Question 1

________ monitor the cash and futures market to see when the differences between the theoretical futures price and actual futures price are sufficiently large to generate an ________.

Accepted Answer

A)   Money managers and advisors; advising profit
B)   Money managers and arbitrageurs; arbitrage profit
C)   Portfolio managers and arbitrageurs; risk-adjusted profit
D)   Money managers and advisors; risk-adjusted profit B

Question 2

A short hedge is undertaken to protect against an increase in the price of a financial instrument or portfolio to be purchased in the cash market at some future time.

Accepted Answer

A) True 
 B)False  False

Question 3

A strategy that seeks to insure the value of a portfolio through the use of a synthetic put option strategy is called dynamic hedging. Given that put options on stock indexes are available to portfolio managers, why should they bother with dynamic hedging? There are four reasons and one of these is ________.

Accepted Answer

A)   The size of the market for options on stock indexes is as large as that for stock index futures.
B)   Exchanges do not impose limits on the number of contracts in which an investor can have a position.
C)   Existing exchange-traded index options contracts are of longer maturity than the period over which some investors seek protection.
D)   The cost of a put option may be higher than the transactions costs associated with dynamic hedging. D

Question 4

A money manager can use both stock index futures and interest rate futures to more efficiently allocate funds between the stock market and the bond market.

Accepted Answer

A) True 
 B)False

Question 5

A corporation plans to sell commercial paper one month from now. Buying put options on Treasury bill futures or Eurodollar CD futures lets the corporation ________.

Accepted Answer

A)   set a floor on its commercial paper interest cost.
B)   set a ceiling on its commercial paper interest profits.
C)   set a ceiling on its commercial paper interest cost.
D)   set a floor on its commercial paper purchases.

Question 6

Suppose that a money manager knows that bonds are maturing in the near future and expects interest rates to fall. ________ can be purchased in this situation.

Accepted Answer

A)   Call options
B)   Put options
C)   Dividend paying stocks
D)   Growth firms

Question 7

Explain how a "protective put buying strategy" works.

Accepted Answer

The answer of Explain how a "protective put buying strategy"...

Question 8

A corporation planning to sell long-term bonds two months from now can protect itself against a rise in interest rates by selling or taking ________ in interest rate futures now.

Accepted Answer

A)   a long position
B)   a passive or neutral position
C)   a short position
D)   an aggressive or active position

Question 9

An investor who wants to speculate that interest rates will rise (fall) can sell (buy) ________.

Accepted Answer

A)   interest rate futures.
B)   stock index futures.
C)   bond index futures.
D)   interest rate movements.

Question 10

If interest rate futures are ________, institutional investors can enhance returns in the same way that they do in equities.

Accepted Answer

A)   mispriced
B)   correctly priced
C)   in short supply
D)   None of these

Question 11

A long hedge is used to protect against a decline in the cash price of a financial instrument or portfolio.

Accepted Answer

A) True 
 B)False

Question 12

A thrift or commercial bank wants to make sure that the cost of its funds will not exceed a certain level. This can be done by ________.

Accepted Answer

A)   buying Eurodollar CDs.
B)   selling put options on Eurodollar CD futures.
C)   buying call options on Eurodollar CD futures.
D)   buying put options on Eurodollar CD futures.

Question 13

Suppose that a pension fund manager knows that bonds must be liquidated in 40 days to make a $5 million payment to the beneficiaries of the pension fund. If interest rates rise in 40 days, more bonds will have to be liquidated to realize $5 million. The hedger will buy put options thus following ________.

Accepted Answer

A)   an unprotected call buying strategy.
B)   a protective put buying strategy.
C)   a protective put selling strategy.
D)   an unprotected put buying strategy.

Question 14

Because futures are highly leveraged and transactions costs are less than in the cash market, market participants can alter their risk exposure to a market (stock or bond) less efficiently in the futures market.

Accepted Answer

A) True 
 B)False

Question 15

When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called ________.

Accepted Answer

A)   perfect hedging.
B)   a cross instrument.
C)   cross hedging.
D)   an hedged instrument.

Question 16

Institutional investors can use stock index futures for seven distinct investment strategies. Name four of these strategies.

Accepted Answer

The answer of Institutional investors can use stock index futures...

Question 17

Interest rate options or options on interest rate futures can be used by investors and issuers to speculate on adverse interest rate movements but still benefit from a favorable interest rate movement.

Accepted Answer

A) True 
 B)False

Question 18

The decision on how to divide funds across the major asset classes (for example, equities, bonds, foreign securities, real estate) is referred to as the ________.

Accepted Answer

A)   index arbitrage decision.
B)   portfolio insurance decision.
C)   controlling the risk decision.
D)   asset allocation decision.

Question 19

In regards to hedging, which of the below statements is FALSE?

Accepted Answer

A)   Hedging is the employment of a futures transaction as a temporary substitute for a transaction in the cash market.
B)   As long as cash and futures prices move together, any loss realized on one position (whether cash or futures)  will be offset by a profit on the other position.
C)   The hedge position locks in a value for the cash position.
D)   When the profit and loss are equal, the hedge is called an equal hedge.

Question 20

Investors can use stock index futures to speculate on stock prices, control a portfolio's price risk exposure, hedge against adverse stock price movements, construct indexed portfolios, engage in index arbitrage, and create a synthetic put option.

Accepted Answer

A) True 
 B)False

Exam 29: The Applications of Futures and Options Contracts

monitor the cash and futures market to see when the differences between the theoretical futures price and actual futures price are sufficiently large to generate an .

A short hedge is undertaken to protect against an increase in the price of a financial instrument or portfolio to be purchased in the cash market at some future time.

A money manager can use both stock index futures and interest rate futures to more efficiently allocate funds between the stock market and the bond market.

A corporation plans to sell commercial paper one month from now. Buying put options on Treasury bill futures or Eurodollar CD futures lets the corporation ________.

Suppose that a money manager knows that bonds are maturing in the near future and expects interest rates to fall. ________ can be purchased in this situation.

Explain how a "protective put buying strategy" works.

A corporation planning to sell long-term bonds two months from now can protect itself against a rise in interest rates by selling or taking ________ in interest rate futures now.

An investor who wants to speculate that interest rates will rise (fall) can sell (buy) ________.

If interest rate futures are ________, institutional investors can enhance returns in the same way that they do in equities.

A long hedge is used to protect against a decline in the cash price of a financial instrument or portfolio.

A thrift or commercial bank wants to make sure that the cost of its funds will not exceed a certain level. This can be done by ________.

Because futures are highly leveraged and transactions costs are less than in the cash market, market participants can alter their risk exposure to a market (stock or bond) less efficiently in the futures market.

When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called ________.

Institutional investors can use stock index futures for seven distinct investment strategies. Name four of these strategies.

Interest rate options or options on interest rate futures can be used by investors and issuers to speculate on adverse interest rate movements but still benefit from a favorable interest rate movement.

The decision on how to divide funds across the major asset classes (for example, equities, bonds, foreign securities, real estate) is referred to as the ________.

In regards to hedging, which of the below statements is FALSE?

Investors can use stock index futures to speculate on stock prices, control a portfolio's price risk exposure, hedge against adverse stock price movements, construct indexed portfolios, engage in index arbitrage, and create a synthetic put option.