8. Which of the following events is likely to increase the value of put options
ID: 2712094 • Letter: 8
Question
8. Which of the following events is likely to increase the value of put options on the common stock of GCC Company?
a)An increase in GCC's stock price.
b)A decrease in the exercise price of the option.
c)A decrease in the amount of time until the option expires.
d)A decrease in the risk-free rate.
9. Which of the following statements is CORRECT?
a) Futures contracts have less default risk because the exchange acts as the counterparty for all transactions
b) Forward contracts trade on an organized exchange and are marked to market daily.
c) Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
d) Forward contracts are available on individual stocks and futures contracts are for commodities.
10. Which statement is FALSE?
a)Interest Rate swaps often involve companies trading fixed rates for floating rates
b)Companies should always try to reduce risk whenever they can.
c)The coupon rate on Inverse Floaters goes up when interest rates fall
d) Credit Default Swaps pay off when a company goes bankrupt, thus they are like an insurance policy on bonds.
11. Which statement is CORRECT?
a)An option is out of the money if its exercise value is negative.
b)An option is in the money as long as the option price is positive.
c)The time value of an option is highest when the spot price equals the strike price.
d)Companies speculate on derivatives in order to reduce their risk.
Explanation / Answer
8. Answer is B: A decrease in the exercise price of the option.
Explaination: The put option gives the right to a buyer to sell the stock at the excercise price. The excercise price falls when there is a decrease in a stock price, hence if the current pric of a stock is 22 and the excercise price is 20 and the stock falls to 18 then the value of a put option increases.
9. Answer is A: Futures contracts have less default risk because the exchange acts as the counterparty for all transactions
Futures are alawys considers more relaible than forwards due to the presence of an intermediary, the exchange.
10 Statement B is False:Companies should always try to reduce risk whenever they can. This can be false because the compnay make increase it risk when it has the ability to generate higher cash flows and generate higher returns for the customer without exceeding the limits.
11.D is correct. It is beacuse the companies baswed on expert reviews take postions in derivative as a hedge against adverse movements in prices, currencies or interest rates
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