Deck 5: Financial Forwards and Futures

Question 1

A strategy in which you buy the underlying asset and short the offsetting forward contract is called a .

A) Cash-and-carry
B) Cash-and-carry arbitrage
C) Quasi-arbitrage-carry
D) Quasi-arbitrage

Answer 1

A

Question 2

An arbitrage related strategy in which you substitute a low yield position for one with a higher return is called a .

A) Cash-and-carry
B) Cash-and-carry arbitrage
C) Quasi-arbitrage-carry
D) Quasi-arbitrage

Answer 2

D

Question 3

Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

A) Forward = stock - zero coupon bond
B) Zero coupon bond = stock - forward
C) Prepaid forward = forward - zero coupon bond
D) Stock = forward + zero coupon bond

Answer 3

C

Question 4

The annualized dividend yield on the S&P 500 Index is 1.40%. The continuously compounded interest rate is 6.4%. If the 9-month forward price is $925.28 and the index is priced at $950.46, what is the profit/loss from a cash-and-carry strategy?

A) $25.18 loss
B) $25.18 gain
C) $61.50 loss
D) $61.50 gain

Question 5

The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. The continuously compounded annual interest rate is 8.40%. What is the price of a forward contract that expires 9 months from today?

A) $937.48
B) $942.66
C) $984.36
D) $1001.69

Question 6

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your dollar gain or loss? (Ignore opportunity costs.)

A) $14,485 loss
B) $14,485 gain
C) $57.94 loss
D) $57.94 gain

Question 7

When purchasing a stock, which arrangement allows for payment of the stock today and receipt of the stock at an agreed-upon future date?

A) Forward contract
B) Fully leveraged purchase
C) Outright purchase
D) Prepaid forward contract

Question 8

When purchasing a stock, which arrangement allows for the simultaneous payment of the stock price in cash and receipt of the actual stock certificate?

A) Forward contract
B) Fully leveraged purchase
C) Outright purchase
D) Prepaid forward contract

Question 9

Consider an investment in five S&P 500 Index futures contracts at a price of $924.80. The initial margin requirement is 15.0% and the maintenance margin is 10.0%. If the continuously compounded interest rate is 5.0% what will the futures price need to be for a margin call to occur 10 days from now? Assume no settlement within the 10 days.

A) $852.64
B) $872.79
C) $898.63
D) $905.25

Question 10

When purchasing a stock, which arrangement allows for both the payment of the stock and receipt of the stock at some specified date in the future?

A) Forward contract
B) Fully leveraged purchase
C) Outright purchase
D) Prepaid forward contract

Question 11

When purchasing a stock, which arrangement allows for the buyer to borrow the entire purchase price of the security?

A) Forward contract
B) Fully leveraged purchase
C) Outright purchase
D) Prepaid forward contract

Question 12

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your percentage gain or loss under a 15.0% margin requirement? (Ignore opportunity costs.)

A) 39% gain
B) 39% loss
C) 43% gain
D) 43% loss

Question 13

The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%. LIBOR is 4.2%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year?

A) 105
B) 120
C) 80
D) 95

Question 14

HAW, Inc. plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months. HAWʹs share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%. What is the price of a forward contract, which expires immediately after the second dividend?

A) $45.28
B) $45.96
C) $45.60
D) $46.24

Question 15

The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. What is the price of a 6-month prepaid forward contract on the S&P 500 Index?

A) $943.83
B) $950.00
C) $964.26
D) $984.21

Question 16

The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year. The current price of the S&P 500 Index futures contract is 1200. If the mutual fund has a beta of 1.24, how many contracts will be needed to hedge the fund?

A) 1,083
B) 3,033
C) 242,963
D) 541,666

Question 17

What phrase is used to describe the payment made by an investor who holds a short index position?

A) Cash-and-carry
B) Lease rate
C) Rate of return
D) Rent

Question 18

KMW, Inc. plans to pay a dividend of $0.50 per share both 3 and 6 months from today. KMWʹs share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%. What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend?

A) $35.00
B) $35.02
C) $36.98
D) $37.00

Question 19

If the price on a 1 year forward contract is $65.92, which of the following prepaid forward contracts on a non-dividend paying stock does NOT represent an arbitrage opportunity if the annual required rate of return on the stock is 8.4%?

A) $ 62.56
B) $ 60.61
C) $ 64.52
D) $ 71.70

Question 20

If the prepaid forward contract on a non-dividend paying stock sells for $85.25 and the annual required rate of return on the stock is 6.5%, which of the following 1 year forward contract prices does NOT represent an arbitrage opportunity?

A) $ 85.25
B) $ 89.56
C) $ 90.98
D) $ 91.32

Question 21

Explain the relationship between beta and cross hedging in the case of a portfolio of equity securities is being hedged by a S&P500 Index contract.

Question 22

What are some uses for index futures contracts?

Question 23

What is the process involved in creating a cash-and-carry strategy?

Question 24

Explain the impact transaction costs have on the ability to make arbitrage profits in forward and futures markets.

Question 25

Name some advantages that futures contracts have over forward contracts.