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Finance: Derivatives > Midterm study > Flashcards

Midterm study Flashcards

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0
Q

the short in a forward contract is obligated to ______ the specified assett

A

deliver

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1
Q

On a settlement date of a forward one part MUST make a _______ to the other party and take delivery, or ______ may be required to sell the asset to the _____

A

cash payment; short, long

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2
Q

True or False: the same/similar futures contracts can ONLY be traded on one exchange in the U.S.

A

False

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3
Q

Forward contracts ______ traded on an organized exchange and futures contracts ______ traded on an organized exchange.

A

are not; are

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4
Q

Futures contracts can be terminated by an offsetting transaction. true or false?

A

True

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5
Q

In futures trading, ‘going long’ means: ______ a futures contract to initiate a position in the market

A

buying

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6
Q

Very few futures contracts are terminated in delivery of the underlying commodity or security. true or false?

A

True

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7
Q

Actual corn prices and corn Futures prices shoould: move in the _____ direction

A

same

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8
Q

Leverage is important to traders because it: allows them to control ______ dollar amounts of a commodity with relatively _____ capital down.

A

large; little

~ called ‘marking to the market’

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9
Q

Credit risk is handled in FORWARD markets by daily marking-to-market. true or false?

A

false

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10
Q

There are NO futures contracts on the Dow Jones Industrial Average. True or False?

A

False

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11
Q

The clearinghouse is the middleman in a FUTURES trade. True or False

A

True

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12
Q

Because futures markets do not have designated market makers, there is no such thing as a bid-ask spread. True or False

A

False

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13
Q

Position traders are futures traders who take very LARGE positions. True or False.

A

False (i answered wrong on quiz)

is it ‘long?’

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14
Q

One party to a futures transaction does NOT bear the risk that the other party will default. True or False

A

True (clearinghouse bears the risk not the trader himself)

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15
Q

Where did the U.S. futures market originate?

A

Chicago

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16
Q

Which of the following is NOT a trader on the floor of the futures exchange?

A

commission broker (supposed to be floor broker?)

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17
Q

Of the following, which is the most active group of futures?

A

financials

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18
Q

Which of the following contract terms is not set by the futures exchange?

A

price

19
Q

The spot price + cost of carry =

A

futures price

20
Q

Suppose it is currently July. The September futures price is $60 and December futures price is $68. What does the $8 spread represent?

A

cost of carry from September to December

21
Q

Most forward contracts are closed by

A

delivery

22
Q

Which of the following duties is not performed by the clearinghouse?

A

lending $$ to meet margin requirements

23
Q

Which of the following is NOT a method of terminating a futures contract?

A

scalping (it is type of speculators instead)

24
Q

True or False: The theoretical fair value is the ONLY value an asset can have

A

False

25
Q

True or False. A risk premium is the additional return investors expect for assuming risk.

A

True

26
Q

At Barings Bank, Trader Nick Leeson started selling put and call options on the Nikkei 225 equity index, placing the premiums earned into an error account number 88888. This strategy, known as _______, is essentially a bet on the stability of market prices.

A

a straddle or ‘straddling’

27
Q

There may be a temptation to view the Barrings’ debacle as being caused by just one individual - the “rogue traderr” - but in reality the fiasco should be attributed to the underlying structure of the firm, and particularly to:

A

the lack of internal checks & balances

28
Q

True or False:
A trader is required to make margin payments when accounts are marked to the market daily. As the value of the positions GO DOWN, these payments also get LOWER.

A

FALSE (got wrong by accident, i knew what it was originally but chose wrong)

29
Q

If the initial margin is $5,000, the maintenance margin is $3,000, and your balance is $2,000, how much MUST you deposit?

A

$3,000 (chapter2 & PP slides)

30
Q

Which of the following duties is not performed by the clearinghouse?

A

lending money to meet margin requirements (chapter 2)

31
Q

Futures and options are similar in all of the following ways except the owner is _______ to proceed with the transaction

A

not obligated (video)

32
Q

Forward contracts ______ traded on an organized exchange and futures contracts ______ traded on an organized exchange.

A

are not; are (ch1 & video)

33
Q

A forward contract has which of the following characteristics?

A

has a buyer and a seller

34
Q

Futures contracts are similar to forward contracts because they both represent a commitment to buy/sell something at a future time at a fixed price. True or False?

A

True (video)

35
Q

A speculator that has ________ a futures contract has taken a _____ position.

A

sold; short. OR buy; long.

36
Q

Currency futures contracts have become standard fare and trade readily in the world money centers. True or False?

A

True

37
Q

The major difference btw currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized & tailored to meet client’s needs. True or False?

A

True

38
Q

Less than _______ of all futures contracts are settled by physical delivery of foreign exchange btw buyer & seller.

A

5% (ch ? and pp slides)

39
Q

True or False:

When futures account are marked-to-market and an account’s balance below the maintenance margin must be brought up to the initial margin.

A

True

40
Q

One of the advantage of a forward market is

A

contracts are private and customized

41
Q

Margin in a futures transaction differs from stock transaction because:

A

‘margin’ in STOCK transaction = borrowing money (T + 3)

‘margin’ in futures transaction = like a down payment (% of total value of futures holdings

42
Q

daily settlement process is the same for futures and forwards contracts? true or false

A

false

43
Q

which is not an example of a forwards contract?

A

rain check (it’s an option)

44
Q

neither party to a forward agreement bears the risk that the other party will depart

A

False!

45
Q

Futures and options are similar in all of the following was except

A

the obligation to proceed with transaction

Finance: Derivatives (6 decks)

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