The Role and Impact of Speculators in Derivative Markets, Exams of Finance

Download The Role and Impact of Speculators in Derivative Markets and more Exams Finance in PDF only on Docsity! FIN 610 EXAM QUESTIONS WITH ANSWERS GRADED A PASS ASSURED 2023-2024 Which of the following does not describe derivatives? A. These financial instruments are often used to speculate. B. Insurance is required when purchasing derivative securities. C. They are assets that derive their economic value from an underlying asset, such as a stock or bond. D. These financial instruments are often used to hedge against risk. Would derivative markets be better off if the only people buying and selling derivative contracts were hedgers? A. No, as in all markets, at least two parties are required for each transaction, and speculators help provide liquidity and efficiency in financial markets. B. Yes, because speculators may cause artificially high asset prices, the market is more efficient with hedgers only. C. Yes, with only hedgers in the market, the number of investments would increase, thus increasing the flow of funds in the financial system. D. Uncertain, it depends on how much risk hedgers are willing to assume. What services do forward contracts provide in the financial system? (Check all that apply) A. They give firms and investors an opportunity to hedge the risk on transactions that depend on future prices. B. They add additional risk to the market which increases the returns that farmers earn since demand for agricultural products is usually price elastic. C. They allow firms to delay signing contracts until a commodity or financial asset is actually delivered. D. They allow an agreement in the present to exchange a given amount of a commodity or a financial asset at a particular date in the future for a set price. E. They allow transactions to be agreed to in the present but to be settled in the future. Someone with no connection to an industry that places financial bets on futures contracts within the industry in an attempt to profit from changes in asset prices is called a speculator. Suppose that you are a wealthy investor. Although you have no connection with the oil industry, you are convinced from studying the determinants of demand and supply in the oil market that the price of oil will decline sharply in the future. How might you use forward contracts to profit from your forecast? A. You could buy oil futures and hold them until the settlement date. B. You could wait until the settlement date and buy at the spot rate if your prediction is correct. C. You could sell oil futures with the intention of buying them back at the lower price on or before the settlement date. D. You could buy oil futures with the intention of selling them back at the lower price on or before the settlement date. Which of the following is not true regarding forward contracts and futures contracts? A. Forward contracts have reduced counterparty risk and lower information costs. B. Futures contracts are traded on exchanges. C. Futures contracts lack the flexibility of forward contracts. D. Futures contracts have a price that changes up until the settlement date with standardized settlement dates. A. Yes, futures contracts make it possible to lock into a price if futures contracts are not sold for profit or loss. B. No, it is not possible to fix the price of the underlying asset. An article in the Wall Street Journal noted that, U.S. oil producers ... are using hedges to lock in prices......In this scenario oil producers be worried about prices falling and would take a short position in the futures market to lock in future prices to hedge against the possibility that they are lower than today. [Related to the Making the Connection] An article in the Wall Street Journal quoted a young investor who works for the social network site LinkedIn who explained that after losing money trading securities linked to crude oil futures prices he was going to stick to investing in what he knows, like tech. Source: Ben Eisen, Nicole Friedman, and Saumya Vaishampayan, The New Oil Traders: Moms and Millennials, Wall Street Journal, May 26, 2016. All of the following are reasons why might someone like this investor who has a full-time job would have trouble earning a profit buying and selling oil futures (or other securities linked to the prices of oil futures), except: A. He would need to follow news about the oil industry carefully. B. He would need to have a better understanding than Wall Street professionals of how news is likely to affect oil prices. C. His trading costs are higher than those of Wall Street professionals. D. He would need a superior knowledge of how the oil market works. Is it likely that the investor would have more success buying and selling derivatives or other securities related to tech firms? A. Yes; everyone is making money in tech derivatives and securities. B. Yes; his has a more intimate working knowledge of the tech industry. C. No; he's not a Wall Street professional so he wouldn't have success in the derivatives market. D. No; few individual investors are able consistently to earn a profit by buying and selling derivatives. According to an article in the Economist magazine: In 1958 American onion farmers, blaming speculators for the volatility of their crops' prices, lobbied a congressman from Michigan named Gerald Ford to ban trading in onion futures. Supported by the president-to-be, they got their way. Onion futures have been prohibited ever since. Source: "Over the Counter, Out of Sight," Economist, November 12, 2009. Is it likely that banning trading futures contracts in onions reduced the volatility in onion prices? Are onion farmers as a group better off because of the ban? A. Yes, by prohibiting the sale of onion futures, farmers can better hedge against volatile onion prices, making them better off as a group. B. Yes, by prohibiting the sale of onion futures, it removed speculators from the market and thus reduced price volatility, making onion farmers better off as a group. C. No, volatility is driven by changes in supply and demand, so banning onion futures has likely eliminated the ability of onion farmers to hedge against volatile onion prices, making them worse off as a group. D. Uncertain, even though banning onion futures eliminated the ability of onion farmers to hedge against volatile onion prices, onion farmers can sell onions at a higher price now, making them better off as a group. The difference between a call option and a put option is that a call option gives the buyer the right to while the buyer of a put option has the right to . A. double the size of any investment within a protected investment portfolio: cancel the purchase of any stock within a protected investment portfolio B. buy the underlying asset at a predetermined price before its expiration date: sell the underlying asset asset at a predetermined price during a set period of time C. sell the underlying asset asset at a predetermined price during a set period of time: buy the underlying asset at a predetermined price before its expiration date D. cancel the purchase of any stock within a protected investment portfolio: double the size of any investment within a protected investment portfolio An option writer is the seller of an option and he/she has the obligation to sell the underlying asset. An option premium is the: A. price of the option. B. payoff to the buyer of the option from exercising it immediately. C. price at which the buyer of an option has the right to buy or sell the underlying asset. D. price of the underlying asset of the option. An option's intrinsic value is the: A. price of the underlying asset of the option. B. payoff to the buyer of the option from exercising it immediately. C. price at which the buyer of an option has the right to buy or sell the underlying asset. D. price of the option. A columnist on marketwatch.com offers the following advice: If I were to hedge Apple, I'd use ... 90- C. Volatility is an important part of the Black-Scholes options pricing model. All else being equal, the lower the volatility in the price of the underlying asset, the larger the option premium, and thus cheaper the option. D. None of the above. Suppose that the Dow Jones Industrial Average is above the level. If the Dow were to fall to , who would gain the most? A. Investors who had sold call options. B. Investors who had sold put options. C. Investors who had bought call options. D. Investors who had bought put options. Who would be hurt the most? A. Investors who had sold call options. B. Investors who had bought call options. C. Investors who had sold put options. D. Investors who had bought put options. A swap is: A. a contract that gives the buyer the right to buy the underlying asset at a set price during a set period of time. B. an agreement to buy or sell an asset at an agreed price at a future time. C. an agreement between two or more counterparties to exchange sets of cash flows over some future period. D. a contract that gives the seller the right to sell the underlying asset at a set price during a set period of time. A swap is different from a futures contract because: A. swaps only offer shorter-term hedging. B. swaps offer less privacy. C. swaps are subject to increased government regulation. D. swaps are private agreements between counterparties and its terms are flexible. How does a credit default swap differ from the other swap contracts discussed in this chapter? Credit default swaps are: A. contracts in which interest-rate payments are exchanged, with the intention of reducing default risk. B. contracts where counterparties agree to swap interest payments over a specified period on a fixed dollar amount. C. contracts where counterparties agree to exchange principle amounts denominated in different currencies. D. derivatives requiring sellers to make payments to buyers if the price of the underlying security declines in value. What difficulties did credit default swaps cause during the financial crisis of 20072009? A. Those selling credit default swaps undercharged buyers relative to the actual risk involved. Thus, when buyers attempted to collect on payments from the price declines, firms lacked sufficient collateral to meet their obligations and faced possible bankruptcy. B. Credit default swaps were issued against mortgage-backed securities without having sufficient reserves to offset the losses incurred when the housing bubble burst. Thus, when the value of the underlying asset plummeted, firms were liable to the buyers of CDSs. C. Because credit default swaps were NOT issued against collateralized debt obligations, but should have, (CDOs), owners of those securities experienced severe losses when the price of the underlying security declined in value. D. A and B are correct. E. All of the above. A column in the Wall Street Journal observes: "Many regulators, politicians and academics consider credit default swaps to be insurance contracts." Briefly explain the reasoning behind this observation. Source: Stuart M. Turnbull and Lee M. Wakeman, "Why Markets Need 'Naked' Credit Default Swaps," Wall Street Journal, September 11, 2012. A credit default swap like an insurance contract since . A. is: the buyer of the credit default swap can sell the underlying asset to the seller at a strike price if the asset drops in value B. is not: the seller of credit default swaps do not hold collateral to cover losses from defaults like an insurance company would C. is not: the seller of the credit default swap is not required to reimburse the buyer unless the government requires it of them D. is: the buyer pays a yearly fee to the seller and the seller agrees to cover any losses if there is a