Econ 2035 Chapter 7, 8 & 9 study
guide Questions Fully Solved.
chapter 7
end of chapter 1.2
what is the difference between hedging and speculating?
__________ serves to reduce risk in financial markets, while _____________ may increase risk
in the market - Answer Hedging, Speculating
chapter 7
end of chapter 1.4
Suppose you are a manufacture of cornbread. What risk do you face from price fluctuations?
a. stable corn prices
b. rising corn prices
c. falling corn prices
d. you face no risk from price fluctuations - Answer b. rising corn prices
chapter 7
end of chapter 1.4
What would have to be true of a derivatives security if the security were to help you to hedge
this risk?
a. the derivative would need to go down in value if corn prices rose
b. the derivative would need to go in value if corn prices fell
c. the derivative would need to go up in value if corn prices rose
d. derivatives would not help you hedge this risk - Answer c. the derivative would need to go
up in vale if corn prices rose
,chapter 7
end of chapter 2.2
forward contracts have counter party risk since_________ - Answer there is a chance that
either the buyer or the seller may default on their obligations under the contract
chapter 7
end of chapter 2.4
Suppose that oil prices decline by 50%. Which counterparty to a forward contract in oil has an
incentive to default on the contract? - Answer the buyer of the forward contract since the
price they have committed to pay is now above the market price.
chapter 7
end of chapter 3.2
Is a firm likely to have a long position in both the spot market and the futures market? - Answer
no, this would imply the firm intends to both buy and sell the same asset in the future
chapter 7
end of chapter 3.2
Hedging involves taking a long position in the futures market to offset a _________ position in
the spot market - Answer short
chapter 7
end of chapter 3.2
Why did futures markets originate in agricultural markets? - Answer the supply of
agricultural products depends on the weather and can be subject to wide price fluctuations
chapter 7
end of chapter 3.4
would a farmer buy or sell futures contracts? what would a farmer hope to gain by doing so?
,a farmer would _____ futures contracts to reduce the risk of agricultural prices _________ -
Answer sell, falling
chapter 7
end of chapter 3.4
would general mills buy or sell futures contracts in wheat? what would general mills hope to
gain by doing so?
general mills would ______ futures contracts in wheat to reduce the risk of prices _______ -
Answer buy, rising
chapter 7
end of chapter 3.6
An article in the Wall Street Journal on the oil market observes that "money managers have
been trimming their long trading positions."
What is a long position in the futures market?
a long position in a futures contract, denotes the right and obligation of the _______________
the underlying asset ________________- - Answer buyer to recieve or buy, on a specified
future date
chapter 7
end of chapter 3.6
An article in the Wall Street Journal on the oil market observes that "money managers have
been trimming their long trading positions."
What is a long position in the futures market?
if money managers are trimming their long trading positions they must be expecting that the
price of oil ___________________- - Answer will fall in the future
chapter 7
end of chapter 3.8
, An article on bloomberg.com in early 2020 discussed a fund manager who believed that interest
rates, which had been falling, would soon begin increasing. Therefore, his fund was "buying
derivatives that will pay off if rates go back up."
Which derivatives would his fund likely be buying? How might these derivatives pay off if
interest rates rose?
This fund would likely use __________. For example, the firm could __________________.
Treasury note futures contracts. if interest rates do end up rising they can then
_______________ than they initially paid to offset their initial position in treasury notes. -
Answer futures contracts
go short in the futures market by selling
buy futures contracts at a lower price
chapter 7
end of chapter 3.8
What would happen to the prices of these derivatives if interest rates fell?
If interest rates end up falling the value of the derivatives that they purchased to hedge risk
would ______. - Answer fall
chapter 7
end of chapter 3.8
If this fund manager was correct and interest rates rose, would that have been good news or
bad news for investors who owned bonds? - Answer this would be bad news for those that
already owned bonds, the value of their bonds would decrease since they are set at a lower rate
chapter 7
end of chapter 3.10
Consider the hypothetical listing in the following table for 10-year Treasury note futures on the
Chicago Board of Trade. One futures contract for Treasury notes = $100,000 face value of 10-
year 6% notes.
guide Questions Fully Solved.
chapter 7
end of chapter 1.2
what is the difference between hedging and speculating?
__________ serves to reduce risk in financial markets, while _____________ may increase risk
in the market - Answer Hedging, Speculating
chapter 7
end of chapter 1.4
Suppose you are a manufacture of cornbread. What risk do you face from price fluctuations?
a. stable corn prices
b. rising corn prices
c. falling corn prices
d. you face no risk from price fluctuations - Answer b. rising corn prices
chapter 7
end of chapter 1.4
What would have to be true of a derivatives security if the security were to help you to hedge
this risk?
a. the derivative would need to go down in value if corn prices rose
b. the derivative would need to go in value if corn prices fell
c. the derivative would need to go up in value if corn prices rose
d. derivatives would not help you hedge this risk - Answer c. the derivative would need to go
up in vale if corn prices rose
,chapter 7
end of chapter 2.2
forward contracts have counter party risk since_________ - Answer there is a chance that
either the buyer or the seller may default on their obligations under the contract
chapter 7
end of chapter 2.4
Suppose that oil prices decline by 50%. Which counterparty to a forward contract in oil has an
incentive to default on the contract? - Answer the buyer of the forward contract since the
price they have committed to pay is now above the market price.
chapter 7
end of chapter 3.2
Is a firm likely to have a long position in both the spot market and the futures market? - Answer
no, this would imply the firm intends to both buy and sell the same asset in the future
chapter 7
end of chapter 3.2
Hedging involves taking a long position in the futures market to offset a _________ position in
the spot market - Answer short
chapter 7
end of chapter 3.2
Why did futures markets originate in agricultural markets? - Answer the supply of
agricultural products depends on the weather and can be subject to wide price fluctuations
chapter 7
end of chapter 3.4
would a farmer buy or sell futures contracts? what would a farmer hope to gain by doing so?
,a farmer would _____ futures contracts to reduce the risk of agricultural prices _________ -
Answer sell, falling
chapter 7
end of chapter 3.4
would general mills buy or sell futures contracts in wheat? what would general mills hope to
gain by doing so?
general mills would ______ futures contracts in wheat to reduce the risk of prices _______ -
Answer buy, rising
chapter 7
end of chapter 3.6
An article in the Wall Street Journal on the oil market observes that "money managers have
been trimming their long trading positions."
What is a long position in the futures market?
a long position in a futures contract, denotes the right and obligation of the _______________
the underlying asset ________________- - Answer buyer to recieve or buy, on a specified
future date
chapter 7
end of chapter 3.6
An article in the Wall Street Journal on the oil market observes that "money managers have
been trimming their long trading positions."
What is a long position in the futures market?
if money managers are trimming their long trading positions they must be expecting that the
price of oil ___________________- - Answer will fall in the future
chapter 7
end of chapter 3.8
, An article on bloomberg.com in early 2020 discussed a fund manager who believed that interest
rates, which had been falling, would soon begin increasing. Therefore, his fund was "buying
derivatives that will pay off if rates go back up."
Which derivatives would his fund likely be buying? How might these derivatives pay off if
interest rates rose?
This fund would likely use __________. For example, the firm could __________________.
Treasury note futures contracts. if interest rates do end up rising they can then
_______________ than they initially paid to offset their initial position in treasury notes. -
Answer futures contracts
go short in the futures market by selling
buy futures contracts at a lower price
chapter 7
end of chapter 3.8
What would happen to the prices of these derivatives if interest rates fell?
If interest rates end up falling the value of the derivatives that they purchased to hedge risk
would ______. - Answer fall
chapter 7
end of chapter 3.8
If this fund manager was correct and interest rates rose, would that have been good news or
bad news for investors who owned bonds? - Answer this would be bad news for those that
already owned bonds, the value of their bonds would decrease since they are set at a lower rate
chapter 7
end of chapter 3.10
Consider the hypothetical listing in the following table for 10-year Treasury note futures on the
Chicago Board of Trade. One futures contract for Treasury notes = $100,000 face value of 10-
year 6% notes.
