Chapters 20, 22 & 24 - CHAPTER 20 AN INTRODUCTION...

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CHAPTER 20 AN INTRODUCTION TO DERIVATIVE MARKETS AND SECURITIES TRUE/FALSE QUESTIONS (t) 1 A cash or spot contract is an agreement for the immediate delivery of an asset such as the purchase of stock on the NYSE. (t) 2 Forward and future contracts, as well as options, are types of derivative securities. (f) 3 All features of a forward contract are standardized, except for price and number of contracts. (t) 4 Forward contracts are traded over-the-counter and are generally not standardized. (t) 5 The forward market has low liquidity relative to the futures market. (f) 6 A futures contract is an agreement between a trader and the clearinghouse of the exchange for delivery of an asset in the future. (t) 7 A primary function of futures markets is to allow investors to transfer risk. (f) 8 The futures market is a dealer market where all the details of the transactions are negotiated. (f) 9 Futures contracts are slower to absorb new information than forward contracts. (f) 10 The initial value of a future contract is the price agreed upon in the contract. (t) 11 A futures contract eliminates uncertainty about the future spot price that an individual can expect to pay for an asset at the time of delivery. (f) 12 Investment costs are generally higher in the derivative markets than in the corresponding cash markets. (f) 13 An option buyer must exercise the option on or before the expiration date. (t) 14 The minimum value of an option is zero. (f) 15 An option to sell an asset is referred to as a call, whereas an option to buy an asset is called a put. (t) 16 If an investor wants to acquire the right to buy or sell an asset, but not the obligation to do it, the best instrument is an option rather than a futures contract.
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(t) 17 Investors buy call options because they expect the price of the underlying stock to increase before the expiration of the option. (t) 18 A call option is in the money if the current market price is above the strike price. (f) 19 A put option is in the money if the current market price is above the strike price. (t) 20 The price at which the stock can be acquired or sold is the exercise price. (t) 21 The minimum amount that must be maintained in an account is called the maintenance margin. MULTIPLE CHOICE QUESTIONS (d) 1 Which of the following statements is false ? a) Derivatives help shift risk from risk-adverse investors to risk-takers. b) Derivatives assist in forming cash prices. c) Derivatives provide additional information to the market. d) In many cases, the investment in derivatives (both commissions and required investment) is more than in the cash market. e) None of the above (that is, all are reasons) (e) 2 Derivative instruments exist because a) They help shift risk from risk-averse investors to risk-takers. b) They help in forming prices.
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