I_SS17_R60_Derivative Markets and Instruments

Question 1

Two general types of derivative contracts

Answer 1

forward commitments and contingent claims

Question 2

Forward contract is agreement between two parties in which

Answer 2

buyer agrees to buy from seller the underlying at a future date at a price established at the start

Question 3

Default risk for a forward contract

Answer 3

Each party is subject to the possibility of default

Question 4

Forward contract may be settled through

Answer 4

delivery where buyer pays and receives asset or through equivalent cash settlement

Question 5

Can generally assume that default risk of futures contract

Answer 5

is default-free

Question 6

A swap is equivalent to

Answer 6

a series of forward contracts

Question 7

Forward contract is a single payment but a swap

Answer 7

is a series of payments

Question 8

Forward commitments are

Answer 8

firm and binding agreements to engage in a transaction at a future date

Question 9

Contingent claims allow one party the

Answer 9

flexibility to not engage in a future transaction depending on market conditions

Question 10

Contingent claims are derivatives in which payoffs occur if

Answer 10

a specific event happens. Generally refer to these types of derivatives as options

Question 11

Chicago Board of Trade was established in

Answer 11

1848

Question 12

Standardized options contracts were introduced in

Answer 12

1973 which essentially killed off the customized options market

Question 13

Futures and options are

Answer 13

exchange-listed contracts

Question 14

Standard option in US covers

Answer 14

100 shares of stock

Question 15

BIS

Answer 15

Bank for International Settlements, http://www.bis.org/

Question 16

Notional principal of a derivative measures

Answer 16

the amount of the underlying asset covered by a derivative contract

Question 17

Derivative market value represents

Answer 17

economic worth of a derivative contract and represents amount of money that would change hands

Question 18

Best estimate of the derivatives market is based on

Answer 18

market value rather than the notional principal of the underlying

Question 19

Primary function of futures market is

Answer 19

price discovery

Question 20

Current price of the underlying asset of a derivative is

Answer 20

the spot price or cash price

Question 21

Proxy for the price of the underlying in the futures market

Answer 21

is the contract with the shortest time to expiration

Question 22

Forwards, futures and swaps allowing hedging through

Answer 22

locking in a price for the future

Question 23

Options protect against loss and also

Answer 23

allow participation in gains if prices move favorably

Question 24

Most important purpose of derivatives market is

Answer 24

risk management

Question 25

Risk management is the process of

Answer 25

identifying the desired level of risk, the actual level of risk and altering the latter to equal the former

Question 26

Futures prices are not necessarily expectations of

Answer 26

future spot prices. They allow substitution of the futures price for the uncertainty of future spot prices of the asset. They permit the acceptance of a sure price and the avoidance of risk

Question 27

Market value of a fixed rate loan is more volatile than

Answer 27

a floating rate loan

Question 28

Derivatives are tools that enable

Answer 28

the practice of risk management

Question 29

Efficient markets are fair and competitive and do not allow one party to

Answer 29

easily take money from another

Question 30

Derivatives markets are characterized by relatively low

Answer 30

transaction costs

Question 31

Insurance cannot be a viable product if its cost is

Answer 31

too high relative to the value of the insured asset

Question 32

Derivatives provide a means of managing

Answer 32

risk

Question 33

Arbitrage occurs when equivalent assets or combinations of assets

Answer 33

sell for two different prices

Question 34

Law of one price

Answer 34

principle that no arbitrage opportunities should be available

Question 35

There are no opportunities for

Answer 35

arbitrage profits

Question 36

Prices are set to eliminate the opportunity

Answer 36

to profit at no risk with no commitment of one’s own funds