Liberty University BUSI 321 Test exam 3 complete solutions correct answers key

Liberty University BUSI 321 Test exam 3 complete solutions correct answers key

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Q1 ____ Trade futures contracts for their own account.

a. Commission brokers

b. Floor brokers

c. Commission traders

d. Floor traders

Q2 -  Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102­12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103­15. What is Baher's nominal profit? The par value of the futures contract is $100,000.

a. $1,030.00; profit

b. $1,030.00; loss

c. $1,093.75; profit

d. $1,093.75; loss

e. none of the above

Question 3 The prices of stock index futures

Q4 ____ risk is the risk of losses as a result of inadequate management or controls.

Q5 Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

A) liquidates its stocks whenever it expects a market downturn.

B) maintains a constant buy position in stock index futures.

C) maintains a constant sell position in stock index futures.

D) none of the above

Q6 Marcia buys an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Marcia's position in the S&P 500 futures contract is ____ percent.

a. - 20

b. - 10

c. 25

d. 20

e. 0

Q7 _________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions.

Answer - Hedgers , Arbitrageurs

Q8 Financial futures contracts on U.S. securities are ____ by non­U.S. financial institutions.

a. not allowed to be traded

b. are rarely desired

c. are commonly traded

d. A and B

Q9 Put options are typically used to hedge

a. when portfolio managers are mainly concerned with a permanent decline in a stock's value.

b. when portfolio managers are mainly concerned with a permanent increase in a stock's value. . c. when portfolio managers are mainly concerned with a temporary decline in a stock's value.

d. when portfolio managers are mainly concerned with a temporary increase in a stock's value.

Q10 If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due.

a. exercise the option; greater

b. exercise the option; less

c. let the option expire; greater

d. let the option expire; less

e. A and D

Q11 The ____ is the most important exchange for trading options.

a. New York Stock Exchange (NYSE)

b. Chicago Board of Options Exchange (CBOE)

c. Boston Options Exchange

d. American Stock Exchange

Q12 Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

a. put; strengthen

b. put; weaken

c. call; strengthen

d. call; weaken

e. A and D

Q13 Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium.

a. higher; higher; higher

 b. higher; higher; lower

c. higher; lower; higher

d. lower; lower; higher

e. none of the above

Q14 A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.

a. call option

b. put option

c. sale of a futures contract

d. purchase of a futures contract

Q15 The ____, the higher the call option premium, other things being equal.

a. lower the existing price of the security relative to the exercise price

b. lower the variability of the security's market price

c. longer the maturity of the option

d. A and B

Q16 A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29, and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?

a. $26 (30-4 =26)

b. $34

c. $28

d. $29

e. $32

Q17 Which of the following can normally be found in quotations for stock options provided by the financial media?

a.     exercise price, expiration date, and implied volatility

b.     exercise price, expiration date, and most recently quoted premium

c.     expiration date, implied volatility, and trading volume

d.     expiration date, most recently quoted premium, and implied volatility

Q18 A firm is involved in an agreement in which it makes payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has

a. purchased an interest rate cap.

b. sold an interest rate cap.

c. purchased an interest rate floor.

d. sold an interest rate floor.

Q19 A firm is involved in an agreement in which it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has

a. purchased an interest rate cap.

b. sold an interest rate cap.

c. purchased an interest rate floor.

d. sold an interest rate floor.

Q20 Savings institutions participate in the swap market primarily to

a. serve as an intermediary by matching up two parties in a swap.

b. serve as a dealer by taking the counterparty position in a swap.

c. reduce interest rate risk.

d. none of the above

21 A(n) ____ swap allows the party making fixed ­rate payments to terminate the swap prior to maturity.

a. forward

b. extendable

c. callable

d. putable

ANS: C

Q22 Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.

a. caps

b. floors

c. collars

d. all of the above

Q23 If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterpar- ty is likely adversely affected by ____ interest rates.

 a. increase; increasing

b. increase; declining

c. decrease; declining

d. decrease; increasing

e. none of the above

Q24 The most likely users of plain vanilla swaps would be

A) commercial banks that focus on short-term consumer loans.

B) savings institutions.

C) manufacturing companies.

D) municipal governments.

Q25 Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate­sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.

a. assets; liabilities; increasing

b. liabilities; assets; decreasing

c. liabilities; assets; increasing

d. none of the above

Q26 Which of the following is not a reason for financial institutions to engage in interest rate swaps?

a. to reduce interest rate risk

b. to act as an intermediary

c. to act as a dealer in swaps

d. all of the above are reasons for financial institutions to engage in swaps

Q27 Currency futures contracts differ from forward contracts in that

A. futures contracts are between the individual hedger and speculator.

B. futures contracts are personalized, unique contracts; forwards are standardized.

C. futures contracts are marked to market daily with changes in value added or subtracted from buyer and seller.

D. forward contracts always require a margin deposit.

Q29 Which of the following is not a method of forecasting exchange rate volatility?

a.

using the absolute forecast error as a percentage of the realized value to improve your forecast.

b.

using the volatility of historical exchange rate movements as a forecast for the future.

c.

using a time series of volatility patterns in previous periods.

d.

deriving the exchange rate's implied standard deviation from the currency option pricing model.

Q30 If the spot rate of the British pound is $2, and the 180­day forward rate is $2.05, what is the annualized premium or discount?

A) 2.5 percent discount

B) 2.5 percent premium

C) 10 percent premium

D) 5 percent discount

E) 5 percent premium

Q31 The devaluation of a country’s currency: we expect that

a. Income will rise because the devaluation stimulates aggregate demand.

b. Income will rise because the devaluation stimulates aggregate supply.

c. Income will fall because the devaluation reduces aggregate demand.

d. Income will fall because the devaluation reduces aggregate supply.

e. There will be no change in income because income is earned from production, not from trade.

Q32 Which of the following statements is incorrect?

a. Banks have expanded their business across services over time.

b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.

c. The banking industry has become less concentrated in recent years.

d. All of the statements above are correct.

Q33 Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S. inflation, this forced ____ pressure on the value of the euro.

a. becomes much higher; upward

b. becomes much higher; downward

c. becomes much less; upward

d. becomes much less; downward

e. B and C

Q34 ____ forecasting involves the use of historical exchange rate data to predict future values.

a. Technical

b. Fundamental

c. Market-based

d. Mixed

Q35 When a bank obtains funds through ____, households are not a common provider of the funds.

A) retail CD

B) NOW account

C) repurchase agreement

D) money market deposit account

Q36 The primary credit lending rate is determined by

A) the Federal Reserve.

B) Congress.

C) the Treasury.

D) the President of the United States.

Q37 Transaction deposits do not include

A) demand deposits.

B) NCDs.

C) NOW accounts.

D) All of these are transaction deposits.

Q38 Money market deposit accounts (MMDAs)

A) require a maturity of 6 months or longer.

B) allow a limited number of checks to be written against the account.

C) pay a higher interest rate than CDs.

D) none of these.

Q39 Banks sometimes prefer to minimize their amount of capital since

A) interest payments must be paid by the bank on all capital that is held.

B) they try to avoid diluting ownership of the bank

C) both of these.

D) neither of these

Q40 The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity.

a. substantially above

b. substantially below

c. close to

d. none of the above; the rate is much higher than the Treasury yield in some periods, and much lower than the Treasury yield in other periods

Q41 Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?

A) working capital loan

B) direct lease loan

C) term loan

D) informal line of credit

Q42 The interest rate banks charge their most creditworthy customers is known as the

Q43 A bank's net interest margin will likely decline if it has a large amount of

A) rate-sensitive assets and no rate-sensitive liabilities.

B) rate-sensitive liabilities and no rate-sensitive assets.

C) loans to technology firms.

D) real estate loans.

Q44 Which of the following is not a likely method used by a bank to reduce interest rate risk?

a. maturity matching

b. using fixed-rate loans

c. using interest rate futures contracts

d. using interest rate caps

Q45 If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate­____ assets.

Q46 The risk of a loss due to closing out a transaction is referred to as ____ risk.

Q47 Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed­rate loans in British pounds. Which of the following would reduce the bank's profit margin?

A) the A$ appreciates against the pound

B) the A$ is stable against the pound

C) the A$ depreciates against the pound

D) the British interest rates increase

Q48 Banks can reduce their required capital levels by

A) increasing their loans.

B) reducing their loans.

C) increasing their dividends.

D) obtaining more deposits.

Q49 Banks can resolve cash deficiencies by

A) creating additional liabilities.

B) selling assets.

C) buying back common stock.

D) increasing dividend payouts.

E) creating additional liabilities or selling assets.

Q50 If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid).