1. Farou invests $2,000 at 8% interest. About how long will it take for Farou to

Question

1. Farou invests $2,000 at 8% interest. About how long will it take for Farou to double his investment (e.g., to have $4,000)?

A. 4 years

B. 5 years

C. 9 years

2. What is the future value of $1,000 after six months earning 12% annually?

A. $1,050.00

B. $1,120.00

C. $1,058.30

3. Professional gamblers know that the odds are always in favor of the house (casinos). The fact that they gamble says they are:

A.irrational.

B. risk-neutral.

C. risk seekers.

4. The clearing corporation's main role in the futures market is to:

A. set the market price of the contract.

B. act as the counterparty to both sides of the transaction, thereby guaranteeing payment.

C. provide the underlying assets so the contracts can be created.

5. Marking to market is a process that:

A. ensures that the buyers and sellers receive what the contract promises.

B. always requires the sellers of contracts to transfer funds to the buyers of contracts.

C. buyers and sellers can request for an additional fee when the contract is created

6. Considering a put option, an increase in the strike price:

A. causes the intrinsic value of the option to decrease if it is above zero.

B. causes the intrinsic value of the option to increase if it is above zero.

C. causes the value of the option to decrease

7. At expiration, the time value of an option:

A. is greater than the intrinsic value.

B. is zero.

C. is less than the intrinsic value.

Explanation / Answer

1. In an excel sheet we can find the no of years as follows
=NPER(8%,0,-2000,4000,0) = 9 years
Here 8% is the interest rate, 0 is the installment payments, 2000 is the present value, 4000 is future value

2. Future value in an excel sheet can be calculated as follows
=FV(12%,0.5,0,-1000,0) = 1058.30
Here 12% is the interest rate, 0 is the installment payments, 0.5 is the years of investments, 1000 is the present value

3. Professional gamblers know that the odds are always in favor of the house (casinos). The fact that they gamble says they are Risk Seekers
So option C is correct
Since they are seekers, there returns are also high

4. The clearing corporation's main role in the futures market is to act as the counter party to both sides of the transaction, thereby guaranteeing payment
So option B is correct
Price is set by demand and supply for the stocks or options
Futures are bothered about underlying asset but not options.
Reduce counter party risk is one of the important functions of clearing house

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