Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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.Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock index future is priced at 1150 with a multiplier of 250.Calculate the profit on the stock index futures position.

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 3

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 4

Financial futures include all of the following underlying securities except

Accepted Answer

A)  Stock indexes 
B)  Treasury bonds 
C)  Bank deposits 
D)  Foreign currencies 
E)  All of the above are examples of underlying securities for financial futures 
A)  Stock indexes 
B)  Treasury bonds 
C)  Bank deposits 
D)  Foreign currencies 
E)  All of the above are examples of underlying securities for financial futures

Question 5

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.How many contracts should you buy or sell in order to increase the portfolio beta to 1.30 (rounded to the nearest integer)?

Accepted Answer

A)  Sell 70 contracts 
B)  Buy 70 contracts 
C)  Buy 87 contracts 
D)  Buy 98 contracts 
E)  None of the above 
A)  Sell 70 contracts 
B)  Buy 70 contracts 
C)  Buy 87 contracts 
D)  Buy 98 contracts 
E)  None of the above

Question 6

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.Calculate the current price of the futures contract.

Accepted Answer

A)  1295.66 
B)  1304.34 
C)  1342.75 
D)  1379.29 
E)  1393.49 
A)  1295.66 
B)  1304.34 
C)  1342.75 
D)  1379.29 
E)  1393.49

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.What is the implied 90-day forward rate at the beginning of the fourth quarter?

Accepted Answer

A)  6.19% 
B)  5.10% 
C)  6.07% 
D)  5.68% 
E)  None of the above 
A)  6.19% 
B)  5.10% 
C)  6.07% 
D)  5.68% 
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 $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 9

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 1 actually occur? (Ignore commissions and margin costs,and assume a naive hedge ratio.)

Accepted Answer

A)  $2,945,000.00 gain 
B)  $65,500.00 gain 
C)  $2,945,000.00 loss 
D)  $65,500.00 loss 
E)  None of the above 
A)  $2,945,000.00 gain 
B)  $65,500.00 gain 
C)  $2,945,000.00 loss 
D)  $65,500.00 loss 
E)  None of the above

Question 10

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.Assume that a month later the equity portfolio has a market value of $20,000,000 and the stock index future is priced at 1150 with a multiplier of 250.Calculate the profit on the equity position.

Accepted Answer

A)  $100,000 
B)  -$200,000 
C)  $600,000 
D)  -$500,000 
E)  $400,000 
A)  $100,000 
B)  -$200,000 
C)  $600,000 
D)  -$500,000 
E)  $400,000

Question 11

The basis is the spot price minus the future price.

Accepted Answer

A) True 
 B)False

Question 12

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.
 $$\begin{array} { l c c } 
& \text { Casel } & \text { Case2 } \
 \text { Current Value - July 2004 } & 8.5 \% & 8.5 \% \
\text { Bond Rate } & 87.75 & 87.75 \
\text { Dec. 2004 Treasury Bonds } & & \
\text { Estimated Values - Nov. 2004 } & 9.5 \% & 7.5 \% \
\text { Bond Rate } & 85.60 & 91.65 \
\text { Dec. 2004 Trea5ury Bonds } &
\end{array}$$
-Refer to Exhibit 21.2.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)  $19,500,000.00 gain 
B)  $27,816,683.04 gain 
C)  $27,816,683.04 loss 
D)  $19,500,000.00 loss 
E)  None of the above 
A)  $19,500,000.00 gain 
B)  $27,816,683.04 gain 
C)  $27,816,683.04 loss 
D)  $19,500,000.00 loss 
E)  None of the above

Question 13

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 14

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 will the dollar level of the bank's interest receipt be at the end of the first quarter?

Accepted Answer

A)  $26,500 
B)  $27,000 
C)  $28,500 
D)  $108,000 
E)  None of the above 
A)  $26,500 
B)  $27,000 
C)  $28,500 
D)  $108,000 
E)  None of the above

Question 15

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
 $$\begin{array} { c c c } 
& \text { T-Eill } & \text { Eurqdollar } \
\text { September } & 93.25 & 92.35
\end{array}$$
-Refer to Exhibit 21.6.If you expected the TED spread to widen over the next month then an appropriate strategy would be to

Accepted Answer

A)  Go long T-Bill futures and long Eurodollar futures. 
B)  Go short T-Bill futures and short Eurodollar futures. 
C)  Go long T-Bill futures and short Eurodollar futures. 
D)  Go short T-Bill futures and long Eurodollar futures. 
E)  None of the above. 
A)  Go long T-Bill futures and long Eurodollar futures. 
B)  Go short T-Bill futures and short Eurodollar futures. 
C)  Go long T-Bill futures and short Eurodollar futures. 
D)  Go short T-Bill futures and long Eurodollar futures. 
E)  None of the above.

Question 16

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
 $$\begin{array} { c c c } 
& \text { T-Eill } & \text { Euradollar } \
 \text { September } & 95.24 & 94.6
\end{array}$$
-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 17

Exhibit 21.4
Use the Information Below for the Following Problem(S)
A 3-month T-bond futures contract (maturity 20 years, coupon 6%, face $100,000) currently trades at $98,781.25 (implied yield 6.11%). A 3-month T-note futures contract (maturity 10 years, coupon 6%, face $100,000) currently trades at $101,468.80 (implied yield 5.80%). Assume semiannual compounding.
-Refer to Exhibit 21.4.Suppose the yield curve changed so the that the new yield on the T-bond contract rose to 6.5% and the new yield on the T-note contract fell to 5.5%.Calculate the profit on the NOB futures spread.(Assume coupons are paid semiannually)

Accepted Answer

A)  -$5850.92 
B)  -$6,671.42 
C)  $6,671.42 
D)  $5850.92 
E)  None of the above 
A)  -$5850.92 
B)  -$6,671.42 
C)  $6,671.42 
D)  $5850.92 
E)  None of the above

Question 18

As a contract approaches maturity,the spot price and forward price

Accepted Answer

A)  Increase. 
B)  Diverge. 
C)  Maintain a fixed price differential. 
D)  Have a random relationship. 
E)  Converge. 
A)  Increase. 
B)  Diverge. 
C)  Maintain a fixed price differential. 
D)  Have a random relationship. 
E)  Converge.

Question 19

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 second quarter?

Accepted Answer

A)  4.70% 
B)  4.85% 
C)  4.60% 
D)  4.94% 
E)  None of the above 
A)  4.70% 
B)  4.85% 
C)  4.60% 
D)  4.94% 
E)  None of the above

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

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.

Financial futures include all of the following underlying securities except

The basis is the spot price minus the future price.

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.

As a contract approaches maturity,the spot price and forward 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

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

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.

Financial futures include all of the following underlying securities except

The basis is the spot price minus the future price.

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.

As a contract approaches maturity,the spot price and forward 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