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3 - Unit 03 Financial Instruments Financial Markets and...

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Unit 03 - Financial Instruments, Financial Markets, and Financial Institutions 3-1 Unit 3 Financial Instruments, Financial Markets, and Financial Institutions Conceptual Problem 1 As the end of the month approaches, you realize that you probably will not be able to pay the next month’s rent. Describe both an informal and a formal financial instrument that you might use to solve your dilemma. Conceptual Problem 2 The Chicago Mercantile Exchange has announced the introduction of a financial instrument that is based on rainfall in the state of Illinois. The standard agreement states that for each inch of rain over and above the average rainfall for a particular month, the seller will pay the buyer $1,000. Who could benefit from buying such a contract? Who could benefit from selling it? Conceptual Problem 3 Consider an annuity that makes monthly payments for as long as someone lives. Describe what happens to the purchase price of the annuity as (1) the age of the purchaser goes up, (2) the size of the monthly payment rises, and (3) the health of the purchaser improves.
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