Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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)  15 contracts short 
A)  25 contracts short 
B)  18 contracts short 
C)  16 contracts long 
D)  19 contracts short 
E)  15 contracts short

Question 3

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A futures contract on Treasury bond futures with a December expiration date currently trade at 103:06. The face value of a Treasury bond futures contract is $100,000. Your broker requires an initial margin of 10 percent.
-Refer to Exhibit 15.8. If the futures contract is quoted at 105:08 at expiration, calculate the percentage return.

Accepted Answer

A)  1.99 percent 
B)  19.99 percent 
C)  20.62 percent 
D)  25.37 percent 
E)  -13.65 percent 
A)  1.99 percent 
B)  19.99 percent 
C)  20.62 percent 
D)  25.37 percent 
E)  -13.65 percent

Question 4

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

Accepted Answer

A) True 
 B)False

Question 5

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5 percent in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3 percent. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and TexMex.

Accepted Answer

A)  The dealer is obligated to pay TexMex $61,881. 
B)  The dealer is obligated to pay TexMex $61,500. 
C)  TexMex is obligated to pay the dealer $247,524. 
D)  TexMex is obligated to pay the dealer $246,000. 
E)  TexMex is obligated to pay the dealer $258,000. 
A)  The dealer is obligated to pay TexMex $61,881. 
B)  The dealer is obligated to pay TexMex $61,500. 
C)  TexMex is obligated to pay the dealer $247,524. 
D)  TexMex is obligated to pay the dealer $246,000. 
E)  TexMex is obligated to pay the dealer $258,000.

Question 6

According to the cost of carry model, the relationship between the spot (S0) and futures price (F0,T) is

Accepted Answer

A)  S0 = F0,T/(1 + rf)T. 
B)  S0 = F0,T(1 + rf)T. 
C)  S0 + F0,T = (1 + rf)T. 
D)  S0 = F0,T + (1 + rf)T. 
E)  S0 - F0,T = (1 + rf)T. 
A)  S0 = F0,T/(1 + rf)T. 
B)  S0 = F0,T(1 + rf)T. 
C)  S0 + F0,T = (1 + rf)T. 
D)  S0 = F0,T + (1 + rf)T. 
E)  S0 - F0,T = (1 + rf)T.

Question 7

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 8

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
TexMex Corporation has decided to borrow $50,000,000 for six months in two three-month issues. The corporation is concerned that interest rates will rise over the next three months. Thus, the corporation purchases a 3 * 6 FRA whereby the corporation pays the dealer's quoted fixed rate of 3.5 percent in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys LIBOR from Newport Inc. at its bid rate of 3 percent. The notional principal is $50,000,000 and that there are 60 days between month 3 and month 6.
-Refer to Exhibit 15.18. Suppose that three-month LIBOR is 4.0 percent on the rate determination day, and the contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Newport.

Accepted Answer

A)  The dealer is obligated to pay Newport $125,000. 
B)  The dealer is obligated to pay Newport $115,000. 
C)  Newport is obligated to pay the dealer $125,000. 
D)  Newport is obligated to pay the dealer $115,000. 
E)  Newport is obligated to pay the dealer $105,000. 
A)  The dealer is obligated to pay Newport $125,000. 
B)  The dealer is obligated to pay Newport $115,000. 
C)  Newport is obligated to pay the dealer $125,000. 
D)  Newport is obligated to pay the dealer $115,000. 
E)  Newport is obligated to pay the dealer $105,000.

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

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

According to the cost of carry model, the relationship between the spot (S₀) and futures price (F_0,T) is

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

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 15: Forward, Futures, and Swap Contracts

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

A plain vanilla swap agreement is used in similar situations as a forward rate agreement.

According to the cost of carry model, the relationship between the spot (S0) and futures price (F0,T) is

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

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Fundamentals and Valuation

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

According to the cost of carry model, the relationship between the spot (S₀) and futures price (F_0,T) is