CFA课后习题：衍生

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Reading48■DerivativeMarketsandInstruments

438

PRACTICEPROBLEMS

1

Aderivativeisbestdescribedasafinancialinstrumentthatderivesitsperfor-

manceby:

A

B

C

passingthroughthereturnsoftheunderlying.

replicatingtheperformanceoftheunderlying.

transformingtheperformanceoftheunderlying.

2

3

Derivativesaresimilartoinsuranceinthatboth:

A

B

C

haveanindefinitelifespan.

allowforthetransferofriskfromonepartytoanother.

allowforthetransformationoftheunderlyingriskitself.

Abeneficialopportunitycreatedbythederivativesmarketistheabilityto:

A

B

C

adjustriskexposurestodesiredlevels.

generatereturnsproportionaltomovementsintheunderlying.

simultaneouslytakelongpositionsinmultiplehighlyliquidfixed-income

securities.

4

Comparedwithexchange-tradedderivatives,over-the-counterderivatives

wouldmostlikelybedescribedas:

A

B

C

standardized.

lesstransparent.

moretransparent.

5

6

7

Exchange-tradedderivativesare:

A

B

C

largelyunregulated.

tradedthroughaninformalnetwork.

guaranteedbyaclearinghouseagainstdefault.

eclearingandsettlementprocessofanexchange-tradedderivativesmarket:

A

B

C

providesacreditguarantee.

providestransparencyandflexibility.

takeslongerthanthatofmostsecuritiesexchanges.

Whichofthefollowingstatementsbestportraysthefullimplementationof

post-financial-crisisregulationsintheOTCderivativesmarket?

A

B

C

Transactionsarenolongerprivate.

Mosttransactionsneedtobereportedtoregulators.

Alltransactionsmustbeclearedthroughcentralclearingagencies.

8

9

Acharacteristicofforwardcommitmentsisthatthey:

A

B

C

providelinearpayoffs.

donotdependontheoutcomeorpayoffofanunderlyingasset.

provideonepartytherighttoengageinfuturetransactionsontermsagreed

oninadvance.

Incontrasttocontingentclaims,forwardcontracts:

A

havetheirpriceschosenbytheparticipants.

couldendindefaultbyeitherparty.

B

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PracticeProblems

439

C

canbeexercisedbyphysicalorcashdelivery.

10Whichofthefollowingstatementsbestdescribesthepayofffromaforward

contract?

A

B

C

ebuyerhasmoretogaingoinglongthanthesellerhastolosegoing

short.

ebuyerprofitsifthepriceoftheunderlyingatexpirationexceedsthe

forwardprice.

egainsfromowningtheunderlyingversusowningtheforwardcontract

areequivalent.

11Whichofthefollowingstatementsregardingthesettlementofforwardcon-

tractsiscorrect?

A

B

C

Contractsettlementbycashhasdifferenteconomiceffectsfromthoseofa

settlementbydelivery.

Non-deliverableforwardsandcontractsfordifferenceshavedistinctsettle-

mentprocedures.

Atcashsettlement,whenthelongpartyacquirestheassetinthemarket,it

effectivelypaystheforwardprice.

12Afuturescontractisbestdescribedasacontractthatis:

A

B

C

standardized.

subjecttocreditrisk.

markedtomarketthroughoutthetradingday.

13Whichofthefollowingstatementsexplainsacharacteristicoffuturesprice

limits?Pricelimits:

A

B

C

helptheclearinghousemanageitscreditexposure.

cantypicallybeexpandedintra-daybywillingtraders.

establishabandaroundthefinaltradeofthepreviousday.

14Whichofthefollowingstatementsdescribesanaspectofmarginaccountsfor

futures?

A

B

C

emaintenancemarginisalwayslessthantheinitialmargin.

einitialmarginrequiredistypicallyatleast10%ofthefuturesprice.

Amargincallrequiresadepositsufficienttoraisetheaccountbalancetothe

maintenancemargin.

15Whichofthefollowingfactorsissharedbyforwardsandfuturescontracts?

A

B

C

Timingofprofits

Flexiblesettlementarrangements

Nearlyequivalentprofitsbyexpiration

16Whichofthefollowingderivativesisclassifiedasacontingentclaim?

A

B

C

Futurescontracts

Interestrateswaps

Creditdefaultswaps

17Incontrasttocontingentclaims,forwardcommitmentsprovidethe:

A

B

C

righttobuyorselltheunderlyingassetinthefuture.

obligationtobuyorselltheunderlyingassetinthefuture.

promisetoprovidecreditprotectionintheeventofdefault.

18Whichofthefollowingderivativesprovidepayoffsthatarenon-linearlyrelated

tothepayoffsoftheunderlying?

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Reading48■DerivativeMarketsandInstruments

440

A

B

C

Options

Forwards

Interest-rateswaps

19Aninterestrateswapisaderivativecontractinwhich:

A

B

C

twopartiesagreetoexchangeaseriesofcashflows.

thecreditsellerprovidesprotectiontothecreditbuyer.

thebuyerhastherighttopurchasetheunderlyingfromtheseller.

20Forwardcommitmentssubjecttodefaultare:

A

B

C

forwardsandfutures.

futuresandinterestrateswaps.

interestrateswapsandforwards.

21Aswapis:

A

B

C

morelikeaforwardthanafuturescontract.

subjecttosimultaneousdefaultbybothparties.

basedonanexchangeoftwoseriesoffixedcashflows.

22Aplainvanillainterestrateswapisalsoknownas:

A

B

C

abasisswap.

afixed-for-floatingswap.

anovernightindexedswap.

23enotionalprincipalofaswapis:

A

B

C

notexchangedinthecaseofaninterestrateswap.

afixedamountwheneveritismatchedwithaloan.

equaltotheamountowedbyoneswappartytotheother.

24Whichofthefollowingderivativesisleastlikelytohaveavalueofzeroatinitia-

tionofthecontract?

A

B

C

Futures

Options

Forwards

25ebuyerofanoptionhasacontingentclaiminthesensethattheoption

creates:

A

B

C

aright.

anobligation.

alinearpayoffwithrespecttogainsandlossesoftheunderlying.

26Whichofthefollowingoptionsgrantstheholdertherighttopurchasethe

underlyingpriortoexpiration?

A

B

C

American-styleputoption

European-stylecalloption

American-stylecalloption

27Acreditderivativeisaderivativecontractinwhichthe:

A

B

C

clearinghouseprovidesacreditguaranteetoboththebuyerandtheseller.

sellerprovidesprotectiontothebuyeragainstthecreditriskofathirdparty.

thebuyerandsellerprovideaperformancebondatinitiationofthe

contract.

28ejuniorandseniortranchesofanasset-backedsecurity:

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PracticeProblems

441

A

B

C

haveequivalentexpectedreturns.

haveclaimsonseparateunderlyingportfolios.

maybedifferentiallyimpactedbyprepaymentsorcreditlosses.

29Inadeclininginterestrateenvironment,comparedwithaCMO’sClassA

tranche,itsClassCtranchewillberepaid:

A

B

C

earlier.

atthesamepace.

later.

30ForagivenCDO,whichofthefollowingtranchesismostlikelytohavethe

highestexpectedreturn?

A

B

C

Equity

Senior

Mezzanine

31Whichofthefollowingderivativesallowsaninvestortopaythereturnona

stockindexandreceiveafixedrate?

A

B

C

Equityswap

Stockwarrant

Indexfuturescontract

32Whichofthefollowingismostlikelytheunderlyingofaplainvanillainterest

rateswap?

A

B

C

180-dayLibor

10-yearUSTreasurybond

BloombergBarclay’sUSAggregateBondIndex

33Currencyswapsare:

A

B

C

rarelyused.

commonlyusedtomanageinterestraterisk.

executedbytwopartiesmakingaseriesofinterestratepaymentsinthe

samecurrency.

34Whichofthefollowingstatementsregardingcommodityderivativesiscorrect?

A

B

C

eprimarycommodityderivativesarefutures.

Commoditiesaresubjecttoasetofwell-definedriskfactors.

Commoditytradersandfinancialtraderstodayaredistinctgroupswithin

thefinancialworld.

35Comparedwiththeunderlyingspotmarket,derivativemarketsaremorelikely

tohave:

A

B

C

greaterliquidity.

highertransactioncosts.

highercapitalrequirements.

36Whichofthefollowingcharacteristicsisleastlikelytobeabenefitassociated

withusingderivatives?

A

B

C

Moreeffectivemanagementofrisk

Payoffssimilartothoseassociatedwiththeunderlying

Greateropportunitiestogoshortcomparedwiththespotmarket

37Whichofthefollowingstatementsbestrepresentsinformationdiscoveryinthe

futuresmarket?

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Reading48■DerivativeMarketsandInstruments

A

B

efuturespriceispredictive.

Informationflowsmoreslowlyintothefuturesmarketthanintothespot

market.

C

efuturesmarketrevealsthepricethattheholderoftheassetcantaketo

avoiduncertainty.

38ederivativemarketstendto:

A

B

C

transferliquidityfromthebroaderfinancialmarkets.

notreflectfundamentalvalueafteritisrestoredintheunderlyingmarket.

offeralesscostlywaytoexploitmispricingincomparisontootherfreeand

competitivefinancialmarkets.

39Whichofthefollowingstatementsmostlikelycontributestotheviewthat

derivativeshavesomeroleincausingfinancialcrashes?

A

B

C

Derivativesaretheprimarymeansbywhichleverageandrelatedexcessive

riskisbroughtintofinancialmarkets.

Growthinthenumberofinvestorswillingtospeculateinderivativesmar-

ketsleadstoexcessivespeculativetrading.

Restrictionsonderivatives,suchasenhancedcollateralrequirementsand

creditmitigationmeasures,intheyearsleadinguptocrashesintroduce

marketrigidity.

40Incontrasttogambling,derivativesspeculation:

A

B

C

hasapositivepublicimage.

isaformoffinancialrisktaking.

benefitsthefinancialmarketsandthussociety.

41Derivativesmaycontributetofinancialcontagionbecauseofthe:

A

B

C

centrallyclearednatureofOTCderivatives.

associatedsignificantcostsandhighcapitalrequirements.

reliancebyderivativesspeculatorsonlargeamountsofleverage.

42ecomplexnatureofderivativeshasledto:

A

B

C

reliablefinancialmodelsofderivativesmarkets.

widespreadtrustinapplyingscientificprinciplestoderivatives.

financialindustryemploymentofmathematiciansandphysicists.

43Whichofthefollowingismostlikelytobeadestabilizingconsequenceofspec-

ulationusingderivatives?

A

B

C

Increaseddefaultsbyspeculatorsandcreditors

Marketpriceswingsresultingfromarbitrageactivities

ecreationoftradingstrategiesthatresultinasymmetricperformance

44elawofonepriceisbestdescribedas:

A

B

C

thetruefundamentalvalueofanasset.

earningarisk-freeprofitwithoutcommittinganycapital.

twoassetsthatwillproducethesamecashflowsinthefuturemustsellfor

equivalentprices.

45Arbitrageopportunitiesexistwhen:

A

B

C

twoidenticalassetsorderivativessellfordifferentprices.

combinationsoftheunderlyingassetandaderivativeearntherisk-freerate.

arbitrageurssimultaneouslybuytakeovertargetsandselltakeoveracquirers.

PracticeProblems

443

Forquestions46–49,consideracalloptionselling

for$4inwhichtheexercisepriceis$50.

46Determinethevalueatexpirationandtheprofileforabuyerifthepriceofthe

underlyingatexpirationis$55.

A

B

C

$5

$1

–$1

47Determinethevalueatexpirationandtheprofileforabuyerifthepriceofthe

underlyingatexpirationis$48.

A

B

C

–$4

$0

$2

48Determinethevalueatexpirationandtheprofitforasellerifthepriceofthe

underlingatexpirationis$49.

A

B

C

$4

$0

–$1

49Determinethevalueatexpirationandtheprofitforasellerifthepriceofthe

underlingatexpirationis$52.

A

B

C

–$2

$5

$2

Forquestions50–52,considerthefollowing

scenario:

Supposeyoubelievethatthepriceofaparticularunderlying,currentlysellingat$99,

isgoingtoincreasesubstantiallyinthenextsixmonths.Youdecidetopurchasea

calloptionexpiringinsixmonthsonthisunderlying.ecalloptionhasanexercise

priceof$105andsellsfor$7.

50Determinetheprofitifthepriceoftheunderlyingsixmonthsfromnowis$99.

A

B

C

$6

$0

–$7

51Determinetheprofitifthepriceoftheunderlyingsixmonthsfromnowis$112.

A

B

C

$7

$0

–$3

52Determinetheprofitifthepriceoftheunderlyingsixmonthsfromnowis$115.

$0

A

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Reading48■DerivativeMarketsandInstruments

B

C

$3

–$3

Forquestions53–55,considerthefollowing

scenario:

Supposeyoubelievethatthepriceofaparticularunderlying,currentlysellingat$99,

isgoingtodecreasesubstantiallyinthenextsixmonths.Youdecidetopurchasea

putoptionexpiringinsixmonthsonthisunderlying.eputoptionhasanexercise

priceof$95andsellsfor$5.

53Determinetheprofitforyouifthepriceoftheunderlyingsixmonthsfromnow

is$100.

A

B

C

$0

$5

–$5

54Determinetheprofitforyouifthepriceoftheunderlyingsixmonthsfromnow

is$95.

A

B

C

$0

$5

–$5

55Determinetheprofitforyouifthepriceoftheunderlyingsixmonthsfromnow

is$85.

A

B

C

$10

$5

$0

Solutions

445

SOLUTIONS

1

2

Ciscorrect.Aderivativeisafinancialinstrumentthattransformstheperfor-

manceoftheunderlying.etransformationofperformancefunctionofderiv-

ativesiswhatdistinguishesitfrommutualfundsandexchangetradedfunds

thatpassthroughthereturnsoftheunderlying.

Aisincorrectbecausederivatives,incontrasttomutualfundsandexchange

tradedfunds,donotsimplypassthroughthereturnsoftheunderlyingat

payout.Bisincorrectbecauseaderivativetransformsratherthanreplicatesthe

performanceoftheunderlying.

Biscorrect.Insuranceisafinancialcontractthatprovidesprotectionagainst

loss.epartybearingtheriskpurchasesaninsurancepolicy,whichtransfers

therisktotheotherparty,theinsurer,foraspecifiedperiodoftime.erisk

itselfdoesnotchange,butthepartybearingitdoes.Derivativesallowforthis

sametypeofrisktransfer.

Aisincorrectbecausederivatives,likeinsurance,haveadefinite,asopposedto

indefinite,lifespanandexpireonaspecifieddate.

Cisincorrectbecausebothderivativesandinsuranceallowforthetransferof

riskfromoneparty(thepurchaseroftheinsurancepolicyorofaderivative)to

anotherparty(theinsureroraderivativeseller),foraspecifiedperiodoftime.

eriskitselfdoesnotchange,butthepartybearingitdoes.

3

Aiscorrect.Derivativesallowmarketparticipantstopracticemoreeffective

riskmanagement,aprocessbywhichanorganization,orindividual,definesthe

levelofriskitwishestotake,measuresthelevelofriskitistaking,andadjusts

thelattertoequaltheformer.

Bisincorrectbecausederivativesarecharacterizedbyarelativelyhighdegree

ofleverage,meaningthatparticipantsinderivativestransactionsusuallyhaveto

investonlyasmallamount,asopposedtoalargeamount,oftheirowncapi-

talrelativetothevalueoftheunderlying.isallowsparticipantstogenerate

returnsthataredisproportional,asopposedtoproportional,tomovementsin

theunderlying.

Cisincorrectbecausederivativesarenotneededtocopystrategiesthatcanbe

implementedwiththeunderlyingonastandalonebasis.Rather,derivativescan

beusedtocreatestrategiesthatcannotbeimplementedwiththeunderlying

alone.Simultaneouslytakinglongpositionsinmultiplehighlyliquidfixed-

incomesecuritiesisastrategythatcanbeimplementedwiththeunderlying

securitiesonastandalonebasis.

4

Biscorrect.Over-thecounter-derivativesmarketsarecustomizedandmostly

unregulated.Asaresult,over-the-countermarketsarelesstransparentincom-

parisonwiththehighdegreeoftransparencyandstandardizationassociated

withexchange-tradedderivativemarkets.

Aisincorrectbecauseexchange-tradedderivativesarestandardized,whereas

over-thecounterderivativesarecustomized.Cisincorrectbecauseexchange-

tradedderivativesarecharacterizedbyahighdegreeoftransparencybecause

alltransactionsaredisclosedtoexchangesandregulatoryagencies,whereas

over-the-counterderivativesarerelativelyopaque.

5

Ciscorrect.Exchanged-tradedderivativesareguaranteedbyaclearinghouse

againstdefault.

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Reading48■DerivativeMarketsandInstruments

Aisincorrectbecausetradedderivativesarecharacterizedbyarelativelyhigh

degreeofregulation.Bisincorrectbecausethetermsofexchange-tradedderiv-

ativestermsarespecifiedbytheexchange.

6

Aiscorrect.eclearingandsettlementprocessofderivativetransactionspro-

videsacreditguarantee.

Bisincorrectbecausealthoughtheexchangemarketsaresaidtohavetrans-

parency,theyalsoinvolvestandardization.atentailsalossofflexibility,with

participantslimitedtoonlythosetransactionspermittedontheexchange.

Cisincorrectbecausederivativesexchangesclearandsettleallcontracts

overnight,whichisfasterthanmostsecuritiesexchanges,whichrequiretwo

businessdays.

7

Biscorrect.WithfullimplementationoftheseregulationsintheOTCderiva-

tivesmarket,mostOTCtransactionsneedtobereportedtoregulators.

Aisincorrectbecausealthoughunderfullimplementationoftheregulations

informationonmostOTCtransactionsneedstobereportedtoregulators,

manytransactionsretainadegreeofprivacywithlowertransparency.

Cisincorrectbecausealthoughunderfullimplementationofnewregulations

anumberofOTCtransactionshavetobeclearedthroughcentralclearing

agencies,thereareexemptionsthatcoverasignificantpercentageofderivative

transactions.

8

9

Aiscorrectbecauseforwardcommitmentsprovidelinearpayoffs.

Bisincorrectbecauseforwardcommitmentsdependontheoutcomeorpayoff

ofanunderlyingasset.

Cisincorrectbecauseforwardcommitmentsobligatepartiestomake(notpro-

videtherighttoengage)afinalpaymentcontingentontheperformanceofthe

underlying.

Biscorrect.Inaforwardcontract,eitherpartycoulddefault,whereasinacon-

tingentclaim,defaultispossibleonlyfromtheshorttothelong.

Aisincorrectbecausetheforwardpriceissetinthepricingofthecontract

suchthatthestartingcontractvalueiszero,unlikecontingentclaims,under

whichpartiescanselectanystartingvalue.

Cisincorrectbecausebothforwardcontractsandcontingentclaimscanbe

settledbyeitherphysicalorcashdelivery.

10Biscorrect.ebuyerisobligatedtopaytheforwardpriceF(T)atexpira-

0

tionandreceivesanassetworthS,thepriceoftheunderlying.econtract

T

effectivelypaysoffS–F(T),thevalueofthecontractatexpiration.ebuyer

T

T

0

0

thereforeprofitsifS>F(T).

Aisincorrectbecausethelongandtheshortareengagedinazero-sumgame.

isisatypeofcompetitioninwhichoneparticipant’sgainsaretheother’s

losses,withtheirpayoffseffectivelybeingmirrorimages.

Cisincorrectbecausealthoughthegainfromowningtheunderlyingandthe

gainfromowningtheforwardarebothdrivenbyS,thepriceoftheunderlying

T

atexpiration,theyarenotthesamevalue.egainfromowningtheunderlying

wouldbeS–S,thechangeinitsprice,whereasthegainfromowningthe

T

0

forwardwouldbeS–F(T),thevalueoftheforwardatexpiration.

T

0

11Ciscorrect.Inthecaseofcashsettlement,thelongcanacquiretheasset,effec-

tivelypayingtheforwardprice,F(T).

0

Aisincorrectbecauseforwardcontractssettledbycashorbydeliveryhavethe

sameeconomiceffect.

Solutions

447

Bisincorrectbecausebothnon-deliverableforwardsandcontractsfordiffer-

encescansettlebyanexchangeofcash.

12Aiscorrect.Afuturescontractisastandardizedderivativecontract.

Bisincorrectbecausethroughitsclearinghousethefuturesexchangeprovides

acreditguaranteethatitwillmakeupalossintheeventalosingpartycannot

pay.

Cisincorrectbecauseafuturescontractismarkedtomarketattheendofeach

day,aprocessinwhichthefuturesclearinghousedeterminesanaverageofthe

finalfuturestradeofthedayanddesignatesthatpriceasthesettlementprice.

13Aiscorrect.Pricelimitsareimportantinhelpingtheclearinghousemanageits

creditexposure.Sharplymovingpricesmakeitmoredifficultfortheclearing-

housetocollectfrompartieslosingmoney.

Bisincorrectbecausetypicallytheexchangerulesallowforanexpansionof

pricelimitsthenextday(notintra-day)iftradersarewilling.

Cisincorrectbecausepricelimitsestablishabandrelativetothepreviousday’s

settlementprice(notfinaltrade).

14Aiscorrect.emaintenancemarginisalwayssignificantlylowerthanthe

initialmargin.

Bisincorrectbecausetheinitialmarginrequiredistypicallyatmost(notat

least)10%ofthefuturesprice.

Cisincorrectbecauseamargincallrequiresadepositlargeenoughtobringthe

balanceuptotheinitial(notmaintenance)margin.

15Ciscorrect.Comparingthederivatives,forwardandfuturescontractshave

nearlyequivalentprofitsbythetimeofexpirationoftheforward.

Aisincorrectbecausethetimingofprofitsforafuturescontractisdifferent

fromthatofforwards.Forwardsrealizethefullamountatexpiration,whereas

futurescontractsrealizetheirprofitinpartsonaday-to-daybasis.

Bisincorrectbecausethesettlementarrangementsfortheforwardscanbe

agreedonatinitiationandwritteninthecontractbasedonthedesiresofthe

engagedparties.However,inthecaseofafuturescontract,theexchange(not

theengagedparties)specifieswhetherphysicaldeliveryorcashsettlement

applies.

16Ciscorrect.Acreditdefaultswap(CDS)isaderivativeinwhichthecredit

protectionsellerprovidesprotectiontothecreditprotectionbuyeragainstthe

creditriskofaseparateparty.CDSareclassifiedasacontingentclaim.

Aisincorrectbecausefuturescontractsareclassifiedasforwardcommit-

ments.Bisincorrectbecauseinterestrateswapsareclassifiedasforward

commitments.

17Biscorrect.Forwardcommitmentsrepresentanobligationtobuyorsellthe

underlyingassetatanagreeduponpriceatafuturedate.

Aisincorrectbecausetherighttobuyorselltheunderlyingassetisacharac-

teristicofcontingentclaims,notforwardcommitments.Cisincorrectbecause

acreditdefaultswapprovidesapromisetoprovidecreditprotectiontothe

creditprotectionbuyerintheeventofacrediteventsuchasadefaultorcredit

downgradeandisclassifiedasacontingentclaim.

18Aiscorrect.Optionsareclassifiedasacontingentclaimwhichprovidespayoffs

thatarenon-linearlyrelatedtotheperformanceoftheunderlying.

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Reading48■DerivativeMarketsandInstruments

Bisincorrectbecauseforwardsareclassifiedasaforwardcommitment,which

providespayoffsthatarelinearlyrelatedtotheperformanceoftheunderlying.

Cisincorrectbecauseinterest-rateswapsareclassifiedasaforwardcommit-

ment,whichprovidespayoffsthatarelinearlyrelatedtotheperformanceofthe

underlying.

19Aiscorrect.Aninterestrateswapisdefinedasaderivativeinwhichtwopar-

tiesagreetoexchangeaseriesofcashflows:Onesetofcashflowsisvariable,

andtheothersetcanbevariableorfixed.

Bisincorrectbecauseacreditderivativeisaderivativecontractinwhichthe

creditprotectionsellerprovidesprotectiontothecreditprotectionbuyer.Cis

incorrectbecauseacalloptiongivesthebuyertherighttopurchasetheunder-

lyingfromtheseller.

20Ciscorrect.Interestrateswapsandforwardsareover-the-countercontracts

thatareprivatelynegotiatedandarebothsubjecttodefault.Futurescontracts

aretradedonanexchange,whichprovidesacreditguaranteeandprotection

againstdefault.

Aisincorrectbecausefuturesareexchange-tradedcontractswhichprovide

dailysettlementofgainsandlossesandacreditguaranteebytheexchange

throughitsclearinghouse.Bisincorrectbecausefuturesareexchange-traded

contractswhichprovidedailysettlementofgainsandlossesandacreditguar-

anteebytheexchangethroughitsclearinghouse.

21Aiscorrect.Aswapisabitmorelikeaforwardcontractthanafuturescontract

inthatitisanOTCcontract,soitisprivatelynegotiatedandsubjecttodefault.

Bisincorrectbecauseinaswap,althougheitherpartycandefault,onlyone

partycandosoataparticulartime.Moneyowedisbasedonthenetowedby

onepartytotheother,andonlythepartyowingthegreateramountcandefault

tothecounterpartyowingthelesseramount.

Cisincorrectbecauseaswapinvolvesanexchangebetweenpartiesinwhichat

leastonepartypaysavariableseriesofcashflowsdeterminedbyanunderlying

assetorrate.

22Biscorrect.Aplainvanillaswapisafixed-for-floatinginterestrateswap,which

isthemostcommontypeofswap.

AisincorrectbecauseabasisswapisatransactionbasedontheTEDspread

(T-billsversusEurodollars)andisnotthesameasaplainvanillaswap.

Cisincorrectbecauseanovernightindexedswapisaswapthatistiedtoafed-

eralfundstypeofrate,reflectingtherateatwhichbanksborrowovernight,and

isnotthesameasaplainvanillaswap.

23Aiscorrect.enotionalprincipalofaswapisnotexchangedinthecaseofan

interestrateswap.

Bisincorrectbecauseanamortizingloanwillbematchedwithaswapwith

apre-specifieddeclining(notfixed)notionalprincipalthatmatchestheloan

balance.

Cisincorrectbecausethenotionalprincipalisequaltotheloanbalance.

Althoughtheloanhasanactualbalance(theamountowedbytheborrowerto

thecreditor),theswapdoesnothavesuchabalanceowedbyoneswappartyto

theother.

24Biscorrect.ebuyeroftheoptionpaystheoptionpremiumtothesellerof

theoptionattheinitiationofthecontract.eoptionpremiumrepresentsthe

valueoftheoption,whereasfuturesandforwardshaveavalueofzeroatthe

initiationofthecontract.

Solutions

449

Aisincorrectbecausenomoneychangeshandsbetweenpartiesattheiniti-

ationofthefuturescontract,thusthevalueofthefuturescontractiszeroat

initiation.Cisincorrectbecausenomoneychangeshandsbetweenpartiesat

theinitiationoftheforwardcontract,thusthevalueoftheforwardcontractis

zeroatinitiation.

25Aiscorrect.Acontingentclaim,aderivativeinwhichtheoutcomeorpayoff

dependsontheoutcomeorpayoffofanunderlyingasset,hascometobeasso-

ciatedwitharight,butnotanobligation,tomakeafinalpaymentcontingenton

theperformanceoftheunderlying.

Bisincorrectbecauseanoption,asacontingentclaim,grantstherightbutnot

theobligationtobuyorselltheunderlyingatalaterdate.

Cisincorrectbecausetheholderofanoptionhasachoiceofwhetherto

exercisetheoption.ischoicecreatesapayoffthattransformstheunderlying

payoffinamorepronouncedmannerthandoesaforward,futures,orswap,

whichprovidelinearpayoffs.Optionsaredifferentinthattheylimitlossesin

onedirection.

26Ciscorrect.erighttobuytheunderlyingisreferredtoasacalloption.

Furthermore,optionsthatc