BMGT 444 FInal Exam Lecture 1
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What is a derivative - CORRECT ANSWER - is an instrument whose value depends on, or
is derived from, the value of another (underlying) asset.
What are soke underlying assets (financial and non financial) - CORRECT ANSWER -
Financial securities
• Stocks
• Currencies
• Bonds
Non-financial securities
• Non-financial securities
What are examples of derivatives? - CORRECT ANSWER - Futures, forwards, swaps,
options
Why are derivatives important? - CORRECT ANSWER - Transferring risks in economy
from one party to another
• Farmer protecting crop (output) prices
Many financial transactions have derivatives embedded
• Example: Owning a Wells Fargo convertible bond
• Like owning straight Wells Fargo bond plus option on Wells Fargo stock
Real options to assess investment decisions
, • Example: GlaxoSmithKline going beyond simple NPV analysis to assess whether to invest in a
new cancer drug
How are derivatives traded? - CORRECT ANSWER - - On exchanges such as the Chicago
Board Options Exchange (CBOE)
- In the over-the-counter (OTC) market where traders working for banks, fund managers, and
corporate treasurers contact each other directly
How are derivatives traded: types of agreements - CORRECT ANSWER - • Bilateral
agreement
• Use Central Counterparty (CCP)
OTC Market Prior to 2008...and Since 2008 - CORRECT ANSWER - • Before Financial
Crisis, OTC market largely unregulated
• Since then, increased regulation with objectives of:
• Reducing systemic risk AND
• Increasing transparency
• Some changes:
• Some standardized OTC products (swaps) must be traded on swap execution facilities (SEFs)
• CCPs must be used for standardized transactions between dealers
• All trades must be reported to a central registry
How Derivatives are Used - CORRECT ANSWER - Hedging risks
• Example: McDonalds sells burgers in Europe (€), but reports profits in U.S. ($)
Speculating
• Example: Betting on Euro appreciating versus US $
UPDATED ACTUAL Exam Questions and
CORRECT Answers
What is a derivative - CORRECT ANSWER - is an instrument whose value depends on, or
is derived from, the value of another (underlying) asset.
What are soke underlying assets (financial and non financial) - CORRECT ANSWER -
Financial securities
• Stocks
• Currencies
• Bonds
Non-financial securities
• Non-financial securities
What are examples of derivatives? - CORRECT ANSWER - Futures, forwards, swaps,
options
Why are derivatives important? - CORRECT ANSWER - Transferring risks in economy
from one party to another
• Farmer protecting crop (output) prices
Many financial transactions have derivatives embedded
• Example: Owning a Wells Fargo convertible bond
• Like owning straight Wells Fargo bond plus option on Wells Fargo stock
Real options to assess investment decisions
, • Example: GlaxoSmithKline going beyond simple NPV analysis to assess whether to invest in a
new cancer drug
How are derivatives traded? - CORRECT ANSWER - - On exchanges such as the Chicago
Board Options Exchange (CBOE)
- In the over-the-counter (OTC) market where traders working for banks, fund managers, and
corporate treasurers contact each other directly
How are derivatives traded: types of agreements - CORRECT ANSWER - • Bilateral
agreement
• Use Central Counterparty (CCP)
OTC Market Prior to 2008...and Since 2008 - CORRECT ANSWER - • Before Financial
Crisis, OTC market largely unregulated
• Since then, increased regulation with objectives of:
• Reducing systemic risk AND
• Increasing transparency
• Some changes:
• Some standardized OTC products (swaps) must be traded on swap execution facilities (SEFs)
• CCPs must be used for standardized transactions between dealers
• All trades must be reported to a central registry
How Derivatives are Used - CORRECT ANSWER - Hedging risks
• Example: McDonalds sells burgers in Europe (€), but reports profits in U.S. ($)
Speculating
• Example: Betting on Euro appreciating versus US $
