Question 1

The primary use of stock index futures by the portfolio manager is:

Accepted Answer

A) to offset the loss on the portfolio in a declining market. 
B) to profit from major market movements. 
C) to increase the profit potential on the portfolio. 
D) All of the above 
A) to offset the loss on the portfolio in a declining market. 
B) to profit from major market movements. 
C) to increase the profit potential on the portfolio. 
D) All of the above

Question 2

An investor bought a March S&P 500 Index futures contract in December for $1,490.05. After six months the contract value went up to $1,539.95. The contract has a multiplier of 250. With an initial margin of $20,000, what is the annualized percent return on margin?

Accepted Answer

A) 25.28% 
B) 29.8% 
C) 30.8% 
D) 120.64% 
E) 124.76% 
A) 25.28% 
B) 29.8% 
C) 30.8% 
D) 120.64% 
E) 124.76%

Question 3

The loss on option purchase is always:

Accepted Answer

A) limited to the premium paid. 
B) limited to the margin maintenance requirement. 
C) the difference between the strike price and the premium paid. 
D) None of the above 
A) limited to the premium paid. 
B) limited to the margin maintenance requirement. 
C) the difference between the strike price and the premium paid. 
D) None of the above

Question 4

Some investors are prohibited by law from participating in the futures market.

Accepted Answer

A) True 
 B)False

Question 5

The term basis represents the difference between the stock index futures price and the value of the underlying index.

Accepted Answer

A) True 
 B)False

Question 6

Program trading calls for:

Accepted Answer

A) computer-based trigger points for large trades. 
B) the use of computer programs to measure performance. 
C) the use of only call options. 
D) All of the above 
A) computer-based trigger points for large trades. 
B) the use of computer programs to measure performance. 
C) the use of only call options. 
D) All of the above

Question 7

Stock index futures and options are sometimes referred to as derivative products because they:

Accepted Answer

A) are often used as part of program trading. 
B) make the market less volatile. 
C) have intrinsic characteristics. 
D) derive their existence from actual market indexes. 
A) are often used as part of program trading. 
B) make the market less volatile. 
C) have intrinsic characteristics. 
D) derive their existence from actual market indexes.

Question 8

In order to effectively hedge a stock portfolio, the portfolio manager must know the total dollar value of the portfolio, the current index futures price, and:

Accepted Answer

A) the number of contracts available in the market. 
B) the portfolio P/E ratio. 
C) the relative volatility of the portfolio to the market. 
D) More than one of the above 
A) the number of contracts available in the market. 
B) the portfolio P/E ratio. 
C) the relative volatility of the portfolio to the market. 
D) More than one of the above

Question 9

The profit on a stock index option is determined by the change in the underlying value of the futures contract.

Accepted Answer

A) True 
 B)False

Question 10

Stock index futures represent an efficient approach to:

Accepted Answer

A) only taking on unsystematic risk. 
B) only taking on systematic risk. 
C) taking on zero risk, because the index is fully diversified. 
D) taking on lots of risk, due to the fact that the indexes are usually composed of lots of stocks, not just a few. 
A) only taking on unsystematic risk. 
B) only taking on systematic risk. 
C) taking on zero risk, because the index is fully diversified. 
D) taking on lots of risk, due to the fact that the indexes are usually composed of lots of stocks, not just a few.

Question 11

The purpose of hedging with stock index futures is not to magnify the gains and losses on the hedged stock portfolio.

Accepted Answer

A) True 
 B)False

Question 12

A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.

Accepted Answer

A) True 
 B)False

Question 13

If you have a put option on a stock index, you hope the market will:

Accepted Answer

A) go up. 
B) go down. 
C) remain unchanged. 
D) None of the above 
A) go up. 
B) go down. 
C) remain unchanged. 
D) None of the above

Question 14

The overuse of portfolio insurance in the market may be dangerous because:

Accepted Answer

A) a large amount of selling may take place simultaneously. 
B) a small amount of arbitraging may take place simultaneously. 
C) in a down market, the insurance companies may not be able to pay for the losses. 
D) All of the above 
A) a large amount of selling may take place simultaneously. 
B) a small amount of arbitraging may take place simultaneously. 
C) in a down market, the insurance companies may not be able to pay for the losses. 
D) All of the above

Question 15

With a given size portfolio, the higher the portfolio beta,

Accepted Answer

A) the more likely the portfolio is to go up, rather than down. 
B) the more likely the portfolio is to go down, rather than up. 
C) the fewer contracts necessary to hedge the portfolio. 
D) the more contracts necessary to hedge the portfolio. 
A) the more likely the portfolio is to go up, rather than down. 
B) the more likely the portfolio is to go down, rather than up. 
C) the fewer contracts necessary to hedge the portfolio. 
D) the more contracts necessary to hedge the portfolio.

Question 16

Stock index futures and options are sometimes referred to as derivatives.

Accepted Answer

A) True 
 B)False

Question 17

The profit of an index option is determined by:

Accepted Answer

A) the total value of the increase in the index. 
B) the total value of the option. 
C) the size of the premium. 
D) More than one above 
A) the total value of the increase in the index. 
B) the total value of the option. 
C) the size of the premium. 
D) More than one above

Question 18

If an investor can prove that he is hedging a long position, the margin requirement will be less.

Accepted Answer

A) True 
 B)False

Question 19

One of the major uses of a stock index future is the ability:

Accepted Answer

A) to use it to hedge. 
B) to make an unlimited amount of money. 
C) to increase risk. 
D) All of the above 
A) to use it to hedge. 
B) to make an unlimited amount of money. 
C) to increase risk. 
D) All of the above

Exam 16: Stock Index Futures and Options

The primary use of stock index futures by the portfolio manager is:

An investor bought a March S&P 500 Index futures contract in December for $1,490.05. After six months the contract value went up to $1,539.95. The contract has a multiplier of 250. With an initial margin of $20,000, what is the annualized percent return on margin?

The loss on option purchase is always:

Some investors are prohibited by law from participating in the futures market.

The term basis represents the difference between the stock index futures price and the value of the underlying index.

Program trading calls for:

Stock index futures and options are sometimes referred to as derivative products because they:

In order to effectively hedge a stock portfolio, the portfolio manager must know the total dollar value of the portfolio, the current index futures price, and:

The profit on a stock index option is determined by the change in the underlying value of the futures contract.

Stock index futures represent an efficient approach to:

The purpose of hedging with stock index futures is not to magnify the gains and losses on the hedged stock portfolio.

A tax hedge is used to reduce or eliminate tax on the capital gains on a portfolio.

If you have a put option on a stock index, you hope the market will:

The overuse of portfolio insurance in the market may be dangerous because:

With a given size portfolio, the higher the portfolio beta,

Stock index futures and options are sometimes referred to as derivatives.

The profit of an index option is determined by:

If an investor can prove that he is hedging a long position, the margin requirement will be less.

One of the major uses of a stock index future is the ability:

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