Reference no: EM13833921

Forward Contracts Questions

1.  Which of the following is most accurate regarding derivatives?

A. Derivative values are based on the value of another security, index, or rate.

B. Exchange-traded derivatives are created and traded by dealers in a market with no central location.

C. Derivatives have no default risk.

2. Which of the following is a common criticism of derivatives?

A. Derivatives are likened to gambling.

B.Derivatives are too illiquid.

C.Fees for derivatives transactions are relatively high.

3.  One reason that criticism has been leveled at derivatives and derivatives markets is that:

A. They are complex instruments and sometimes hard to understand.

B.Derivatives have too much default risk.

C.Derivatives expire.

4.  Which of the following is most likely an exchange-traded derivative?

A. Equity index futures contract.

B. Bond option.

C. Currency forward contract.

5. A derivative security:

A. Is like a callable bond.

B.Is one that is based on the value of another security?

C.Has a value dependent on the shape of the yield curve.

6.  A derivative security:

A. Has no default risk.

B. Has a value based on stock prices.

C. Has a value based on another security or index.

7.  Which of the following statements regarding exchange-traded derivatives is NOT correct? Exchange-traded derivatives:

A. Often trade in a physical location.

B. Are standardized contracts.

C. Are illiquid.

8. Over-the- counter derivatives:

A. Have good liquidity in the over-the-counter (OTC) market.

B. Are backed by the OTC Clearinghouse.

C. Are customized contracts.

9.  All of the following are benefits of derivatives markets EXCEPT:

A. Transactions costs are usually smaller in derivatives markets, than for similar trades in the underlying asset.

B. Derivatives markets help keep interest rates down.

C. Derivatives allow the shifting of risk to those who can most efficiently bear it.

10. A financial instrument that has payoffs based on the price of an underlying physical or financial asset is a(n):

A. Option.

B.Derivative security.

C.Future.

11. Financial derivatives contribute to market completeness by allowing traders to do all of the following EXCEPT:

A. Narrow the amount of trading opportunities to a more manageable range.

B. Engage in high risk speculation.

C. Increase market efficiency through the use of arbitrage.

12. Derivatives are often criticized by investors with limited knowledge of complex financial securities. A common criticism of derivatives is that they:

A. Increase investor transactions costs.

B. Shift risk among market participants.

C. Can be likened to gambling.

13. The process of arbitrage does all of the following EXCEPT:

A. Promote pricing efficiency.

B. Produce riskless profits.

C. Insure that risk-adjusted expected returns are equal.

14. Any rational quoted price for a financial instrument should:

A. Provide an opportunity for investors to make a profit.

B. Provide no opportunity for arbitrage.

C. Be low enough for most investors to afford.

15. Which of the following statements about arbitrage opportunities is CORRECT?

A. Engaging in arbitrage requires a large amount of capital for the investment.

B. When an opportunity exists to profit from arbitrage, it usually lasts for several trading days.

C. Pricing errors in securities are instantaneously corrected by the first arbitrageur to recognize them.

16. Which of the following is the best interpretation of the no-arbitrage principle?

A. There is no way you can find an opportunity to make a profit.

B. There is no free money.

C. The information flow is quick in the financial market.

17. Which of the following statements about arbitrage is NOT correct

A. No investment is required when engaging in arbitrage.

B. Arbitrage can cause markets to be less efficient.

C. If an arbitrage opportunity exists, making a profit without risk is possible.

18. When calculating the settlement payment on a long position in a London Interbank Offered Rate (LIBOR)-based forward rate agreement, the denominator is best described as:

A. A discount factor based on LIBOR at settlement.

B. A discount factor based on the contract LIBOR rate.

C. The interest differential between a loan made at the contract rate and one made at the market rate at contract expiration.

19. The party to a forward contract that is obligated to purchase the asset is called the:

A. Short.

B. Receiver.

C. Long.

20. The short in a forward rate agreement:

A. Profits if LIBOR decreases.

B. Faces default risk.

C. Profits if London Interbank Offered Rate (LIBOR) increases.

21. Which of the following statements regarding forward contract dealers is NOT correct?

A. Dealers are compensated through up-front payments by the parties to forward contracts.

B. Forward contract dealers are often banks.

C. Dealers offer long and short forward contracts at different prices.

22. Which of the following statements regarding forward contracts is NOT correct?

A. End users of forwards most often have a business exposure to price risk from the asset covered by the contract.

B. Dealers will enter into forward contracts with other dealers.

C. Dealers make the majority of their profits by anticipating price moves in the underlying asset.

23. A forward contract that must be settled by a sale of an asset by one party to the other party is termed a:

A. Take-and-pay contract.

B.Physicals-only contract.

C.Deliverable forward contract.

24. Which of the following statements regarding futures and forward contracts is least accurate?

A. Futures contracts are highly standardized.

B. Forwards require no cash transactions until the delivery date, while futures require a margin deposit when the position is opened.

C. Both forward contracts and futures contracts trade on organized exchanges.

25. A forward rate agreement is equivalent to:

A. Either an interest rate put or an interest rate call.

B. A long interest rate call and a written interest rate put.

C. A swap.

26. An agreement that requires the parties to exchange a certain amount of Yen for a certain amount of Euros on a specific date in the future is called a(n):

A. Currency forward contract.

B. Exchange rate agreement.

C. Foreign exchange future.

27. Which of the following statements regarding forward rate agreements (FRAs) is least accurate?

A. If the floating rate at contract expiration is greater than the rate specified in the FRA, the long position will receive a payment.

B. Because the cash payment will happen in the future, the forward interest rate reflects the creditworthiness of the party which is long the FRA.

C. If the floating rate at contract expiration is less than the rate specified in the FRA, the right to lend at rates higher than market rates has a positive value.

28. Which of the following statements regarding Eurodollar time deposits is NOT correct?

A. USD denominated deposits in large banks in Tokyo are Eurodollar accounts.

B. U.S. dollar (USD) denominated deposits at large banks in London are Eurodollar accounts.

C. Euro denominated deposits at large banks in the U.S. are Eurodollar accounts.

29. The offer rate on U.S. dollar (USD) denominated loans between large banks in London is called:

A. London Interbank Offered Rate (LIBOR).

B. Eurobor.

C. The Exchequer rate.

30. Default risk in a forward contract:

A. Is the risk to either party that the other party will not fulfill their contractual obligation?

B. Only applies to the short, which must make the cash payment at settlement.

C. Only applies to the long, and is the probability that the short cannot acquire the asset for delivery.

31. A forward rate agreement (FRA):

A. Is settled by making a loan at the contract rate.

B. Can be used to hedge the interest rate exposure of a floating-rate loan.

C. Is risk-free when based on the Treasury bill rate.

32. An equity forward contract may be on all of the following assets EXCEPT a(n):

A. Bond.

B. Specific portfolio of five stocks.

C.Index.

33. Which of the following is NOT a method of terminating a forward contract prior to expiration?

A. Make an agreed upon payment to the counterparty.

B. Exercise a swaption.

C. Enter into an offsetting forward contract with the original counterparty.

34. The forward contract price of a coupon-bearing bond is typically quoted as:

A. A discount to the face value.

B. A yield to maturity at the settlement date.

C. The bond dollar-price plus accrued interest as of the settlement date.

35. All of the following are typically end users of forward contracts EXCEPT:

A. A forwards dealer.

B. Non-profit institutions.

C. Governmental units.

36. A currency forward contract:

A. Requires a payment at settlement based on London Interbank Offered Rate.

B. Can be a deliverable contract.

C. Is priced using the future interest rate on a foreign currency.

37. An investor can exit a forward position prior to contract expiration by all of the following methods EXCEPT:

A. Making a cash payment or accepting a cash payment by agreement with the original counterparty.

B. Entering into an offsetting contract with the original counterparty.

C. Exercising the early delivery option.

38. Eurodollar time deposits are:

A. Denominated in U.S. dollars (USD).

B. Priced at a discount.

C. Actively traded in the secondary market.

39. The price of a 90-day forward contract on a 90-day Treasury bill will be:

A. Above the current price of a 90-day T-bill.

B. Above the current price of a 180-day T-bill.

C. Either above or below the current price of a 180-day T-bill.

40. An FRA is:

A. The Futures Regulatory Administration.

B. A Forward Risk-free Asset.

C. A Forward Rate Agreement.

41. Some forward contracts are termed cash settlement contracts. This means:

A. At contract expiration, the long can buy the asset from the short or pay the difference between the market price of the asset and the contract price.

B. Either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered.

C. At settlement, the long purchases the asset from the short for cash.

42. Which of the following statements regarding Eurodollar time deposits is NOT correct?

A. Rates are quoted as an add-on yield.

B. They are available in Switzerland.

C. Sometimes the best rates are available in New York City.

43. The short in a forward contract:

A. Has the right to deliver the asset upon expiration of the contract.

B. Is obligated to deliver the asset upon expiration of the contract.

C. Is obligated to deliver the asset any time prior to expiration of the contract.