Question 1

Some forward contracts, particularly in the foreign exchange market, are quite standard and liquid.

Accepted Answer

A) True 
 B)False

Question 2

A riskless stock index arbitrage profit is possible if the following condition holds:

Accepted Answer

A) F0,T = S0(1 + rf -d)T 
B) F0,T > S0(1 + rf - d)T 
C) F0,T 0(1 + rf - d)T 
D) a and b 
E) b and c 
A) F0,T = S0(1 + rf -d)T 
B) F0,T > S0(1 + rf - d)T 
C) F0,T 0(1 + rf - d)T 
D) a and b 
E) b and c

Question 3

If you have entered into a currency futures hedge for the Japanese yen in connection with buying Japanese equipment, if the yen goes from 110 yen/$1 to 100 yen/$1, you will lose in the spot market but have an offsetting gain in the futures market.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 21.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
As a portfolio manager, you are responsible for a $150 million portfolio, 90 percent of which is invested in equities, with a portfolio beta of 1.25. You are utilizing the S&P 500 as your passive benchmark. Currently the S&P 500 is valued at 1202. The value of the S&P 500 futures contract is equal to $250 times the value of the index. The beta of the futures contract is 1.0.
-Refer to Exhibit 21.9. If you anticipate a cash outflow of $5 million next week, how many futures contracts should you buy or sell in order to mitigate the effect of this outflow on the portfolio's performance (rounded to the nearest integer)?

Accepted Answer

A) Sell 21 contracts 
B) Buy 21 contracts 
C) Sell 17 contracts 
D) Buy 17 contracts 
E) None of the above 
A) Sell 21 contracts 
B) Buy 21 contracts 
C) Sell 17 contracts 
D) Buy 17 contracts 
E) None of the above

Question 5

A backwardated futures market occurs when

Accepted Answer

A) F0,T 0 
B) F0,T = S0 
C) F0,T > S0 
D) F0,T > E( ST) 
E) F0,T > ST 
A) F0,T 0 
B) F0,T = S0 
C) F0,T > S0 
D) F0,T > E( ST) 
E) F0,T > ST

Question 6

Exhibit 21.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Assume that you observe the following prices in the T-Bill and Eurodollar futures markets $$\begin{array}{l}
\begin{array} { c c } 
&\text { T-Bill } & \text { Eurodollar } \
\hline \text { September }& 95.24 & 94.6
\end{array}
\end{array}$$
-Refer to Exhibit 21.7. Assume that a month later the price of the September T-Bill future is 96.25 and the price of the Eurodollar future is 95.9. Calculate the profit on the Eurodollar futures position.

Accepted Answer

A) 101 basis points. 
B) 130 basis points. 
C) -101 basis points. 
D) -130 basis points. 
E) 29 basis points. 
A) 101 basis points. 
B) 130 basis points. 
C) -101 basis points. 
D) -130 basis points. 
E) 29 basis points.

Question 7

The number of future contracts needed to hedge a unit of the spot assets is solely a function of the variance of the spot prices.

Accepted Answer

A) True 
 B)False

Question 8

The major difference between valuing futures versus forward contracts stems from the fact that future contracts are

Accepted Answer

A) Traded on exchange. 
B) Backed by a clearinghouse. 
C) Marked-to-market daily. 
D) Less risky. 
E) Relatively inflexible. 
A) Traded on exchange. 
B) Backed by a clearinghouse. 
C) Marked-to-market daily. 
D) Less risky. 
E) Relatively inflexible.

Question 9

Exhibit 21.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1300. The annualized interest rate is 4.0% and the annualized dividend is 2%. You are currently considering purchasing a 2-month futures contract for your portfolio.
-Refer to Exhibit 21.10. If the futures contract was currently available for 1280, 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

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 90-day LIBOR rises to the levels "predicted" by the implied forward rates, what will the dollar level of the bank's interest receipt be at the end of the second quarter?

Accepted Answer

A) $40,500.00 
B) $38,250.00 
C) $35,250.00 
D) $37,064.25 
E) None of the above 
A) $40,500.00 
B) $38,250.00 
C) $35,250.00 
D) $37,064.25 
E) None of the above

Question 11

Exhibit 21.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
In late January 2004, The Union Cosmos Company is considering the sale of $100 million in 10-year debentures that will probably be rated AAA like the firm's other bond issues. The firm is anxious to proceed at today's rate of 10.5 percent. As treasurer, you know that it will take until sometime in April to get the issue registered and sold. Therefore, you suggest that the firm hedge the pending issue using Treasury bond futures contracts each representing $100,000. $$\begin{array} { c c c } 
& \text { Case 1 } & \text { Case 2 } \
\hline  \text { Current Value - January 2004 } & & \
\quad \text { Bond Rate } & 10.5 \% & 10.5 \% \
\quad \text { June 2004 Treasury B onds } & 78.875 & 78.875 \
\text { Estimated Values - April 2004 } & & \
\quad \text { Bond Rate } & 11.0 \% & 10.0 \% \
\quad \text { June 2004 Treasury B onds } & 75.93 & 81.84
\end{array}$$
-Refer to Exhibit 21.1. Explain how you would go about hedging the bond issue?

Accepted Answer

A) Sell 1,000 contracts 
B) Buy 1,000 contracts 
C) Sell 100 contracts 
D) Sell 10,000 contracts 
E) None of the above 
A) Sell 1,000 contracts 
B) Buy 1,000 contracts 
C) Sell 100 contracts 
D) Sell 10,000 contracts 
E) None of the above

Question 12

Assume that you manage an equity portfolio. The portfolio beta is 1.15. You anticipate a rise in equity values and wish to increase equity exposure on $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 13

Exhibit 21.11
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $10,000,000 equity portfolio under management. The manager wishes to hedge against a decline in share values using stock index futures. Currently a stock index future is priced at 1350 and has a multiplier of 250. The portfolio beta is 1.50.
-Refer to Exhibit 21.11. Assume that a month later the equity portfolio has a market value of $10,000,000 and the stock index future is priced at 1300 with a multiplier of 250. Calculate the profit (loss) on the stock index futures position.

Accepted Answer

A) -$1,050,000 
B) -$550,000 
C) -$50,000 
D) $550,000 
E) $1,050,000 
A) -$1,050,000 
B) -$550,000 
C) -$50,000 
D) $550,000 
E) $1,050,000

Question 14

The basis (Bt,T) at time t between the spot price (St) and a futures contract expiring at time T (Ft,T) is

Accepted Answer

A) Bt,T = St + Ft,T 
B) Bt,T = St - Ft,T 
C) Bt,T = St * Ft,T 
D) Bt,T = St/Ft,T 
E) None of the above 
A) Bt,T = St + Ft,T 
B) Bt,T = St - Ft,T 
C) Bt,T = St * Ft,T 
D) Bt,T = St/Ft,T 
E) None of the above

Question 15

Since futures contracts are "marked-to-market" daily, the gains and losses are settled daily.

Accepted Answer

A) True 
 B)False

Question 16

An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.

Accepted Answer

A) True 
 B)False

Question 17

The basis is the spot price minus the future price.

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 21.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1300. The annualized interest rate is 4.0% and the annualized dividend is 2%. You are currently considering purchasing a 2-month futures contract for your portfolio.
-Refer to Exhibit 21.10. If the futures contract was currently available for 1350, calculate the arbitrage profit.

Accepted Answer

A) $8.33 
B) $28.45 
C) $45.67 
D) $50.00 
E) $54.33 
A) $8.33 
B) $28.45 
C) $45.67 
D) $50.00 
E) $54.33

Question 19

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

Accepted Answer

A) Call option 
B) Put option 
C) Forward contract 
D) Futures contract 
E) None of the above 
A) Call option 
B) Put option 
C) Forward contract 
D) Futures contract 
E) None of the above

Some forward contracts, particularly in the foreign exchange market, are quite standard and liquid.

A riskless stock index arbitrage profit is possible if the following condition holds:

If you have entered into a currency futures hedge for the Japanese yen in connection with buying Japanese equipment, if the yen goes from 110 yen/$1 to 100 yen/$1, you will lose in the spot market but have an offsetting gain in the futures market.

A backwardated futures market occurs when

The number of future contracts needed to hedge a unit of the spot assets is solely a function of the variance of the spot prices.

The major difference between valuing futures versus forward contracts stems from the fact that future contracts are

The basis (B_t,T) at time t between the spot price (S_t) and a futures contract expiring at time T (F_t,T) is

Since futures contracts are "marked-to-market" daily, the gains and losses are settled daily.

An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.

The basis is the spot price minus the future price.

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

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

Some forward contracts, particularly in the foreign exchange market, are quite standard and liquid.

A riskless stock index arbitrage profit is possible if the following condition holds:

If you have entered into a currency futures hedge for the Japanese yen in connection with buying Japanese equipment, if the yen goes from 110 yen/$1 to 100 yen/$1, you will lose in the spot market but have an offsetting gain in the futures market.

A backwardated futures market occurs when

The number of future contracts needed to hedge a unit of the spot assets is solely a function of the variance of the spot prices.

The major difference between valuing futures versus forward contracts stems from the fact that future contracts are

The basis (Bt,T) at time t between the spot price (St) and a futures contract expiring at time T (Ft,T) is

Since futures contracts are "marked-to-market" daily, the gains and losses are settled daily.

An investor in a hedge position is no longer exposed to the absolute price movement of the underlying asset, but the investor is still exposed to basis risk.

The basis is the spot price minus the future price.

An investor who wants a long position in a ____ must first place the order with a broker, who then passes it on to the trading pit or electronic network. Details of the order are then passed on to the exchange clearinghouse.

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

The basis (B_t,T) at time t between the spot price (S_t) and a futures contract expiring at time T (F_t,T) is