Chapter 1 Introduction

Question 1

(Exchange-Traded Markets)
A ______________ is a market where individuals trade standardized contracts that have been defined by the exchange.

Answer 1

derivatives exchange

Question 2

(Exchange-Traded Markets)
This exchange was originally established in 1848 to bring farmers and merchants together by standardizing the quantities and qualities of grains that were traded.

Answer 2

The Chicago Board of Trade (CBOT)

Question 3

(Exchange-Traded Markets)
The first futures-type contract developed by CBOT were known as a _____________.

Answer 3

to-arrive contract

Question 4

(Exchange-Traded Markets)
This rival futures exchange to the CBOT was established in 1919.

Answer 4

The Chicago Mercantile Exchange (CME)

Question 5

(Exchange-Traded Markets)
_______________ started trading call option contracts on 16 stocks in 1973.

Answer 5

The Chicago Board Options Exchange (CBOE)

Question 6

(Exchange-Traded Markets)
The CBOE started trading call options contracts on 16 stocks in ______ (year).

Answer 6

1973

Question 7

Banks, other large financial institutions, fund managers, and corporations are the main participants in these types of derivatives.

Answer 7

OTC derivatives

Question 8

(OTC Markets)
Once an OTC trade has been agreed, the two parties can either present it to a ___________ or clear the trade ____________.

Answer 8

central counterparty (CCP); bilaterally

Question 9

(OTC Markets)
main duty/function of a CCP?

Answer 9

The CCP stands between the two parties to the derivatives transaction sot hat one party does not have to bear the risk that the other party will default.

Question 10

(OTC Markets)
Large banks often act as ____________ for the more commonly traded instruments. This means that they are always prepared to quote a bid price and an offer price.

Answer 10

market makers

Question 11

(OTC Markets)
Prior to _______________, the OTC derivatives markets were largely unregulated.

Answer 11

the credit crisis of 2007

Question 12

(OTC Markets)
Standardized OTC derivatives between two financial institutions in the United States must, whenever possible, be traded on what are referred to as ____________.

Answer 12

swap execution facilities (SEFs)

Question 13

(OTC Markets)
What does SEFs stand for?

Answer 13

swap execution facilities (SEFs)

Question 14

(OTC Markets)
What does CCP stand for?

Answer 14

central counterparty

Question 15

(OTC Markets)
There is a requirement in most parts of the world that a _________ be used for most standardized derivatives transactions between financial institutions.

Answer 15

CCP

Question 16

(OTC Markets)
All trades must be reported to a ______________

Answer 16

central repository

Question 17

(OTC Markets)
Define systemic risk

Answer 17

Systemic risk is the risk that a default by one financial institution will create a “ripple effect” that leads to defaults by other financial institutions and threatens the stability of the financial system.

Question 18

(OTC Markets)
____________ is the risk that a default by one financial institution will create a “ripple effect” that leads to defaults by other financial institutions and threatens the stability of the financial system.

Answer 18

system risk

Question 19

A ____________ is a relatively simple derivative that is an agreement to be or sell an asset at a certain future time for a certain price.

Answer 19

forward contract

Question 20

(forward contracts)
The party that assumes the ________ position agrees to buy the underlying asset on a certain specified future date. The party that assumes the _______ position agrees to sell the asset on the same date for the same price

Answer 20

long (position); short (position)

Question 21

(Types of traders)
Three broad categories of traders in the derivatives markets

Answer 21

hedgers, speculators, and arbitrageurs

Question 22

(Strategies)
long/short equities

Answer 22

Purchase securities considered to be undervalued and short those considered to be overvalued

Question 23

(Strategies)
convertible arbitrage

Answer 23

Take a long position in a thought-to-be-undervalued convertible bond combined with an actively managed short position in the underlying equity

Question 24

(Strategies)
distressed securities

Answer 24

Buy securities issued by companies in, or close to, bankruptcy

Question 25

(Strategies)
emerging markets

Answer 25

Invest in debt and equity of companies in developing or emerging countries and in the debt of the countries themselves

Question 26

(Strategies)
global macro

Answer 26

Carry out trades that reflect anticipated global macroeconomic trends

Question 27

(Strategies)
merger arbitrage

Answer 27

Trade after a possible merger or acquisition is announced so that a profit is made if the announced deal takes place