Introduction to Derivative Securities By Robert A. Jarrow – Test Bank
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Sample
Questions
CHAPTER 4: Forwards and Futures
MULTIPLE CHOICE
1. The
holder of a long forward contract has:
|
a. |
the option to buy the
underlying asset at a fixed price on a fixed future date |
|
b. |
the option to sell the
underlying asset at a fixed price on a fixed future date |
|
c. |
the obligation to buy the
underlying asset at a fixed price on a fixed future date |
|
d. |
the obligation to sell the
underlying asset at a fixed price on a fixed future date |
|
e. |
None of these answers are
correct. |
ANS:
C
DIF:
Easy
REF:
4.2
TOP: Forward Contracts
MSC: Factual
2. The
holder of a short forward position has:
|
a. |
the option to buy the
underlying asset at a fixed price on a fixed future date |
|
b. |
the option to sell the
underlying asset at a fixed price on a fixed future date |
|
c. |
the obligation to buy the
underlying asset at a fixed price on a fixed future date |
|
d. |
the obligation to sell the
underlying asset at a fixed price on a fixed future date |
|
e. |
None of these answers are
correct. |
ANS:
D
DIF:
Easy
REF:
4.2
TOP: Forward Contracts
MSC: Factual
3. Shaq
buys a futures contract today. Which of the following is true?
|
a. |
Shaq agrees to buy the
asset at a fixed price at some future date. |
|
b. |
Shaq will get dividends on
the underlying asset. |
|
c. |
Shaq acquires voting rights
on the asset. |
|
d. |
Shaq will have to return
the asset when closing out his position. |
|
e. |
None of these answers are
correct. |
ANS:
A
DIF:
Easy
REF:
4.2
TOP: Forward Contracts
MSC: Factual
4. Which
of the following is INCORRECT?
|
a. |
The buyer and seller in a
forward contract agree to trade a commodity on some later delivery date at a
fixed delivery (forward) price. |
|
b. |
Forwards are zero net
supply contracts. |
|
c. |
Forward trading is a
zero-sum game. |
|
d. |
Forward contracts have
significant counterparty risk. |
|
e. |
Forward contracts are
regulated by the Commodity Futures Trading Commission. |
ANS:
E
DIF:
Easy
REF:
4.2
TOP: Forward Contracts
MSC: Factual
·
A US company has bought a machine worth 3 million euros from a
German manufacturer with payment due in three months. The treasurer finds that
DeutscheUSA (a fictitious name), a large commercial bank, bids euros for
$1.5000 and offers euros for $1.5010 in three months’ time. He readily agrees
and locks in that price.
·
Suppose DeutscheUSA would like to hedge its trade. It finds that
a German importer hoping to buy 2 million euros worth of computer parts from
the United States in three months’ time. They also agree to trade.
5. What
is the price risk exposure remaining for DeutscheUSA?
|
a. |
$1 million US dollars today |
|
b. |
$2 million US dollars in
three months’ time |
|
c. |
3 million euros today |
|
d. |
1 million euros in three
months’ time |
|
e. |
None of these answers are correct. |
ANS:
D
DIF:
Easy
REF: 4.3
TOP: The Over-the Counter Market for Trading
Forwards MSC: Applied
6. What
is DeutscheUSA’s profit and risk exposure after three months time?
|
a. |
a profit of $1,000 US dollars
plus risk exposure on $2 million dollars |
|
b. |
a profit of $2,000 US
dollars |
|
c. |
a profit of $2,000 US
dollars plus risk exposure on $1 million dollars |
|
d. |
a profit of $2,000 US
dollars plus risk exposure on 1 million euros |
|
e. |
None of these answers are
correct. |
ANS:
D
DIF: Moderate
REF: 4.3
TOP: The Over-the Counter Market for Trading
Forwards MSC: Applied
7. Which
statement is INCORRECT about futures contracts?
|
a. |
Futures contracts are regulated. |
|
b. |
Futures require
counterparties to know each other. |
|
c. |
Futures trades require
margins. |
|
d. |
Performance of futures
contracts are guaranteed by a clearinghouse. |
|
e. |
Most futures contracts are
closed out before maturity. |
ANS: B
DIF:
Easy
REF: 4.4
TOP: Futures Contracts
MSC: Factual
8. The
main distinction between a forward and a futures contract is:
|
a. |
a forward contract has a
final cash flow, while a futures contract has daily cash flows |
|
b. |
a forward contract requires
no collateral, while a futures contract requires traders to post margins |
|
c. |
a forward trade is usually
closed out early, while a futures trade usually ends with physical delivery |
|
d. |
a forward trade requires
cash settlement, while a futures trade does not require this |
|
e. |
minor—they are the same
contracts |
ANS:
A
DIF: Moderate
REF: 4.4
TOP: Futures Contracts
MSC: Factual
9. Which
of the following is NOT a job performed by a futures clearinghouse?
|
a. |
guaranteeing contract
performance |
|
b. |
providing price support in
case of a market crash |
|
c. |
resolving small disputes
among traders regarding an executed trade |
|
d. |
recording and recognizing
trades |
|
e. |
checking that trades match |
ANS:
B
DIF:
Easy
REF: 4.5
TOP: Exchange Trading of a Futures
Contract
MSC: Factual
10. Settlement
of a futures trade:
|
a. |
takes place on the following
trading day |
|
b. |
takes place five days after
a trade is executed |
|
c. |
have real time, instant
settlement due to advances in technology |
|
d. |
takes place on every
trading day until the contract is closed out or it matures |
|
e. |
None of these answers are
correct. |
ANS:
D
DIF: Moderate
REF: 4.5
TOP: Exchange Trading of a Futures
Contract
MSC: Factual
11. The
open interest on a futures contract is:
|
a. |
the sum of both the outstanding
long and short positions |
|
b. |
the total of all hedged
positions |
|
c. |
the total number of
contracts that got traded during the day |
|
d. |
the number of contracts in
which traders have shown trading interest by submitting a bid or an ask price
quote |
|
e. |
the total of all
outstanding contracts |
ANS:
E
DIF:
Easy
REF: 4.5
TOP: Exchange Trading of a Futures
Contract
MSC: Factual
12. Suppose
that July gold futures just become eligible for trading. Tim buys 20 of those
contracts from Ned. Next, he sells 10 contracts to Mary. Finally, Ned buys 10
contracts from Tim. As a result of these three trades:
|
a. |
trading volume is 20
contracts and open interest rate is 20 contracts |
|
b. |
trading volume is 30
contracts and open interest rate is 15 contracts |
|
c. |
trading volume is 40
contracts and open interest rate is 10 contracts |
|
d. |
trading volume is 40
contracts and open interest rate is 20 contracts |
|
e. |
None of these answers are
correct. |
ANS:
C
DIF: Moderate
REF: 4.5
TOP: Exchange Trading of a Futures
Contract
MSC: Applied
13. You
manufacture silver jewelry. To hedge some of your risks, you can:
|
a. |
go long silver futures to
hedge input price risk |
|
b. |
go short silver futures to
hedge input price risk |
|
c. |
go long silver futures to
hedge output price risk |
|
d. |
do nothing with silver
futures |
|
e. |
do nothing as silver
futures do not trade |
ANS: A
DIF:
Easy
REF: 4.6
TOP: Hedging with Forwards and
Futures
MSC: Applied
14. Golddiggers,
Inc., mines gold and sells refined, pure gold in the world market. To hedge
some of its price risk, the company can:
|
a. |
short gold futures to hedge
input risk |
|
b. |
long gold futures to hedge
output risk |
|
c. |
short gold futures to hedge
output risk |
|
d. |
long gold futures to hedge
input risk |
|
e. |
There’s no suitable
contract that Golddiggers can use for hedging purposes. |
ANS:
C
DIF:
Easy
REF: 4.6
TOP: Hedging with Forwards and
Futures
MSC: Applied
15. Suppose
you trade futures contracts on precious metals. Which of the following risks
are you are exposed to?
|
a. |
credit risk, legal risk,
liquidity risk, and market risk |
|
b. |
no credit risk; legal risk,
liquidity risk, and market risk |
|
c. |
no credit risk or legal
risk; liquidity risk and market risk |
|
d. |
no credit risk, legal risk,
or liquidity risk; market risk |
|
e. |
no credit risk, legal risk,
liquidity risk, or market risk |
ANS:
C
DIF: Moderate
REF: 4.6
TOP: Hedging with Forwards and Futures
MSC: Applied
CHAPTER 7: Financial Engineering and Swaps
MULTIPLE CHOICE
1. The
holder of the following security gives an option to the issuer:
|
a. |
a callable bond |
|
b. |
a convertible bond |
|
c. |
an employee stock option |
|
d. |
a stock |
|
e. |
a warrant |
ANS:
A
DIF:
Easy
REF: 7.2
TOP: The Build and Break
Approach MSC: Factual
2. The
holder of the following security gets an additional option embedded within the
bond:
|
a. |
a callable bond |
|
b. |
a convertible bond |
|
c. |
an employee stock option |
|
d. |
a stock |
|
e. |
a warrant |
ANS:
B
DIF:
Easy
REF: 7.2
TOP: The Build and Break
Approach MSC: Factual
3. Hybrids:
|
a. |
are bonds with repayment
pegged to the stock’s price |
|
b. |
are derivative securities
that combine swaps with options |
|
c. |
are derivative securities
that combine calls with puts |
|
d. |
are derivatives whose
payoffs are tied to exchange rates |
|
e. |
are combinations of options
and futures |
ANS:
A
DIF:
Easy
REF:
7.3
TOP: Financial Engineering
MSC: Factual
Your company is planning to buy euros in six months time. The
spot price is $1.25 per euro. Boldman Bankers Inc. (fictitious name) designs a
“fancy derivative” that provides protection against an appreciation in the
euro, but it also limits your benefits if the euro declines. After six months,
by the terms of this “range forward,” (1) if the spot exchange rate for the
euro is above $1.30, then you pay $1.30; (2) if the spot exchange rate for the
euro is below $1.20, then you pay $1.20; and (3) if the spot exchange rate lies
between this range, then you buy euros at the prevailing market price.
4. Your
cousin, who is studying derivatives at college, says “This is no big deal,” and
breaks down this range forward into basic building blocks. His breakdown is:
|
a. |
long zero-coupon bond with
a face value $1.20, long call with strike price $1.20, and short call with
strike price $1.30 |
|
b. |
long zero-coupon bond with
a face value $1.20, short call with strike price $1.20, and short call with
strike price $1.30 |
|
c. |
short zero-coupon bond with
a face value $1.20, short call with strike price $1.20, and long call with
strike price $1.30 |
|
d. |
short zero-coupon bond with
a face value $1.30, short call with strike price $1.20, and long call with
strike price $1.30 |
|
e. |
long zero-coupon bond with
a face value $1.30, short call with strike price $1.20, and short call with
strike price $1.30 |
ANS:
A
DIF: Moderate
REF: 7.3
TOP: Financial Engineering
MSC: Applied
5. Another
cousin, who is also studying derivatives at university, said your portfolio
must include a long spot position in euros, because you are planning to buy
euros. Her breakdown is:
|
a. |
long spot, short put with
strike price $1.30, and short call with strike price $1.20 |
|
b. |
short spot, long put with
strike price $1.30, and short call with strike price $1.20 |
|
c. |
long spot, long put with
strike price $1.20, and short call with strike price $1.30 |
|
d. |
short spot, long put with
strike price $1.20, and short call with strike price $1.30 |
|
e. |
long spot, long put with
strike price $1.30, and long call with strike price $1.20 |
ANS:
C
DIF: Moderate
REF: 7.3
TOP: Financial Engineering
MSC: Applied
6. The
following is NOT a feature of plain vanilla interest rate swap contracts:
|
a. |
interest rate risk |
|
b. |
counterparty risk |
|
c. |
early termination of the
swap with the consent of all counterparties |
|
d. |
existence of swap
facilitators |
|
e. |
the Swap Trading
Corporation (STC) overseeing all swap transactions |
ANS: E
DIF:
Easy
REF: 7.4
TOP: An Introduction to Swaps
MSC: Factual
7. A
typical commodity swap involves:
|
a. |
a payment of the difference
between two different commodities’ prices on the expiration date |
|
b. |
an exchange of a fixed
payment for the daily average of a commodity’s price over a time period |
|
c. |
an exchange of a fixed
payment for a floating payment that depends on one of the counterparty’s
fluctuating commodity need during the month |
|
d. |
payments in two different
currencies |
|
e. |
None of these answers are
correct. |
ANS:
B
DIF:
Easy
REF: 7.5
TOP: Applications and Uses of
Swaps MSC: Factual
8. The
following is NOT a characteristic feature of a plain vanilla interest rate
swap:
|
a. |
cash flows in the same
currency |
|
b. |
counterparty risk |
|
c. |
exchange of principal at
the beginning and at the end |
|
d. |
a net payment by one of the
parties |
|
e. |
notional principal |
ANS: C
DIF:
Easy
REF: 7.6
TOP: Types of Swaps
MSC: Factual
9. A
plain vanilla forex swap does NOT involve which of the following?
|
a. |
exchange of principal at
the beginning |
|
b. |
exchange back of principal
along with interest payments |
|
c. |
cash flows in different
currencies |
|
d. |
cash flows at intermediate
dates |
|
e. |
more than two
counterparties |
ANS:
D
DIF:
Easy
REF:
7.6
TOP: Types of Swaps
MSC: Factual
10. A
plain vanilla currency swap does NOT involve which of the following?
|
a. |
an exchange of equivalent
amounts in two different currencies on the start date |
|
b. |
a net payment by one of the
counterparties |
|
c. |
cash flows in different
currencies at intermediate dates |
|
d. |
exchange of interest
payments on these two currency loans on intermediate dates |
|
e. |
repayment of the principal
amounts on the ending date along with the final period’s interest payments |
ANS:
B
DIF:
Easy
REF:
7.6
TOP: Types of Swaps
MSC: Factual
Americana Bank has $200 million of excess funds and Britannia
Bank has £100 million of excess funds in pound sterling. The spot exchange
rate SA is
$2 per pound sterling. They enter into a currency swap today that has a tenor
of two months. The annual risk-free simple interest rates are i = 4 percent in
the United States and iE =
5 percent in the United Kingdom. Cash flows are exchanged at the end of each month.
11. The
currency swap begins today with:
|
a. |
Americana paying $200
million to Britannia and receiving £200 million in return |
|
b. |
Americana paying $200
million to Britannia and receiving £100 million in return |
|
c. |
Americana paying $100
million to Britannia and receiving £100 million in return |
|
d. |
currency swaps have
notional principal—no exchange of cash flows takes place today |
|
e. |
None of these answers are
correct. |
ANS:
B
DIF:
Easy
REF: 7.6
TOP: Types of Swaps
MSC: Applied
12. At
the end of one month:
|
a. |
Americana pays £0.4167
million to Britannia and receives $0.6667 million in return |
|
b. |
Americana pays £0.8333
million to Britannia and receives $0.3333 million in return |
|
c. |
Americana pays £0.4167
million to Britannia and receives $0.3333 million in return |
|
d. |
Americana pays £0.8333
million to Britannia and receives $0.6667 million in return |
|
e. |
None of these answers are
correct. |
ANS: A
DIF:
Easy
REF: 7.6
TOP: Types of Swaps
MSC: Applied
13. After
two months, the swap ends with the following transaction:
|
a. |
Americana pays £100 million
to Britannia and receives $200 million in return |
|
b. |
Americana pays £100.8333
million to Britannia and receives $201.3333 million in return |
|
c. |
Americana pays £100.4167
million to Britannia and receives $200.6667 million in return |
|
d. |
Americana pays £100.4167
million to Britannia and receives $201.3333 million in return |
|
e. |
None of these answers are
correct. |
ANS:
C
DIF:
Easy
REF:
7.6
TOP: Types of Swaps
MSC: Applied
14. Consider
a swap between Americana Auto Company (which wants to build an auto plant in
the United Kingdom) and Britannia Bus Corporation (which wants to build an auto
plant in the United States; both fictitious names):
·
The automakers enter into a swap with a three-year term on a
principal of $200 million.
·
The spot exchange rate SA is
$2 per pound. Americana raises 100 ´ 2 = $200 million and gives it to
Britannia, who, in turn, raises £100 million and gives it to Americana.
·
Americana pays Britannia at the coupon rate of 4 percent per
year on £100 million and Britannia pays Americana at the coupon rate of 5
percent per year on $200 million for three years.
Now assume that the companies make payments every six months:
the swap ends after six semiannual payments, and the principals are handed back
after three years.
Zero-Coupon Bond Prices in the United States (Domestic Country)
and the
United Kingdom (Foreign Country)
|
Time to Maturity (in
Years) |
US (Domestic)
Zero-Coupon Bond Prices (in Dollars) |
UK (Foreign or
European) Zero-Coupon Bond Prices (in Pounds Sterling) |
|
0.5 |
B(0.5) = $0.99 |
B(0.5)E = £0.98 |
|
1 |
B(1) = $0.97 |
B(1)E = £0.96 |
|
1.5 |
B(1.5) = $0.95 |
B(1.5)E = £0.93 |
|
2 |
B(2) = $0.93 |
B(2)E = £0.91 |
|
2.5 |
B(2.5) = $0.91 |
B(1.5)E = £0.88 |
|
3 |
B(3) = $0.88 |
B(3)E = £0.85 |
Using zero-coupon bond prices (maturing every six months) given
above, one can compute the dollar value of this foreign currency swap to
Americana as:
|
a. |
$8.96 |
|
b. |
$12.11 million |
|
c. |
$18.22 million |
|
d. |
$108.13 |
|
e. |
None of these answers are
correct. |
ANS:
B
DIF: Difficult
REF:
7.6
TOP: Types of Swaps
MSC: Applied
15. A
credit default swap (CDS) on a bond with physical delivery is:
|
a. |
a term insurance policy,
with a regular premium payment, that pays the face value of the bond if there
is a credit event |
|
b. |
a term insurance policy,
with a regular premium payment, that pays the value of the firm’s equity if
there is a credit event |
|
c. |
a term insurance policy,
with a one time up-front premium, that pays the face value of the bond if there
is a credit event |
|
d. |
a term insurance policy,
with a one time up-front premium, that pays the value of the firm’s equity if
there is a credit event |
|
e. |
None of these answers are
correct. |
ANS:
A
DIF: Easy
REF:
7.6
TOP: Types of Swaps
MSC: Factual
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