Test 2

Question 1

Types of Derivatives

Answer 1

Fowards, Futures, Options, and Swaps

Question 2

Derivatives

Answer 2

Fin’l securities that derive their economic value from an underlying asset (such as a stock or bond)

Question 3

Hedge

Answer 3

To reduce risks

Question 4

Speculate

Answer 4

Place financial bets on movements in asset prices

Question 5

Forward Contract

Answer 5

Agreement to buy/sell an asset at an agreed price in the future

Question 6

Spot

Answer 6

Agreement to buy/sell an asset at an agreed price today

Question 7

Settlement Date

Answer 7

The delivery date of an asset in a forward contract

Question 8

Counter-party Risk

Answer 8

Risk that the other party will default

Question 9

Future Contract

Answer 9

Contract to buy/sell a specified amount of an asset at a SPECIFIC future date

Question 10

Put option (Short Position)

Answer 10

(in a futures contract) The right/obligation of the seller to sell/deliver the asset at a specified future date

Question 11

Call option (Long Position)

Answer 11

(in a futures contract) Right/obligation of buyer to receive/buy asset on a specified future date

Question 12

Maintenance Margins

Answer 12

minimum account value required to maintain holding one or more futures contracts

Question 13

Initial Margins

Answer 13

Amount of money deposited by buyers/sellers of futures contracts to ensure terms of the contract

Question 14

European Options

Answer 14

Can only be exercised at the expiration date

Question 15

American Options

Answer 15

Can be exercised at any time until the expiration date passes

Question 16

Nominal Exchange Rate

Answer 16

Price of 1 country’s currency in terms of another (what we see)

Question 17

Real Exchange Rate

Answer 17

Price of 1 country’s products in terms of another

cost of living

Question 18

Spot Exchange Rate

Answer 18

exchange rate for delivery today

Question 19

Forward Exchange Rate

Answer 19

exchange rate for delivery in the future

Question 20

Solvency

Answer 20

The possession of assets in excess of Liabilities (ability to pay off one’s debts)

Question 21

Liquidity

Answer 21

Availability of liquid assets

Question 22

Leverage

Answer 22

High Leverage ratio may indicate danger of insolvency

Question 23

GAP

Answer 23

measures income risk

In scenario that Int. rates RISE…
if GAP is Positive, profits RISE
If GAP is Negative, profits FALL

Question 24

Duration GAP

Answer 24

measures wealth risk

In scenario that Int. rates RISE…
if DG is Positive, net worth FALLS
if DG is Negative, net worth RISES

Question 25

Loan Commitment

Answer 25

bank agrees to lend a certain amount to at a given rate for a period of time

Question 26

Balance Sheet Assets

Answer 26

Cash
Bonds
Loans
Loan Loss Reserves
Real Estate

Question 27

Balance Sheet Liabilities

Answer 27

Checkable Deposits
Savings Accounts
CDs
Fed funds purchased & RRPs	
Equity (Capital)

Question 28

Currency Swaps

Answer 28

allows the company to hedge the risk that the currency that it receives depreciates over time

Question 29

Credit Default Swaps

Answer 29

one party pays a fixed amount per period while the other party agrees to pay a certain amount if something bad occurs