Question 1

In the cost of carry model the inclusion of storage costs will increase the futures price.

Accepted Answer

A) True 
 B)False  True

Question 2

Exhibit 21.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%.
-Refer to Exhibit 21.5. If the futures contract was currently available for 1250, calculate the arbitrage profit.

Accepted Answer

A) $0 
B) $133.41 
C) -$133.41 
D) $147.25 
E) -$147.25 
A) $0 
B) $133.41 
C) -$133.41 
D) $147.25 
E) -$147.25 D

Question 3

Exhibit 21.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: $$\begin{array} { l l } 
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
270 \text {-day LIBOR } & 5.10 \% \
360 \text {-day LIBOR } & 5.40 \%
\end{array}$$
-Refer to Exhibit 21.3. If the bank wanted to hedge its exposure to falling LIBOR on this loan commitment, describe the sequence of transactions in the futures markets it could undertake.

Accepted Answer

A) Buy 3 Eurodollar futures contracts that expire at the end of the first quarter. 
B) Buy 3 Eurodollar futures contracts that expire at the end of the first quarter, 3 that expire at the end of the second quarter, and 3 that expire at the end of the third quarter. 
C) Sell 3 Eurodollar futures contracts that expire at the end of the year. 
D) Sell one Eurodollar futures contract that expires at the end of the first quarter, one that expires at the end of the second quarter, and one that expires at the end of the third quarter. 
E) Buy 3 Eurodollar futures contracts that expire at the end of the year. 
A) Buy 3 Eurodollar futures contracts that expire at the end of the first quarter. 
B) Buy 3 Eurodollar futures contracts that expire at the end of the first quarter, 3 that expire at the end of the second quarter, and 3 that expire at the end of the third quarter. 
C) Sell 3 Eurodollar futures contracts that expire at the end of the year. 
D) Sell one Eurodollar futures contract that expires at the end of the first quarter, one that expires at the end of the second quarter, and one that expires at the end of the third quarter. 
E) Buy 3 Eurodollar futures contracts that expire at the end of the year. B

Question 4

Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a decline in equity values and wish to hedge $500 million of the portfolio. Calculate the number of contracts you would need to hedge your position and indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is 1105 and the multiplier is 250.

Accepted Answer

A) 2500 contracts short 
B) 1810 contracts short 
C) 1810 contracts long 
D) 2081 contracts short 
E) 2081 contracts long 
A) 2500 contracts short 
B) 1810 contracts short 
C) 1810 contracts long 
D) 2081 contracts short 
E) 2081 contracts long

Question 5

The cost-of-carry model is useful for pricing future contracts.

Accepted Answer

A) True 
 B)False

Question 6

Exhibit 21.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows: $$\begin{array} { l l } 
90 \text {-day LIBOR } & 2.70 \% \
180 \text {-day LIBOR } & 2.85 \% \
270 \text {-day LIBOR } & 3.10 \% \
360 \text {-day LIBOR } & 3.40 \%
\end{array}$$
-Refer to Exhibit 21.12. What is the implied 90-day forward rate at the beginning of the third quarter?

Accepted Answer

A) 2.97% 
B) 3.05% 
C) 3.34% 
D) 3.55% 
E) 3.76% 
A) 2.97% 
B) 3.05% 
C) 3.34% 
D) 3.55% 
E) 3.76%

Question 7

Exhibit 21.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose you are a loan officer for a commercial bank and one of your clients has just approached you about a one-year loan for $4,000,000. Interest on the new loan will be paid at the end of each quarter based on the prevailing level of LIBOR at the beginning of each quarter. The LIBOR yield curve in the cash market is as follows: $$\begin{array} { l l } 
90 \text {-day LIBOR } & 2.70 \% \
180 \text {-day LIBOR } & 2.85 \% \
270 \text {-day LIBOR } & 3.10 \% \
360 \text {-day LIBOR } & 3.40 \%
\end{array}$$
-Refer to Exhibit 21.12. A bond portfolio manager expects a cash inflow of $10,000,000. The manager plans to hedge potential risk with a Treasury futures contract with a value of $102,150. The conversion factor between the CTD and the bond specified in the Treasury futures contract is 0.88. The duration of bond portfolio is 6 years, and the duration of the CTD bond is 4.5 years. Indicate the number of contracts required and whether the position to be taken is short or long.

Accepted Answer

A) 114 contracts short 
B) 114 contracts long 
C) 60 contract short 
D) 60 contracts long 
E) None of the above 
A) 114 contracts short 
B) 114 contracts long 
C) 60 contract short 
D) 60 contracts long 
E) None of the above

Question 8

In the absence of arbitrage opportunities, the forward contract price should be equal to the current spot price plus interest.

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 21.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%.
-Refer to Exhibit 21.5. If the futures contract was currently available for 1050, indicate the appropriate strategy that would earn an arbitrage profit.

Accepted Answer

A) Long futures, and short the index. 
B) Short futures and long the index. 
C) Long futures and long the index. 
D) Short futures and short the index. 
E) None of the above. 
A) Long futures, and short the index. 
B) Short futures and long the index. 
C) Long futures and long the index. 
D) Short futures and short the index. 
E) None of the above.

Question 10

In your portfolio you have $1 million of 20 year, 8 5/8 percent bonds which are selling at 83.15 (or 83 15/32) against this position. Because you feel interest rates will rise you sell 10 bond futures at 81.15 (or 81 15/32) against this position. Two months later you decide to close your position. The bonds have fallen to 78 and the futures contracts are at 75.16 (75 16/32). Disregarding margin and transaction costs, what is your gain or loss?

Accepted Answer

A) $5,000 loss 
B) $500 loss 
C) Breakeven 
D) $500 gain 
E) $5,000 gain 
A) $5,000 loss 
B) $500 loss 
C) Breakeven 
D) $500 gain 
E) $5,000 gain

Question 11

The most popular financial futures in terms of average daily volume is the

Accepted Answer

A) OEX contracts. 
B) S&P 500 contracts. 
C) LIBOR contracts. 
D) T-bill contracts. 
E) T-bond contracts. 
A) OEX contracts. 
B) S&P 500 contracts. 
C) LIBOR contracts. 
D) T-bill contracts. 
E) T-bond contracts.

Question 12

Exhibit 21.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets $$\begin{array}{l}
\begin{array} { c c } 
&\text { T-Bill } & \text { Eurodollar } \
\hline \text { September }& 93.25 & 92.35
\end{array}
\end{array}$$
-Refer to Exhibit 21.6. Assume that a month later the price of the September T-Bill future is 93 and the price of the Eurodollar future is 90.25. Calculate the profit on the Eurodollar futures position.

Accepted Answer

A) 190 basis points. 
B) 210 basis points. 
C) -190 basis points. 
D) -210 basis points. 
E) 100 basis points. 
A) 190 basis points. 
B) 210 basis points. 
C) -190 basis points. 
D) -210 basis points. 
E) 100 basis points.

Question 13

The process by which invest on margin accounts are credited or debited to reflect daily trading gains or losses is referred to as the ____ process.

Accepted Answer

A) Hedge rationing 
B) Daily settlement 
C) Marked-to-market 
D) Book-to-market 
E) Account realization 
A) Hedge rationing 
B) Daily settlement 
C) Marked-to-market 
D) Book-to-market 
E) Account realization

Question 14

When F0,T > E(ST) it is known as

Accepted Answer

A) Backwardation. 
B) Normal backwardation. 
C) Normal contango. 
D) Inverted spread. 
E) Pure expectations equilibrium. 
A) Backwardation. 
B) Normal backwardation. 
C) Normal contango. 
D) Inverted spread. 
E) Pure expectations equilibrium.

Question 15

Exhibit 21.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a relationship officer for a money-center commercial bank, one of your corporate accounts has just approached you about a one-year loan for $3,000,000. The customer would pay a quarterly interest expense based on the prevailing level of LIBOR at the beginning of each quarter. As is the bank's convention on all such loans, the amount of the interest payment would then be paid at the end of the quarterly cycle when the new rate for the next cycle is determined. You observe the following LIBOR yield curve in the cash market: $$\begin{array} { l l } 
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
270 \text {-day LIBOR } & 5.10 \% \
360 \text {-day LIBOR } & 5.40 \%
\end{array}$$
-Refer to Exhibit 21.3. Assuming the yields inferred from the Eurodollar futures contract prices for the next three settlement periods are equal to the implied forward rates, calculate in annual (360-day) percentage terms, the annuity that would leave the bank indifferent between making the floating-rate loan and hedging it in the futures market, and making a one-year fixed-rate loan.

Accepted Answer

A) 20.86% 
B) 5.10% 
C) 4.91% 
D) 5.20% 
E) None of the above 
A) 20.86% 
B) 5.10% 
C) 4.91% 
D) 5.20% 
E) None of the above

Question 16

Assume that you manage a $50 million equity portfolio. The portfolio beta is 0.85. You anticipate a cash inflow of $5 million into the portfolio. Calculate the number of contracts you would need to hedge your position and indicate whether you would go short or long. Assume that the price of the S&P 500 futures contract is 1062 and the multiplier is 250.

Accepted Answer

A) 25 contracts short 
B) 18 contracts short 
C) 16 contracts long 
D) 19 contracts short 
E) None of the above 
A) 25 contracts short 
B) 18 contracts short 
C) 16 contracts long 
D) 19 contracts short 
E) None of the above

Question 17

Exhibit 21.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets $$\begin{array}{l}
\begin{array} { c c } 
&\text { T-Bill } & \text { Eurodollar } \
\hline \text { September }& 93.25 & 92.35
\end{array}
\end{array}$$
-Refer to Exhibit 21.6. Assume that a month later the price of the September T-Bill future is 93 and the price of the Eurodollar future is 90.25. Calculate the profit on the T-Bill futures position.

Accepted Answer

A) 25 basis points. 
B) 110 basis points. 
C) -25 basis points. 
D) -110 basis points. 
E) 50 basis points. 
A) 25 basis points. 
B) 110 basis points. 
C) -25 basis points. 
D) -110 basis points. 
E) 50 basis points.

Question 18

Exhibit 21.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume you are the Treasurer for the Johnson Pharmaceutical Company and in late July 2004, the company is considering the sale of $500 million in 20-year debentures that will most likely be rated the same as the firm's other debt issues. The firm would like to proceed at the current rate of 8.5%, but you know that it will probably take until November to bring the issue to market. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts which each represent $100,000. $$\begin{array} { l c c } 
& \text { Case 1 } & \text { Case 2 } \
\hline  \text { Current Value - July 2004 } & & \
\quad \text { Bond Rate } & 8.5 \% & 8.5 \% \
\quad \text { Dec. } 2004 \text { Treasury Bonds } & 87.75 & 87.75 \
\text { Estimated Values - Nov. 2004 } & & \
\quad \text { Bond Rate } & 9.5 \% & 7.5 \% \
\quad \text { Dec. } 2004 \text { Treasury Bonds } & 85.60 & 91.65
\end{array}$$
-Refer to Exhibit 21.2. How you would go about hedging the bond issue?

Accepted Answer

A) Buy 5,000 contracts 
B) Buy 50,000 contracts 
C) Sell 5,000,000 contracts 
D) Sell 5,000 contracts 
E) None of the above 
A) Buy 5,000 contracts 
B) Buy 50,000 contracts 
C) Sell 5,000,000 contracts 
D) Sell 5,000 contracts 
E) None of the above

Question 19

The inclusion of the following in the cost of carry model will increase the futures price

Accepted Answer

A) Dividends 
B) Storage costs 
C) Interest rate 
D) a and b 
E) None of the above 
A) Dividends 
B) Storage costs 
C) Interest rate 
D) a and b 
E) None of the above

Question 20

Which of the following statements is true?

Accepted Answer

A) The buyer of a forward contract is said to be long forward. 
B) The seller of a forward contract is said to be short forward. 
C) The seller of a forward contract is said to be long forward. 
D) The buyer of a forward contract is said to be short forward. 
E) Choices a and b 
A) The buyer of a forward contract is said to be long forward. 
B) The seller of a forward contract is said to be short forward. 
C) The seller of a forward contract is said to be long forward. 
D) The buyer of a forward contract is said to be short forward. 
E) Choices a and b

In the cost of carry model the inclusion of storage costs will increase the futures price.

Exhibit 21.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%. -Refer to Exhibit 21.5. If the futures contract was currently available for 1250, calculate the arbitrage profit.

The cost-of-carry model is useful for pricing future contracts.

In the absence of arbitrage opportunities, the forward contract price should be equal to the current spot price plus interest.

The most popular financial futures in terms of average daily volume is the

The process by which invest on margin accounts are credited or debited to reflect daily trading gains or losses is referred to as the ____ process.

When F_0,T > E(S_T) it is known as

The inclusion of the following in the cost of carry model will increase the futures price

Which of the following statements is true?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 21: Forward and Futures Contracts

In the cost of carry model the inclusion of storage costs will increase the futures price.

Exhibit 21.5 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) The S&P 500 stock index is at 1100. The annualized interest rate is 3.5% and the annualized dividend is 2%. -Refer to Exhibit 21.5. If the futures contract was currently available for 1250, calculate the arbitrage profit.

The cost-of-carry model is useful for pricing future contracts.

In the absence of arbitrage opportunities, the forward contract price should be equal to the current spot price plus interest.

The most popular financial futures in terms of average daily volume is the

The process by which invest on margin accounts are credited or debited to reflect daily trading gains or losses is referred to as the ____ process.

When F0,T > E(ST) it is known as

The inclusion of the following in the cost of carry model will increase the futures price

Which of the following statements is true?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

When F_0,T > E(S_T) it is known as