Question

A swap​ is:

A. an agreement between two or more counterparties to exchange sets of cash flows over some future period.

B. a contract that gives the buyer the right to buy the underlying asset at a set price during a set period of time.

C. a contract that gives the seller the right to sell the underlying asset at a set price during a set period of time.

D. an agreement to buy or sell an asset at an agreed price at a future time.

A swap is different from a futures contract​ because:

A. swaps are subject to increased government regulation.

B. swaps are private agreements between counterparties and its terms are flexible.

C. swaps only offer​ shorter-term hedging.

D. swaps offer less privacy.

Why did futures markets originate in agricultural​ markets?

A. The supply of agricultural products depends on the weather and can be subject to wide price fluctuations.

B. The demand for agricultural products depends on the weather and can be subject to wide price fluctuations.

C. Demand for agricultural products is price elastic.

D. All of the above.

Would a farmer buy or sell futures​ contracts? What would a farmer hope to gain by doing​ so?

A farmer would ▼(sell/buy) futures contracts to reduce the risk of agricultural prices ▼(rising/falling).

Would General Mills buy or sell futures contracts in​ wheat? What would General Mills hope to gain by doing​ so?

General Mills would ▼(sell/buy) futures contracts in wheat to reduce the risk of prices ▼(falling/rising).

According to an article in the Wall Street Journal​, options traders were expecting a large move in the price of Facebook stock. They were buying both call options and put options with strike prices near the​ stock's current market price. The article described this strategy as a bet on the size of the​ [price] move instead of its direction.

​Source: Saumya​ Vaishampayan, Options Traders Betting on Big Move for Facebook ​Shares, Wall Street Journal​, April​ 27, 2016.

If the future price of Facebook stock increased above the current market​ price, traders would exercise the ▼(put options/call options)​, ▼(selling/buying) Facebook stock for ▼(less/more) than the then market price. If the price of Facebook stock decreased from the current market​ price, traders would exercise the ▼(call options/put options)​,▼(selling/buying) Facebook stock for ▼(more/less) than the then market price. Traders would make money using this strategy if the ▼(price of the unexercised options/ spread between the future and current market prices) was less than the ▼(spread between the future and current market prices/price of the unexercised options).

What is the difference between hedging and​ speculating?

▼(Speculating/Hedging) serves to reduce risk in financial​ markets, while ▼(speculating/hedging)

may increase risk in the market.

​[Related to the Making the ConnectionLOADING...​] In one of his annual letters to shareholders of Berkshire​ Hathaway, Warren Buffett wrote that trading derivatives has much more counterparty risk than does trading stocks or bonds because​ "a normal stock trade is completed in a few days with one party getting its​ cash, the other its securities. Counterparty risk therefore quickly​ disappears...."

​Source: Warren​ Buffett, "Chairman's​ Letter," Berkshire Hathaway Inc. 2008 Annual Report​, February​ 27, 2009.

Counterparty risk​ is:

A. the risk that the buyer or seller may be unwilling to fulfill the contract.

B. the risk that one party will sell the contract without notifying the other party.

C. the risk of bargaining.

D. the risk of the other party to the transaction defaulting.  

Counterparty risk is greater for trading in derivatives​ because:

A. the transaction is completed before the underlying asset matures.

B. the transaction is only completed after the underlying asset has matured.

C. some of the more complicated derivatives are traded on exchanges.

D. none of the above.

Answer 1

A swap​ is:

A. an agreement between two or more counterparties to exchange sets of cash flows over some future period.

B and C refer to options. D refers to forward/future contracts.

A swap is different from a futures contract​ because:

B. swaps are private agreements between counterparties and its terms are flexible.

A is incorrect - Futures are also subject to regulation.

C is incorrect - Swaps offer long-term hedging as well as short-term.

D is incorrect - Swaps offer more privacy since they are OTC contracts.

Why did futures markets originate in agricultural​ markets?

A. The supply of agricultural products depends on the weather and can be subject to wide price fluctuations.

B is incorrect - demand is not dependent on weather.

C is incorrect - demand is price inelastic.

Would a farmer buy or sell futures​ contracts? What would a farmer hope to gain by doing​ so?

A farmer would sell futures contracts to reduce the risk of agricultural prices falling

This is because the farmer is a seller of agricultural goods.

Would General Mills buy or sell futures contracts in​wheat? What would General Mills hope to gain by doing​ so?

General Mills would buy futures contracts in wheat to reduce the risk of prices rising.

This is because General Mills is a buyer of agricultural goods.