Exam 29: The Applications of Futures and Options Contracts

________ monitor the cash and futures market to see when the differences between the theoretical futures price and actual futures price are sufficiently large to generate an ________.

A short hedge is undertaken to protect against an increase in the price of a financial instrument or portfolio to be purchased in the cash market at some future time.

A strategy that seeks to insure the value of a portfolio through the use of a synthetic put option strategy is called dynamic hedging. Given that put options on stock indexes are available to portfolio managers, why should they bother with dynamic hedging? There are four reasons and one of these is ________.

A money manager can use both stock index futures and interest rate futures to more efficiently allocate funds between the stock market and the bond market.

A corporation plans to sell commercial paper one month from now. Buying put options on Treasury bill futures or Eurodollar CD futures lets the corporation ________.

Suppose that a money manager knows that bonds are maturing in the near future and expects interest rates to fall. ________ can be purchased in this situation.

Explain how a "protective put buying strategy" works.

A corporation planning to sell long-term bonds two months from now can protect itself against a rise in interest rates by selling or taking ________ in interest rate futures now.

An investor who wants to speculate that interest rates will rise (fall) can sell (buy) ________.

If interest rate futures are ________, institutional investors can enhance returns in the same way that they do in equities.

A long hedge is used to protect against a decline in the cash price of a financial instrument or portfolio.

A thrift or commercial bank wants to make sure that the cost of its funds will not exceed a certain level. This can be done by ________.

Suppose that a pension fund manager knows that bonds must be liquidated in 40 days to make a $5 million payment to the beneficiaries of the pension fund. If interest rates rise in 40 days, more bonds will have to be liquidated to realize $5 million. The hedger will buy put options thus following ________.

Because futures are highly leveraged and transactions costs are less than in the cash market, market participants can alter their risk exposure to a market (stock or bond) less efficiently in the futures market.

When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called ________.

Institutional investors can use stock index futures for seven distinct investment strategies. Name four of these strategies.

Interest rate options or options on interest rate futures can be used by investors and issuers to speculate on adverse interest rate movements but still benefit from a favorable interest rate movement.

The decision on how to divide funds across the major asset classes (for example, equities, bonds, foreign securities, real estate) is referred to as the ________.

In regards to hedging, which of the below statements is FALSE?

Investors can use stock index futures to speculate on stock prices, control a portfolio's price risk exposure, hedge against adverse stock price movements, construct indexed portfolios, engage in index arbitrage, and create a synthetic put option.