Financial Derivatives and Forward Contracts

<p>Market risk, resulting from changes in interest rates, exchange rates, and market prices. (D)</p> Signup and view all the answers

<p>To meet the growing demands of global trade and investment. (D)</p> Signup and view all the answers

<p>Mutual Funds (B)</p> Signup and view all the answers

<p>To eliminate the risk of price volatility for both buyers and sellers. (A)</p> Signup and view all the answers

<p>An increase in the interconnectedness of global financial markets and potential for systemic risks. (C)</p> Signup and view all the answers

<p>Dojima Rice Market (A)</p> Signup and view all the answers

<p>To provide an overview of the complex world of financial derivatives and their functions. (B)</p> Signup and view all the answers

<p>Livestock and Meat Products (A)</p> Signup and view all the answers

<p>Notional principal (C)</p> Signup and view all the answers

<p>1972 (D)</p> Signup and view all the answers

<p>More than $20 trillion (B)</p> Signup and view all the answers

<p>1982 (A)</p> Signup and view all the answers

<p>15% of total assets (C)</p> Signup and view all the answers

<p>Replacement-cost credit exposure (B)</p> Signup and view all the answers

<p>Philadelphia Stock Exchange (A)</p> Signup and view all the answers

<p>They all offer options on futures contracts. (A)</p> Signup and view all the answers

<p>By allowing risks to be isolated and sold to those willing to accept them (B)</p> Signup and view all the answers

<p>All of the above (D)</p> Signup and view all the answers

<p>Futures markets arose first, followed later by the development of options markets. (C)</p> Signup and view all the answers

<p>Because financial derivatives provide a useful tool for managing and controlling financial risks (D)</p> Signup and view all the answers

<p>300% (B)</p> Signup and view all the answers

<p>Forward contracts are customized and traded over the counter. (D)</p> Signup and view all the answers

<p>Banks (A)</p> Signup and view all the answers

<p>To hedge against fluctuations in the exchange rate of the dollar (A)</p> Signup and view all the answers

<p>Open Position (A)</p> Signup and view all the answers

<p>Counterparty risk (C)</p> Signup and view all the answers

<p>Agreeing to buy an asset at a certain future date (D)</p> Signup and view all the answers

<p>Because they are based on underlying assets that are themselves derivatives. (D)</p> Signup and view all the answers

<p>The risk that the other party to the contract will default on their obligations. (B)</p> Signup and view all the answers

<p>To allow owners of securities to raise short-term capital while retaining ownership. (C)</p> Signup and view all the answers

<p>Short squeeze (A)</p> Signup and view all the answers

<p>The risk-free rate of interest (C)</p> Signup and view all the answers

<p>Fluctuating interest rates for borrowing and lending (B)</p> Signup and view all the answers

<p>The repo rate is usually higher than the Treasury bill rate. (D)</p> Signup and view all the answers

<p>Non-dividend paying equity shares (D)</p> Signup and view all the answers

<p>A forward contract on an asset providing no income (A)</p> Signup and view all the answers

<p>The delivery price of the underlying asset at the contract's maturity (B)</p> Signup and view all the answers

<p>When the price of the stock is below ` 790 (A)</p> Signup and view all the answers

<p>Options carry a limited risk for the buyer, unlike forward or futures contracts. (A)</p> Signup and view all the answers

<p>Their ease of trading and customization. (A)</p> Signup and view all the answers

<p>Options offer the holder the right but not the obligation to execute the contract. (D)</p> Signup and view all the answers

<p>To make debt securities more appealing to a wider range of investors. (C)</p> Signup and view all the answers

<p>It increases the number of outstanding shares of the issuing company. (B)</p> Signup and view all the answers

<p>The additional features or benefits attached to warrants. (D)</p> Signup and view all the answers

<p>They guarantee a minimum return to the holder. (C)</p> Signup and view all the answers

Contracts whose value is derived from underlying assets or rates.

Includes forward contracts, futures, options, swaps, and warrants.

Agreements to buy or sell an asset at a future date for a price agreed upon today.

Standardized forward contracts traded on exchanges with stipulated terms.

Derivatives help manage financial risks like interest rate, exchange rate, and market price fluctuations.

The rise in international trade and globalization increased the demand for derivatives.

Forward contracts used primarily to manage exposure to price fluctuations.

Non-transferable specific delivery contracts in forward trading.

A market where financial instruments are traded directly between parties, not on exchanges.

The risk that one party in a transaction may default on their obligations.

The position of agreeing to buy an asset in a forward contract.

The position of agreeing to sell an asset in a forward contract.

A status where a party has no obligation offsetting the forward contract.

A party that takes a closed position in a contract to minimize risk.

Each forward contract is unique in size, date, and asset type.

A put option is exercised when the stock price falls below a specific level, in this case, `790.

Options offer limited loss and unlimited profit potential for buyers.

The first organized exchange for stock options, started in April 1973.

Options traded outside organized exchanges are called OTC options.

OTC options are gaining popularity due to their higher liquidity.

Option holders have the right but not the obligation to exercise their options.

Warrants allow holders to buy shares at a predetermined price within a specific time.

Exercising warrants increases share quantity, potentially diluting existing shareholder equity.

The first recognized futures market established in 1730 in Osaka, Japan.

Forward trading, existing since the 12th century, laid the groundwork for futures markets.

A major futures and options exchange formed in 1898 for trading commodities.

A division of CME established in 1972 for foreign currency futures trading.

Contracts giving the right, but not the obligation, to buy/sell futures contracts.

The premier exchange for trading foreign exchange options.

Key aspect of futures markets that facilitates organized trading.

Originally to cover price risk for future transactions.

The reduction of government rules governing financial institutions, allowing more competition.

The total value used to calculate payments for derivatives, not transferred between parties.

The potential financial loss due to a counterparty defaulting before contract settlement.

The cost of replacing a derivative contract at current market value if default occurs.

Derivatives improve market efficiency by isolating and reallocating risks to those willing to bear them.

Breaking down risks into manageable parts that can be independently managed.

The value of the derivatives market, regularly exceeding $20 trillion.

For major US banks, average derivative credit exposure is 15% of total assets.

A situation where an investor has to close a short position immediately due to lack of shares to borrow.

The interest rate at which the owner of securities sells and agrees to repurchase them later.

An arrangement to sell securities and buy them back at a higher price later.

The agreed price for an asset to be purchased on a future date.

The current price of the underlying asset.

An agreement to buy an asset at a future date for a price agreed upon today, focusing on gaining value.

Assets that do not generate income, like non-dividend paying stocks.

Conditions for determining forward prices: no transaction costs, same tax rate, borrowing at risk-free rates.