the economics of money, banking, and financial markets

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30. 
    

    The main reason to buy an option on a futures contract rather than buying the futures
    contract is ____.
    A) to reduce transaction cost
    B) to preserve the possibility for gains
    C) to limit losses
    D) to remove the possibility for gains
    Answer: B
    Diff: 3 Type: MC Page Ref: 339
    Skill: Applied
    Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
    manage interest-rate and foreign-exchange risk

    
    


31. 
    

    All other things held constant, premiums on call options will increase when the ____.
    A) exercise price falls
    B) volatility of the underlying asset falls
    C) term to maturity decreases
    D) futures price increases
    Answer: A
    Diff: 3 Type: MC Page Ref: 341 - 342
    Skill: Recall
    Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
    manage interest-rate and foreign-exchange risk

    
    


32. 
    

    An increase in the volatility of the underlying asset, all other things held constant, will
    ____ the option premium.
    A) increase
    B) decrease
    C) increase or decrease
    D) Not enough information is given.
    Answer: A
    Diff: 3 Type: MC Page Ref: 341 - 342
    Skill: Recall
    Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
    manage interest-rate and foreign-exchange risk

    
    


33. 
    

    An increase in the exercise price, all other things held constant, will ____ the premium
    on call options.
    A) increase
    B) decrease
    C) increase or decrease
    D) Not enough information is given.
    Answer: B
    Diff: 3 Type: MC Page Ref: 341 - 342
    Skill: Recall
    Objective List: 14.3 Explain how managers of financial institutions use financial derivatives to
    manage interest-rate and foreign-exchange risk