Question 1

The value of a stock index futures contract is the product of ____ and the appropriate multiplier.

Accepted Answer

A) the settle price 
B) the change in the settle price 
C) the difference between the settle price and the change 
D) None of the above 
A) the settle price 
B) the change in the settle price 
C) the difference between the settle price and the change 
D) None of the above

Question 2

Stock index futures represent an efficient approach to:

Accepted Answer

A) only taking on unsystematic risk. 
B) only taking on systematic risk. 
C) taking on zero risk,because the index is fully diversified. 
D) taking on lots of risk,due to the fact that the indexes are usually composed of lots of stocks,not just a few. 
A) only taking on unsystematic risk. 
B) only taking on systematic risk. 
C) taking on zero risk,because the index is fully diversified. 
D) taking on lots of risk,due to the fact that the indexes are usually composed of lots of stocks,not just a few.

Question 3

Which of the following statements about hedging a stock portfolio with stock index futures is NOT true?

Accepted Answer

A) Futures contracts magnify gains (or losses)on the stock portfolio 
B) In a declining market,futures contracts help offset losses on the portfolio 
C) A risk-taker would probably not hedge the entire portfolio with stock index futures 
D) All of the above are true 
A) Futures contracts magnify gains (or losses)on the stock portfolio 
B) In a declining market,futures contracts help offset losses on the portfolio 
C) A risk-taker would probably not hedge the entire portfolio with stock index futures 
D) All of the above are true

Question 4

The value of an option to purchase a stock index futures contract depends on the outlook of the futures contract.

Accepted Answer

A) True 
 B)False

Question 5

The purpose of hedging with stock index futures is not to magnify the gains and losses on the hedged stock portfolio.

Accepted Answer

A) True 
 B)False

Question 6

Stock index futures provide the portfolio manager a realistic alternative to selling either a part or the entirety of a portfolio in a declining market.

Accepted Answer

A) True 
 B)False

Question 7

One of the major uses of a stock index future is the ability:

Accepted Answer

A) to use it to hedge. 
B) to make an unlimited amount of money. 
C) to increase risk. 
D) All of the above 
A) to use it to hedge. 
B) to make an unlimited amount of money. 
C) to increase risk. 
D) All of the above

Question 8

A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.

Accepted Answer

A) True 
 B)False

Question 9

Since there is never physical delivery of goods in the stock index futures market,all open transactions are automatically closed out on the settlement date.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is NOT an advantage of investing in stock index futures for the speculator?

Accepted Answer

A) The elimination of unsystematic risk 
B) Manipulation by insiders is less likely than with individual securities 
C) Maximum leverage potential 
D) All of the above are advantages 
A) The elimination of unsystematic risk 
B) Manipulation by insiders is less likely than with individual securities 
C) Maximum leverage potential 
D) All of the above are advantages

Question 11

Stock index futures contracts are limited to the Dow Jones Industrial Average.

Accepted Answer

A) True 
 B)False

Question 12

Options may have advantages over futures for some investors because:

Accepted Answer

A) options have a lower margin requirement. 
B) options provide more efficient hedging. 
C) some investors are prohibited by law from participating in the futures market. 
D) None of the above 
A) options have a lower margin requirement. 
B) options provide more efficient hedging. 
C) some investors are prohibited by law from participating in the futures market. 
D) None of the above

Question 13

The profit on a stock index option is determined by the change in the underlying value of the futures contract.

Accepted Answer

A) True 
 B)False

Question 14

The S&P 100 Index is composed of 100 blue chip stocks on which the CME currently has individual option contracts.

Accepted Answer

A) True 
 B)False

Question 15

A combination of a futures and options contract is an option to purchase the futures contract.

Accepted Answer

A) True 
 B)False

Question 16

A perfect hedge using stock index futures eliminates both losses and gains on a stock portfolio.

Accepted Answer

A) True 
 B)False

Question 17

The term basis represents the difference between the stock index futures price and the value of the underlying index.

Accepted Answer

A) True 
 B)False

Question 18

Stock index options tend to be more highly speculative than stock index futures.

Accepted Answer

A) True 
 B)False

Question 19

The primary use of stock index futures by the portfolio manager is:

Accepted Answer

A) to offset the loss on the portfolio in a declining market. 
B) to profit from major market movements. 
C) to increase the profit potential on the portfolio. 
D) All of the above 
A) to offset the loss on the portfolio in a declining market. 
B) to profit from major market movements. 
C) to increase the profit potential on the portfolio. 
D) All of the above

Question 20

When an investment banker hedges a stock for initial distribution with stock index futures,

Accepted Answer

A) the underwriter intends to reduce the risk of loss during the distribution period. 
B) there is potential of gain or loss on both the stock and the stock index futures. 
C) he or she sells futures contracts. 
D) All of the above 
A) the underwriter intends to reduce the risk of loss during the distribution period. 
B) there is potential of gain or loss on both the stock and the stock index futures. 
C) he or she sells futures contracts. 
D) All of the above

Exam 14: Stock Index Futures and Options

The value of a stock index futures contract is the product of ____ and the appropriate multiplier.

Stock index futures represent an efficient approach to:

Which of the following statements about hedging a stock portfolio with stock index futures is NOT true?

The value of an option to purchase a stock index futures contract depends on the outlook of the futures contract.

The purpose of hedging with stock index futures is not to magnify the gains and losses on the hedged stock portfolio.

Stock index futures provide the portfolio manager a realistic alternative to selling either a part or the entirety of a portfolio in a declining market.

One of the major uses of a stock index future is the ability:

A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.

Since there is never physical delivery of goods in the stock index futures market,all open transactions are automatically closed out on the settlement date.

Which of the following is NOT an advantage of investing in stock index futures for the speculator?

Stock index futures contracts are limited to the Dow Jones Industrial Average.

Options may have advantages over futures for some investors because:

The profit on a stock index option is determined by the change in the underlying value of the futures contract.

The S&P 100 Index is composed of 100 blue chip stocks on which the CME currently has individual option contracts.

A combination of a futures and options contract is an option to purchase the futures contract.

A perfect hedge using stock index futures eliminates both losses and gains on a stock portfolio.

The term basis represents the difference between the stock index futures price and the value of the underlying index.

Stock index options tend to be more highly speculative than stock index futures.

The primary use of stock index futures by the portfolio manager is:

When an investment banker hedges a stock for initial distribution with stock index futures,

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