6. Which one of the following statements is incorrect regarding the margining of exchange-trade futures contracts? (a) If an investor fails to deposit variation margin in a timely manner, the positions may b liquidated by the carrying broker. (b) Initial margin is the amount of money that must be deposited when a futures contract opened. (c) A margin call will be issued if the investor's margin account balance drops below the mainte nance level. (d) A margin call will be issued only if the investor's margin account becomes negative 2

6. Which one of the following statements is incorrect regarding the margining of exchange-trade futures contracts? (a) If an investor fails to deposit variation margin in a timely manner, the positions may b liquidated by the carrying broker. (b) Initial margin is the amount of money that must be deposited when a futures contract opened. (c) A margin call will be issued if the investor's margin account balance drops below the mainte nance level. (d) A margin call will be issued only if the investor's margin account becomes negative 2

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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5. Which of the following is incorrect regarding establishing central counterparties (CCPs)? (a) CCPs allow netting of contracts. (b) CCPs can not be applied to OTC trades. (c) CCPs can create more transparency in trading. (d) CCPs mitigate counterparty risk in the financial system. 6. Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? (a) If an investor fails to deposit variation margin in a timely manner, the positions may be liquidated by the carrying broker. (b) Initial margin is the amount of money that must be deposited when a futures contract is opened. (c) A margin call will be issued if the investor's margin account balance drops below the mainte- nance level. (d) A margin call will be issued only if the investor's margin account becomes negative
Which of the following statements about interest rate swaps is/are true? I - The notional principals are exchanged by the counterparties at the end of an interest rate swap's life II - The differences in how credit risk is priced gives rise to comparative advantage in borrowing through swaps. III - When an intermediary is involved in a swap, the intermediary assumes no counterparty risk for either end of the transaction IV - It is possible for both counterparties to benefit from a swap even if one counterparty has the absolute advantage in all types of borrowing O a. I, II, III, and IV O b. II and IV O c. II, III, and IV O d. I, II, and IV Oe. II and III
In the context of financial derivatives, what is a futures contract? A) An agreement to exchange assets at a predetermined price and date. B) A contract that grants the holder the right, but not the obligation, to buy or sell an asset. C) A contract to buy or sell a specific quantity of an asset at a future date at a price specified today. D) A contract that provides regular interest payments and returns the principal at maturity.
Q9. How would you hedge the risk of a price rise using a derivative? Group of answer choices 1. You would take out a spot contract to sell the underlying. 2. You would take out a forward contract to sell the underlying. 3. You would take out a spot contract to buy the underlying. 4. You would take out a forward contract to buy the underlying.
Exchanges are different than Over the counter markets because on exchanges A. Futures contracts are standardized B. All of the Above C. Futures require margin D. Futures are traded on an exchanges that clear
All of the statements below are true of futures contractsexcept that futures contracts: O a. result in predictable gross profits. O b. result in predictable cash flows. O c. eliminate downside risk and upside potential. O d. eliminate downside risk while allowing for upside potential.
Not all credit risk can be removed with a credit default swap because counterparty risk still exists interest rate risk still exists swaps are not traded on an exchange all of the above
Merck is an example of a company who decided to mitigate the adverse impact of market fluctuations by entering into hedging agreements using: B. Interest rate swaps C. Both A & B A. Currency options D. Neither A or B
The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is TRUE? a. The hedger’s position stays the same. b. The hedger’s position improves. c. The hedger’s position sometimes worsens and sometimes improves. d. The hedger’s position worsens.
What is the correct strategy when the asset backing the futures contract differs from the asset whose price is being hedged? O Short hedge O Long hedge O Perfect hedge O Tailing the hedge O Cross hedge
Organized exchanges offer important advantages like (a) mitigating credit risk and (b) providing liquidity. But they have the following market imperfections: 1. Open interest in futures contracts declines for longer maturities; so, for liquidity reasons, you may be unable to hedge longer deliveries using longer maturity futures contracts. Explain briefly how you would overcome these market imperfections.

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