Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

If you were bearish on the near term outlook for the stock market but did not want to sell your portfolio,you could hedge against the decline by selling stock index futures.

Accepted Answer

A) True 
 B)False  True

Question 3

The main tradeoff between forward and future contracts is

Accepted Answer

A)  Design flexibility. 
B)  Credit risk. 
C)  Liquidity risk. 
D)  All of the above. 
E)  Choices a and b only 
A)  Design flexibility. 
B)  Credit risk. 
C)  Liquidity risk. 
D)  All of the above. 
E)  Choices a and b only D

Question 4

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
\text { 270-day LIBOR } & 5.10 \% \
\text { 360-day LIBOR } & 5.40 \%
\end{array}$
-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 fourth quarter?

Accepted Answer

A)  $36,223.50 
B)  $40,500.00 
C)  $38,250.00 
D)  $36,375.00 
E)  None of the above 
A)  $36,223.50 
B)  $40,500.00 
C)  $38,250.00 
D)  $36,375.00 
E)  None of the above

Question 5

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
\text { 270-day LIBOR } & 5.10 \% \
\text { 360-day LIBOR } & 5.40 \%
\end{array}$
-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 6

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

Question 7

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
\text { 270-day LIBOR } & 5.10 \% \
\text { 360-day LIBOR } & 5.40 \%
\end{array}$
-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 third quarter?

Accepted Answer

A)  $35,250.00 
B)  $36,375.00 
C)  $38,250.00 
D)  $41,005.50 
E)  None of the above 
A)  $35,250.00 
B)  $36,375.00 
C)  $38,250.00 
D)  $41,005.50 
E)  None of the above

Question 8

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 $9,500,000 and the stock index future is priced at 1300 with a multiplier of 250.Calculate the profit on the equity position.

Accepted Answer

A)  $100,000 
B)  $200,000 
C)  -$200,000 
D)  -$500,000 
E)  -$600,000 
A)  $100,000 
B)  $200,000 
C)  -$200,000 
D)  -$500,000 
E)  -$600,000

Question 9

The optimal hedge ratio is a function of all of the following except

Accepted Answer

A)  The standard deviation of changes in spot prices. 
B)  The variance deviation of changes in forward prices. 
C)  The covariance between changes in spot and forward prices. 
D)  Choices a and b only 
E)  All of the above 
A)  The standard deviation of changes in spot prices. 
B)  The variance deviation of changes in forward prices. 
C)  The covariance between changes in spot and forward prices. 
D)  Choices a and b only 
E)  All of the above

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

According to the cost of carry model the futures price is the present value of the spot price discounted at the risk free rate.

Accepted Answer

A) True 
 B)False

Question 13

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.
 $$\begin{array} { l c c } 
& \text { Casel } & \text { Case2 } \
 \text { Current Value - January 2004 } & & \
\text { Bond Rate } & 10.5 \% & 10.5 \% \
\text { June 2004 Treasury Bonds } & 78.875 & 78.875 \
\text { Estimated Values - Aprì 2004 } & & \
\quad \text { Bond Rate } & 11.0 \% & 10.0 \% \
\text { June 2004 Trea5ury Bonds } & 75.93 & 81.84
\end{array}$$
-Refer to Exhibit 21.1.What is the dollar gain or loss assuming that future conditions described in Case 2 actually occur? (Ignore commissions and margin costs,and assume a naive hedge ratio.)

Accepted Answer

A)  $2,965,000.00 gain 
B)  $45,500.00 gain 
C)  $2,965,000.00 loss 
D)  $45,500.00 loss 
E)  None of the above 
A)  $2,965,000.00 gain 
B)  $45,500.00 gain 
C)  $2,965,000.00 loss 
D)  $45,500.00 loss 
E)  None of the above

Question 14

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 4.70 \% \
180 \text {-day LIBOR } & 4.85 \% \
\text { 270-day LIBOR } & 5.10 \% \
\text { 360-day LIBOR } & 5.40 \%
\end{array}$
-Refer to Exhibit 21.3.What is the implied 90-day forward rate at the beginning of the third quarter?

Accepted Answer

A)  5.10% 
B)  5.47% 
C)  4.70% 
D)  4.85% 
E)  None of the above 
A)  5.10% 
B)  5.47% 
C)  4.70% 
D)  4.85% 
E)  None of the above

Question 15

The goal of a hedge transaction is to increase expected returns of a fundamental holding.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 21.8
Use the Information Below for the Following Problem(S)
Consider a portfolio manager with a $20,500,000 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 1250 and has a multiplier of 250. The portfolio beta is 1.25.
-Refer to Exhibit 21.8.Calculate the overall profit.

Accepted Answer

A)  $1,550,000 
B)  -$2,000,000 
C)  $2,050,000 
D)  -$5,000,000 
E)  $2,400,000 
A)  $1,550,000 
B)  -$2,000,000 
C)  $2,050,000 
D)  -$5,000,000 
E)  $2,400,000

Question 17

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.Calculate the overall profit.

Accepted Answer

A)  -$50,000 
B)  -$150,000 
C)  $50,000 
D)  $150,000 
E)  $550,000 
A)  -$50,000 
B)  -$150,000 
C)  $50,000 
D)  $150,000 
E)  $550,000

Question 18

In the absence of arbitrage opportunities,the forward price should be equal to the spot price plus the cost of carry.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is not considered a "cost of carry"?

Accepted Answer

A)  Commissions for physical storage 
B)  An opportunity cost for the net amount of invested capital 
C)  A premium for the convenience of consuming the asset now 
D)  A risk premium for uncertainty 
E)  All of the above are considered costs of carry. 
A)  Commissions for physical storage 
B)  An opportunity cost for the net amount of invested capital 
C)  A premium for the convenience of consuming the asset now 
D)  A risk premium for uncertainty 
E)  All of the above are considered costs of carry.

Question 20

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

Exam 21: Forward and Futures Contracts

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

If you were bearish on the near term outlook for the stock market but did not want to sell your portfolio,you could hedge against the decline by selling stock index futures.

The main tradeoff between forward and future contracts is

Which of the following statements is true?

The optimal hedge ratio is a function of all of the following except

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

When F₀,T > E(ST)it is known as

According to the cost of carry model the futures price is the present value of the spot price discounted at the risk free rate.

The goal of a hedge transaction is to increase expected returns of a fundamental holding.

In the absence of arbitrage opportunities,the forward price should be equal to the spot price plus the cost of carry.

Which of the following is not considered a "cost of carry"?

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

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

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

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

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

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Filters

The basis (B_t,_T)at time t between the spot price (S_t)and a futures contract expiring at time T (_t,T)is: St - Ft,T.

When F_₀,T > E(S_T)it is known as

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