Question 1

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 2

In late January 2011,Starlight Corporation is considering the sale of $50 million in 10-year debentures rated AAA.The issue will most likely be registered and sold some time in April.Therefore,Starlight Corporation desires to hedge the pending issue using Treasury bond futures contracts each representing $100,000.Explain how you would go about hedging the bond issue?

Accepted Answer

A)  Sell 500 contracts 
B)  Buy 500 contracts 
C)  Sell 50 contracts 
D)  Buy 50 contracts 
E)  None of the above 
A)  Sell 500 contracts 
B)  Buy 500 contracts 
C)  Sell 50 contracts 
D)  Buy 50 contracts 
E)  None of the above

Question 3

Interest rate parity is a key concept in managing risk in the commodities market.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 2.70 \% \
180 \text {-day LIBOR } & 2.85 \% \
270 \text {-day LIBOR } & 3.10 \% \
360 \text {-day LIBOR } & 3.40 \%
\end{array}$
-Refer to Exhibit 21.12.What is the implied 90-day forward rate at the beginning of the second quarter?

Accepted Answer

A)  2.70% 
B)  2.85% 
C)  2.98% 
D)  3.15% 
E)  3.32% 
A)  2.70% 
B)  2.85% 
C)  2.98% 
D)  3.15% 
E)  3.32%

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A)  Contract price. 
B)  The cost of carry. 
C)  Margin requirement. 
D)  The price discovery rate. 
E)  The convenience return. 
A)  Contract price. 
B)  The cost of carry. 
C)  Margin requirement. 
D)  The price discovery rate. 
E)  The convenience return.

Question 8

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.Calculate the price of the futures contract now.

Accepted Answer

A)  1108.59 
B)  1102.75 
C)  1139.79 
D)  1123.19 
E)  None of the above 
A)  1108.59 
B)  1102.75 
C)  1139.79 
D)  1123.19 
E)  None of the above

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

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

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 2.70 \% \
180 \text {-day LIBOR } & 2.85 \% \
270 \text {-day LIBOR } & 3.10 \% \
360 \text {-day LIBOR } & 3.40 \%
\end{array}$
-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 12

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 13

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:
 $\begin{array}{ll}
90 \text {-day LIBOR } & 2.70 \% \
180 \text {-day LIBOR } & 2.85 \% \
270 \text {-day LIBOR } & 3.10 \% \
360 \text {-day LIBOR } & 3.40 \%
\end{array}$
-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 14

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

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

Accepted Answer

A)  $35,250.00 
B)  $36,375.00 
C)  $38,250.00 
D)  $40,500.00 
E)  None of the above 
A)  $35,250.00 
B)  $36,375.00 
C)  $38,250.00 
D)  $40,500.00 
E)  None of the above

Question 16

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 17

Like hedging,arbitrage results in increased returns with a disproportional increase in risk.

Accepted Answer

A) True 
 B)False

Question 18

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 number of contract required to hedge the risk exposure and indicate whether the manager should be short or long.

Accepted Answer

A)  100 contracts long. 
B)  82 contracts short. 
C)  82 contracts long. 
D)  100 contract short. 
E)  None of the above. 
A)  100 contracts long. 
B)  82 contracts short. 
C)  82 contracts long. 
D)  100 contract short. 
E)  None of the above.

Question 19

Like future contracts,all forward contracts are processed by a clearing corporation.

Accepted Answer

A) True 
 B)False

Question 20

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

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

Interest rate parity is a key concept in managing risk in the commodities market.

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.

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

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

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.Calculate the price of the futures contract now.

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.

Like hedging,arbitrage results in increased returns with a disproportional increase in risk.

Like future contracts,all forward contracts are processed by a clearing corporation.

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

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

Exam 21: Forward and Futures Contracts

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

Interest rate parity is a key concept in managing risk in the commodities market.

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.

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

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

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.Calculate the price of the futures contract now.

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.

Like hedging,arbitrage results in increased returns with a disproportional increase in risk.

Like future contracts,all forward contracts are processed by a clearing corporation.

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

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