Question 1

The wild card option exists because of the difference in the closing times of the spot and futures markets for Treasury bills.

Accepted Answer

A) True 
 B)False

Question 2

If a firm is planning to borrow money in the future, the rate it is trying to lock in is

Accepted Answer

A)  the current forward rate 
B)  the current spot rate 
C)  the difference between the spot rate and the forward rate 
D)  the forward rate at the termination of the hedge 
E)  none of the above 
A)  the current forward rate 
B)  the current spot rate 
C)  the difference between the spot rate and the forward rate 
D)  the forward rate at the termination of the hedge 
E)  none of the above

Question 3

If a stock index futures is at 455 and the pricing model says it should be at 458, an arbitrageur should buy the futures and sell short the stock.

Accepted Answer

A) True 
 B)False

Question 4

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

Accepted Answer

A) True 
 B)False

Question 5

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

Accepted Answer

A) True 
 B)False

Question 6

The timing option results from the difference in closing times of the spot and futures market.

Accepted Answer

A) True 
 B)False

Question 7

Use the following information to answer questions .  On October 1, the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent.  The November Fed funds futures is quoted at 94.50.  The contract size is $5,000,000.
-All of the following are limitations to Fed funds futures arbitrage, except

Accepted Answer

A)  Fed funds rates are determined by Federal Reserve Bank policy 
B)  basis risk between Fed funds and LIBOR 
C)  repo rate is variable for the trading horizon 
D)  settlement is based on average in delivery month 
E)  transaction costs 
A)  Fed funds rates are determined by Federal Reserve Bank policy 
B)  basis risk between Fed funds and LIBOR 
C)  repo rate is variable for the trading horizon 
D)  settlement is based on average in delivery month 
E)  transaction costs

Question 8

If you buy both a 30-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.)

Accepted Answer

A)  7.25 percent 
B)  7.07 percent 
C)  10.15 percent 
D)  7.75 percent 
E)  6.95 percent 
A)  7.25 percent 
B)  7.07 percent 
C)  10.15 percent 
D)  7.75 percent 
E)  6.95 percent

Question 9

The end-of-the-month option is

Accepted Answer

A)  the right to exercise an option on the last day of the month 
B)  an option expiring on the last day of the month 
C)  the right to deliver during the last seven business days of the month 
D)  an option that trades only at the end of the month 
E)  none of the above 
A)  the right to exercise an option on the last day of the month 
B)  an option expiring on the last day of the month 
C)  the right to deliver during the last seven business days of the month 
D)  an option that trades only at the end of the month 
E)  none of the above

Question 10

The most common means of financing a cash-and-carry arbitrage is a repurchase agreement.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is not a risk of program trading?

Accepted Answer

A)  the stocks cannot be simultaneously sold at expiration 
B)  fractional contracts cannot be purchased or sold 
C)  the dividends are not certain 
D)  the stocks cannot be purchased simultaneously 
E)  none of the above 
A)  the stocks cannot be simultaneously sold at expiration 
B)  fractional contracts cannot be purchased or sold 
C)  the dividends are not certain 
D)  the stocks cannot be purchased simultaneously 
E)  none of the above

Question 12

Stock index arbitrage will earn, at no risk, the difference between the futures price and the theoretical futures price.

Accepted Answer

A) True 
 B)False

Question 13

The settlement price, conversion factor and accrued interest are necessary to calculate the invoice price.

Accepted Answer

A) True 
 B)False

Question 14

Determine the conversion factor for delivery of the 7 1/4's off May 15, 2026 on the March 2010 T-bond futures contract.

Accepted Answer

A)  1.225 
B)  0.932 
C)  1.083 
D)  1.127 
E)  1.509 
A)  1.225 
B)  0.932 
C)  1.083 
D)  1.127 
E)  1.509

Question 15

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

Accepted Answer

A) True 
 B)False

Question 16

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

Accepted Answer

A)  bond insurance 
B)  program trading 
C)  the wild card 
D)  delivery arbitrage 
E)  none of the above 
A)  bond insurance 
B)  program trading 
C)  the wild card 
D)  delivery arbitrage 
E)  none of the above

Question 17

The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a

Accepted Answer

A)  Bond-bill spread 
B)  MOB spread 
C)  designated order turnaround 
D)  turtle trade 
E)  none of the above 
A)  Bond-bill spread 
B)  MOB spread 
C)  designated order turnaround 
D)  turtle trade 
E)  none of the above

Question 18

Which one of the following options is not associated with the Treasury bond futures contract?

Accepted Answer

A)  end-of-the-month 
B)  spread option 
C)  wild card option 
D)  quality option 
E)  none of the above 
A)  end-of-the-month 
B)  spread option 
C)  wild card option 
D)  quality option 
E)  none of the above

Question 19

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25, the accrued interest is 1.35, the futures price is 114.75, the CF is 1.0125, the accrued interest at delivery is 0.95, and the holding period is three months.

Accepted Answer

A)  1.85 percent 
B)  0.77 percent 
C)  14.77 percent 
D)  13.04 percent 
E)  2.23 percent 
A)  1.85 percent 
B)  0.77 percent 
C)  14.77 percent 
D)  13.04 percent 
E)  2.23 percent

Question 20

Suppose you observe the spot euro at $1.38/€ and the three month euro futures at $1.379/€. Based on carry arbitrage, you conclude

Accepted Answer

A)  this futures market is inefficient because the futures price is below the spot price 
B)  this futures market is indicating that the spot price is expected to fall 
C)  the spot price is too high relative to the observed futures price 
D)  the risk-free rate in Europe is higher than the risk-free rate in the U. S. 
E)  none of the above 
A)  this futures market is inefficient because the futures price is below the spot price 
B)  this futures market is indicating that the spot price is expected to fall 
C)  the spot price is too high relative to the observed futures price 
D)  the risk-free rate in Europe is higher than the risk-free rate in the U. S. 
E)  none of the above

The wild card option exists because of the difference in the closing times of the spot and futures markets for Treasury bills.

If a firm is planning to borrow money in the future, the rate it is trying to lock in is

If a stock index futures is at 455 and the pricing model says it should be at 458, an arbitrageur should buy the futures and sell short the stock.

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

The timing option results from the difference in closing times of the spot and futures market.

If you buy both a 30-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.)

The end-of-the-month option is

The most common means of financing a cash-and-carry arbitrage is a repurchase agreement.

Which of the following is not a risk of program trading?

Stock index arbitrage will earn, at no risk, the difference between the futures price and the theoretical futures price.

The settlement price, conversion factor and accrued interest are necessary to calculate the invoice price.

Determine the conversion factor for delivery of the 7 1/4's off May 15, 2026 on the March 2010 T-bond futures contract.

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a

Which one of the following options is not associated with the Treasury bond futures contract?

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25, the accrued interest is 1.35, the futures price is 114.75, the CF is 1.0125, the accrued interest at delivery is 0.95, and the holding period is three months.

Suppose you observe the spot euro at $1.38/€ and the three month euro futures at $1.379/€. Based on carry arbitrage, you conclude

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 10: Futures Arbitrage Strategies

The wild card option exists because of the difference in the closing times of the spot and futures markets for Treasury bills.

If a firm is planning to borrow money in the future, the rate it is trying to lock in is

If a stock index futures is at 455 and the pricing model says it should be at 458, an arbitrageur should buy the futures and sell short the stock.

It is important to identify the cheapest bond to deliver because it is the one the futures contract is priced off of.

The timing option will lead to early delivery if the coupon rate is higher than the repo rate.

The timing option results from the difference in closing times of the spot and futures market.

If you buy both a 30-day Eurodollar CD paying 6.7 percent and a 90-day futures on a 90-day Eurodollar CD with a price implying a yield of 7.2 percent, what is your total annualized return? (Both yields are based on 360-day years.)

The end-of-the-month option is

The most common means of financing a cash-and-carry arbitrage is a repurchase agreement.

Which of the following is not a risk of program trading?

Stock index arbitrage will earn, at no risk, the difference between the futures price and the theoretical futures price.

The settlement price, conversion factor and accrued interest are necessary to calculate the invoice price.

Determine the conversion factor for delivery of the 7 1/4's off May 15, 2026 on the March 2010 T-bond futures contract.

Covered interest arbitrage relates to program trading and the need to cover the interest on funds borrowed.

The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called

The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a

Which one of the following options is not associated with the Treasury bond futures contract?

Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25, the accrued interest is 1.35, the futures price is 114.75, the CF is 1.0125, the accrued interest at delivery is 0.95, and the holding period is three months.

Suppose you observe the spot euro at $1.38/€ and the three month euro futures at $1.379/€. Based on carry arbitrage, you conclude

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters