

Question 8 (1 point) Futures contracts avoid the difficulties of forward contracts by:

Question 8 options:

efficiently linking buyers and sellers.

controlling the price of the commodity being traded.

allowing speculators to make a profit on futures contracts.

covering any losses incurred by buyers and sellers on the contract.

Question 9 (1 point) Lenders of last resort intend to

Question 9 options:

add liquidity to financial markets.

restore confidence in financial markets. lower interest rates.

all of the above.

The payoff for issuing an option is known as a(n) _____.

Question 10 options:

put

call

premium

valuation

Question 11 (1 point)

Bailouts are intended to

Question 11 options:

increase the capital in financial institutions.

restore confidence in financial markets.

prevent insolvencies.

all of the above.

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Question 12 (1 point)

Subprime mortgages refer to home loans

Question 12 options:

to high risk borrowers.

for real estate with rising prices.

at below market interest rates.

all of the above.

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Question 13 (1 point)

Which of the following does NOT determine the premium paid by the option holder to the option issuer?

Question 13 options:

Interest rates

The expiration date

The strike price

The volume of the asset traded

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Question 14 (1 point)

Which government action involves putting taxpayer money at risk?

Question 14 options:

lowering interest rates

bailout

lender of last resort

none of the above

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Question 15 (1 point)

In order to prevent traders from reneging on futures contracts, exchanges require traders to maintain _____.

Question 15 options:

micro accounts

savings accounts

credit accounts

margin accounts

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Question 16 (1 point)

All of the following EXCEPT one would have a strong propensity to initiate a financial crisis. Which is the exception?

Question 16 options:

increases in uncertainty

increases in interest rates

balance sheet deterioration

exchange rate appreciation

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Question 17 (1 point)

When the Fed bought commercial paper (short term loans to established firms) they were

Question 17 options:

engaged in a bailout.

operating as a lender of last resort.

decreasing the money supply.

all of the above.

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Question 18 (1 point)

A farmer and a sugar factory enter into a futures contract requiring the delivery of 4,000 tons of sugarcane to the buyer in June at a price of $30 per ton. Suppose the futures contracts for sugarcane increases to $35 per bushel the day after the farmer and the sugar factory enter into their futures contract. If the contract was settled under these conditions, the farmer will have:

Question 18 options:

lost $5.

lost $20,000.

gained $5.

gained $20,000.

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Question 19 (1 point)

When the Treasury Department recapitalized some banks, they were

Question 19 options:

engaged in a bailout.

operating as a lender of last resort.

decreasing the money supply.

all of the above.

Save

Question 20 (1 point)

At the beginning of March 2012, Brian told Chris that he is thinking of buying some shares of Ford motors from him at the end of the month at $12/share. Chris agreed to this proposal and wrote a contract to sell shares to Brian at a price of $12/share. The current market price is $10/share. At the end of the month, the share price was $11/share, so Brian chose not to buy the shares from Chris. This is an example of:

Question 20 options:

a forward contract.

an option.

a future contract.

a swap.

increase the capital in financial institutions.

restore confidence in financial markets.

prevent insolvencies.

all of the above.

Explanation / Answer

1.

Ans

Swap

A swap is a derivative through which two parties exchange financial instruments. These instrument are anything but mostly cashflows.

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