Futures Contract and Bank

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Multiple choice type questions for Financial Instruments and Markets As requested, below are questions from my "data base" of multiple choice type questions. I do not expect to be able to put the answers on the web before your final exam. I do not have a "data base" of the answers to these questions. Some of these questions are on material that was on the first exam and other questions are on material that I covered last year but did not cover this year (such as margin, selling stock short). But since some students requested this "data base", it is here, if you find it useful.

Multiple Choice
1. Multiple Choice (____ points; each multiple choice question is worth ___ points)
Circle the correct answer. If you change your answer, indicate the new choice to the left of the question and circle it. 1.Federal Funds are typically:
a.Loan from a dealer that is collateralized by Treasury securities. b.Federal Reserve assets
c.Loans from the Federal Reserve to banks
d.Loans from banks to their “best” commercial customers e.Overnight loans settled in immediately available funds

2.Eurodollars are best associated with:
a.The use of dollar currency ($100 bills) in less developed countries in Europe b.The financing of Europeans by domestic US banks
c. The transfer of ownership of a domestic US bank deposit from a US company to a foreign based owner d.The development of a common currency in Europe.

3.A hedger in the futures market hedges to prevent a loss in a business transaction, but also gives up: a.A sizable fee to the exchange
b.The loss on the futures contract
c.The opportunity to gain from a favorable turn in prices of the item d.The potential gain on the futures contract.

4.All the following are risks associated with futures contracts except: not good question a.Margin risk
b.Basis risk
c.Price risk
d.Manipulation risk

5.What action would the holder of a maturing (expiring) call option take with an option which cost $300, had a strike price of $50 and the price of the shares was $52, if the option expires today: a.Let the option expire unexercised

b.Exercise the option
c.Request that the $300 be returned
d.Buy more call options with a strike of $53.

6.An S&L with a high negative GAP position for the next 180 days would most likely take which action to hedge its interest rate risk: a.Buy futures contracts
b.Sell futures contracts
c.Sell put options on futures contracts
d.Buy put options on futures contracts
e.Both b and d above

7.The value of any option varies directly with:
a.The price variance of the underlying commodity
b.The time to expiration
c.The level of interest rates
d.The expected dividend payments on the underlying stock
e.Both a and b above

8.A farmer growing wheat is ______ wheat and may hedge price risk by _______ wheat futures: a.Short; long
b.Buying; selling
c.Selling; buying
d.Long; selling.

9.First National Bank recently purchased a T-bill futures contract to hedge a risk position at the bank. If the price of the futures contract is increasing, a.First National is “gaining”
b.First National is “losing” on futures.
c.First National is neither “gaining nor losing”
d.None of the above.

10.Daily changes in futures prices means that one party (hedger or speculator) has gained; another lost money on the contract. How are the exchanges able to keep the “daily” loser in the contract and prevent default: a.Threat of bankruptcy

b.Daily margin calls if needed
c.Loans
d.Guarantees by third parties

11.A five-member federal regulatory commission, which serves as the primary regulator of the futures market is the: a.Chicago Mercantile Exchange
b.Federal Commodity Futures Commission
c.Commodity Futures Trading Commission
d.Chicago Board of Trade

12.A bank that hedges its future funding costs in the T-bill futures market is: a.Hedging perfectly
b.Accepting some basis risk...
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