1. ______________ is when derivatives are used to try and make money by taking on risk.
Hedging
Speculation
Arbitrage
Commodity
2. Suppose you believe that Du Pont’s stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $83.00 per share. If you bought a 100-share contract for $510.25 and Du Pont’s stock price actually dropped to $63.00, what would be your net profit (after transactions costs but before taxes)?
a. $1,950.00 b. $1,439.75 c. $1,489.75 d. $2,435.00
3. A swap is a method for reducing financial risk. Which of the following statements about swaps is not correct?
a. A swap involves the exchange of cash payment obligations.
b. The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
c. Swaps are generally arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
d. A problem with swaps is the lack of standardized contracts, which limits the development of a secondary market.