Answer Options:
a. True
b. False
Answer:
a. True
Question: An investor who “writes” a call option against stock held in his or her portfolio is selling a(n) a. Straddle option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option.
Answer:
e. Covered option.
Question: Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.
Answer Options:
a. True
b. False
Answer:
a. True
Question: An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n) a. Call option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option.
Answer:
b. Put option.
Question: You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
Answer Options:
a. A money market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. A futures market transaction.
e. An over-the-counter market transaction.
Answer:
c. A secondary market transaction.
Question: Trades on the NYSE are generally completed by having a brokerage firm acting as a “dealer” buy securities and adding them to its inventory or selling from its inventory. The NASDAQ, on the other hand, operates as an auction market, where buyers offer to buy, and sellers to sell, and the price is negotiated on the floor of the exchange.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates? a. Buying inverse floaters. b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates. c. Purchase principal only (PO) strips that decline in value whenever interest rates rise. d. Enter into a short hedge where the bank agrees to sell interest rate futures. e. Sell some of the bank’s floating-rate loans and use the proceeds to make fixed-rate loans.
Answer:
d. Enter into a short hedge where the bank agrees to sell interest rate futures.
Question: One objective of risk management can be to reduce the volatility of a firm’s cash flows. a. True b. False
Answer:
a. True
Question: A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n) a. Straddle option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option.
Answer:
c. Out-of-the-money option.
Question: Which of the following statements is most CORRECT? a. One advantage of forward contracts is that they are default free. b. Futures contracts generally trade on an organized exchange and are marked to market daily. c. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts. d. Forward contracts are generally standardized instruments, whereas futures contracts are generally tailor-made for the 2 parties of the contract. e. Essentially there are no differences between forward and futures contracts, except that forward contracts are used only for financial assets while futures contracts are used only for commodities.
Answer:
b. Futures contracts generally trade on an organized exchange and are marked to market daily.
Question: Which of the following statements is CORRECT? a. Put options give investors the right to buy a stock at a certain exercise price before a specified date. b. Call options give investors the right to sell a stock at a certain exercise price before a specified date. c. Options typically sell for less than their exercise value. d. LEAPS are very short-term options that have begun trading on the exchanges in recent years. e. Option holders are not entitled to receive dividends unless they choose to exercise their option.
Answer:
e. Option holders are not entitled to receive dividends unless they choose to exercise their option.
Question: Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net cash outflows. a. True b. False
Answer:
b. False
Question: Which of the following statements regarding factors that affect call option prices is CORRECT? a. The longer the time until the call option expires the smaller its value and the smaller its premium. b. An option on an extremely volatile stock is worth less than one on a very stable stock. c. The price of a call option increases as the risk-free rate increases. d. Two call options on the same stock will have the same value even if they have different strike prices. e. If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.
Answer:
c. The price of a call option increases as the risk-free rate increases.
Question: A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.
Answer Options:
a. True
b. False
Answer:
a. True
Question: If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.
b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.
c. Hedge funds have more in common with investment banks than with any other type of financial institution.
d. Hedge funds have more in common with commercial banks than with any other type of financial institution.
e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only “sophisticated investors” (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary “due diligence” on their own rather than have it done by the SEC or some other regulator.
Answer:
e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only “sophisticated investors” (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary “due diligence” on their own rather than have it done by the SEC or some other regulator.