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FOFM - Tutorial 11

1 .Derivatives are financial instruments that:


A. payment is made when the contract is
A. present high levels of risk and should only be created.
used by the wealthy.
B. no payment is made until the settlement date.
B. when used correctly can actually lower risk.
C. the short position agrees to purchase the
C. should only be used by people seeking high
underlying asset.
returns from low risk.
D. the risk is eliminated for both parties.
D. represent the outright purchase of a bond.
9. The key difference between a forward and a
2. The value of a derivative is determined by:
futures contract is:
A. RBI
A. a forward contract is customized where a
B. SEBI regulation.
futures contract is not.
C. the value of the underlying asset.
B. a forward contract is bought and sold on
D. the risk-free rate.
organized exchanges.
C. only the forward contracts have settlement
3. In a derivative transaction:
dates.
A. the dollar amount of the transaction increases
D. the amount of time involved.
as the contract date approaches.
B. the risk is less than if actually purchasing the
10. The clearing corporation's main role in the
underlying asset.
futures market is to:
C. what one person gains is what the other
A. set the market price of the contract.
person loses.
B. act as the counterparty to both sides of the
D. there is always a futures contract.
transaction, thereby guaranteeing payment.
C. provide the underlying assets so the contracts
4. The purpose of derivatives is to:
can be created.
A. increase the risk so the return is larger.
D. all of the above.
B. eliminate risk for both parties in the
transaction.
11. A pension fund manager who plans on
C. postpone the risk for both parties in the
purchasing bonds in the future:
transaction.
A. wants to insure against the price of bonds
D. transfer the risk from one person to another.
falling.
B. can offset the risk of bond prices rising by
5. Forward contracts are:
selling a futures contract.
A. an agreement between more than two parties.
C. will take the long position in a futures contract.
B. contracts usually involving the exchange of a
D. will take the short position in a futures contract.
commodity or financial instrument.
C. always standardized.
12. A baker of bread has a long-term fixed-price
D. easily resold.
contract to supply bread. Which of the following
would NOT reduce her risk?
A. Taking the long position in wheat futures
6. The short position in a futures contract is the
contract
party that will:
B. Hedging this risk in the wheat futures market
A. deliver a commodity or financial instrument to
C. Finding a wheat farmer who will take the short
the buyer at a future date.
position in a wheat futures contract
B. suffer the loss.
D. Finding a wheat farmer who will take the long
C. accept the risk.
position in a wheat futures contract
D. benefit from increases in price of the
underlying asset.
13. A wheat farmer who must purchase his inputs
now but will sell his wheat at a market price at a
7. The long position in a futures contract is the
future date:
party that will:
A. faces a market risk that cannot be offset.
A. benefit from decreases in the price of the
B. is a good example of what the chapter refers to
underlying asset.
as a speculator.
B. agree to make delivery of a commodity or
C. would hedge by taking the short position in a
financial instrument at a future date.
wheat futures contract.
C. benefit from increases in the price of the
D. would hedge by taking the long position in a
underlying asset.
wheat futures contract.
D. accept the greater share of the risk.
8. With a futures contract:

14. Users of commodities are:

A. usually not participants in futures contracts.


B. speculators preferring to get the large returns
which result from large risk.
C. likely to take the short position in a futures
contract.
D. buyers of futures.
15. Speculators differ from hedgers in the sense
that:
A. speculators do not like risk.
B. hedgers seek to transfer risk.
C. speculators seek to transfer risk.
D. speculators are hedgers, there isn't any
difference.
16. One argument why farmers in poor countries
remain poor is:
A. they know very little about farming techniques
needed for the crop they are growing.
B. they are poor assessors of the risks they face.
C. risk taking is a deterrent to growth.
D. poor farmers in many countries lack access to
commodity futures markets.
17. Futures markets and derivatives contribute to
economic growth by:
A. decreasing speculation.
B. increasing the risk-taking capacity of the
economy.
C. deterring the transfer of risk.
D. forcing people to accept the risk their
decisions create.

18. The user of a commodity who is trying to


insure against the price of the commodity
rising would:
A. take the short position in a futures contract.
B. take the long position in a futures contract.
C. be better off speculating on price movements
and earning higher profits.
D. want to hedge by selling a futures contract.
19. An individual who neither uses nor produces a
commodity but sells a futures contract for the
asset is:
A. speculating that the price of the commodity is
going to fall.
B. speculating that the price of the commodity is
going to increase.
C. hedging trying to transfer risk.
D. using arbitrage to earn profits without taking a
risk.
20. An individual who neither uses nor produces a
commodity but buys a futures contract for the
asset is:
A. speculating that the price of the commodity is
going to fall.
B. speculating that the price of the commodity is
going to increase.
C. is using arbitrage to earn profits without taking
a risk.
D. is hedging and transferring risk.