Question 1

A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.

Accepted Answer

A) True 
 B)False

Question 2

Suppose you buy an asset at $70 and sell a futures contract at $72. What is your profit if, prior to expiration, you sell the asset at $75 and the futures price is $78?

Accepted Answer

A)  -$1 
B)  $2 
C)  $1 
D)  -$6 
E)  none of the above 
A)  -$1 
B)  $2 
C)  $1 
D)  -$6 
E)  none of the above

Question 3

Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.

Accepted Answer

A) True 
 B)False

Question 4

If you plan to issue a liability in the future, you are currently short in the spot market.

Accepted Answer

A) True 
 B)False

Question 5

In the real-world, financial decisions are irrelevant, so there is really no reason for firms to hedge.

Accepted Answer

A) True 
 B)False

Question 6

A strengthening of the basis means

Accepted Answer

A)  the spot price rises more than the futures price 
B)  the futures price falls more than the spot price 
C)  a short hedger benefits 
D)  all of the above 
E)  none of the above 
A)  the spot price rises more than the futures price 
B)  the futures price falls more than the spot price 
C)  a short hedger benefits 
D)  all of the above 
E)  none of the above

Question 7

What is the profit on a hedge if bonds are purchased at $150,000, two futures contracts are sold at $72,500 each, then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

Accepted Answer

A)  -$2,500 
B)  -$5,500 
C)  -$500 
D)  -$3,000 
E)  none of the above 
A)  -$2,500 
B)  -$5,500 
C)  -$500 
D)  -$3,000 
E)  none of the above

Question 8

Which of the following statements about the use of futures in tactical asset allocation is correct?

Accepted Answer

A)  Implementing tactical asset allocation using futures is a form of market timing. 
B)  Futures can be used to synthetically buy or sell stocks but you cannot simultaneously adjust the beta or duration 
C)  A difference between the portfolio held and the index on which the futures is based will generate a gain for the investor. 
D)  The use of futures in tactical asset allocation will generate cash from the synthetic sale, which is then used in the synthetic purchase. 
E)  None of the above 
A)  Implementing tactical asset allocation using futures is a form of market timing. 
B)  Futures can be used to synthetically buy or sell stocks but you cannot simultaneously adjust the beta or duration 
C)  A difference between the portfolio held and the index on which the futures is based will generate a gain for the investor. 
D)  The use of futures in tactical asset allocation will generate cash from the synthetic sale, which is then used in the synthetic purchase. 
E)  None of the above

Question 9

A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.

Accepted Answer

A) True 
 B)False

Question 10

Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the following occurs?

Accepted Answer

A)  futures prices are more volatile than spot prices 
B)  the spot and futures contracts are correctly priced at the onset 
C)  spot and futures prices are positively correlated 
D)  futures prices are less volatile than spot prices 
E)  none of the above 
A)  futures prices are more volatile than spot prices 
B)  the spot and futures contracts are correctly priced at the onset 
C)  spot and futures prices are positively correlated 
D)  futures prices are less volatile than spot prices 
E)  none of the above

Question 11

When the target duration is set at zero, the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

Accepted Answer

A) True 
 B)False

Question 12

You hold a bond portfolio worth $10 million and a modified duration of 8.5. What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.

Accepted Answer

A)  buy 109 contracts 
B)  buy 17 contracts 
C)  buy 669 contracts 
D)  sell 100 contracts 
E)  sell 669 contracts 
A)  buy 109 contracts 
B)  buy 17 contracts 
C)  buy 669 contracts 
D)  sell 100 contracts 
E)  sell 669 contracts

Question 13

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

Accepted Answer

A) True 
 B)False

Question 14

An anticipatory hedge is one in which

Accepted Answer

A)  the basis is expected to fall 
B)  the hedger expects to make a profit on the futures 
C)  the spot position will be taken in the future 
D)  all of the above 
E)  none of the above 
A)  the basis is expected to fall 
B)  the hedger expects to make a profit on the futures 
C)  the spot position will be taken in the future 
D)  all of the above 
E)  none of the above

Question 15

You hold a stock portfolio worth $15 million with a beta of 1.05. You would like to lower the beta to 0.90 using S&P 500 futures, which have a price of 460.20 and a multiplier of 250. What transaction should you do? Round off to the nearest whole contract.

Accepted Answer

A)  sell 130 contracts 
B)  sell 9,778 contracts 
C)  sell 20 contracts 
D)  buy 50,000 contracts 
E)  sell 50,000 contracts 
A)  sell 130 contracts 
B)  sell 9,778 contracts 
C)  sell 20 contracts 
D)  buy 50,000 contracts 
E)  sell 50,000 contracts

Question 16

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

Accepted Answer

A) True 
 B)False

Question 17

Based on the price sensitivity hedge ratio approach, what is the optimal number of futures contracts to deploy, given the following information. The yield beta is 0.65, the present value of a basis point change for the underlying bond portfolio is $33,000, and the present value of a basis point change for the bond futures contract is $325. (Select the closest answer.)

Accepted Answer

A)  long 100 futures contracts 
B)  long 55 futures contracts 
C)  short 66 futures contracts 
D)  short 22 futures contracts 
E)  short 11 futures contracts 
A)  long 100 futures contracts 
B)  long 55 futures contracts 
C)  short 66 futures contracts 
D)  short 22 futures contracts 
E)  short 11 futures contracts

Question 18

Which of the following is not a reason for firms to hedge?

Accepted Answer

A)  Firms can hedge less expensively than can their shareholders 
B)  Shareholders cannot tolerate mark-to-market losses 
C)  Hedging by corporations can have tax advantages 
D)  Shareholders are not always aware of their firms' risks 
E)  none of the above 
A)  Firms can hedge less expensively than can their shareholders 
B)  Shareholders cannot tolerate mark-to-market losses 
C)  Hedging by corporations can have tax advantages 
D)  Shareholders are not always aware of their firms' risks 
E)  none of the above

Question 19

An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.

Accepted Answer

A) True 
 B)False

Question 20

A short hedge is one in which

Accepted Answer

A)  the margin requirement is waived 
B)  the hedger is short futures 
C)  the hedger is short in the spot market 
D)  the futures price is lower than the spot price 
E)  none of the above 
A)  the margin requirement is waived 
B)  the hedger is short futures 
C)  the hedger is short in the spot market 
D)  the futures price is lower than the spot price 
E)  none of the above

A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.

Suppose you buy an asset at $70 and sell a futures contract at $72. What is your profit if, prior to expiration, you sell the asset at $75 and the futures price is $78?

Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.

If you plan to issue a liability in the future, you are currently short in the spot market.

In the real-world, financial decisions are irrelevant, so there is really no reason for firms to hedge.

A strengthening of the basis means

What is the profit on a hedge if bonds are purchased at $150,000, two futures contracts are sold at $72,500 each, then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

Which of the following statements about the use of futures in tactical asset allocation is correct?

A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.

Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the following occurs?

When the target duration is set at zero, the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

You hold a bond portfolio worth $10 million and a modified duration of 8.5. What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

An anticipatory hedge is one in which

You hold a stock portfolio worth $15 million with a beta of 1.05. You would like to lower the beta to 0.90 using S&P 500 futures, which have a price of 460.20 and a multiplier of 250. What transaction should you do? Round off to the nearest whole contract.

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

Which of the following is not a reason for firms to hedge?

An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.

A short hedge is one in which

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

Futures Arbitrage Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 11: Forward and Futures Hedging, Spread, and Target Strategies

A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.

Suppose you buy an asset at $70 and sell a futures contract at $72. What is your profit if, prior to expiration, you sell the asset at $75 and the futures price is $78?

Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.

If you plan to issue a liability in the future, you are currently short in the spot market.

In the real-world, financial decisions are irrelevant, so there is really no reason for firms to hedge.

A strengthening of the basis means

What is the profit on a hedge if bonds are purchased at $150,000, two futures contracts are sold at $72,500 each, then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

Which of the following statements about the use of futures in tactical asset allocation is correct?

A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.

Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the following occurs?

When the target duration is set at zero, the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

You hold a bond portfolio worth $10 million and a modified duration of 8.5. What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

An anticipatory hedge is one in which

You hold a stock portfolio worth $15 million with a beta of 1.05. You would like to lower the beta to 0.90 using S&P 500 futures, which have a price of 460.20 and a multiplier of 250. What transaction should you do? Round off to the nearest whole contract.

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

Which of the following is not a reason for firms to hedge?

An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.

A short hedge is one in which

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

Futures Arbitrage Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters