FIN 432 Exam 1

The frequency with which margin accounts are adjusted for gains and losses is A. Daily B. Weekly C. Monthly D. Quarterly

a. Daily

A trader buys 100 call options on the stock with a strike price of $60 when the option price is $2. The options are exercised when the stock price is $65. The trader's net profit is a.) $700 b.) $500 c.) $300 d.) $600

c. $300

What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. a.) The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. b.) The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. c.) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year d.) The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

d. the trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day? a.) $1,800 b.) $3,300 c.) $2,200 d.) $3,700

a. $1,800

You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day? A. $1,800 B. $3,300 C. $2,200 D. $3,700

a. $1,800

For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the open interest for Sept 2012 contracts, is usually A. Higher B. Lower C. The same D. Equally likely to be higher or lower

a. Higher

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? a.) The hedger's position improves. b.) The hedger's position worsens. c.) The hedger's position sometimes worsens and sometimes improves. d.) The hedger's position stays the same.

a. The hedger's position improves

Which of the following best describes the term "spot price" A. The price for immediate delivery B. The price for delivery at a future time C. The price of an asset that has been damaged D. The price of renting an asset

a. The price for immediate delivery

A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? A. $58 B. $62 C. $64 D. $66

b. $62

Which entity in the United States takes primary responsibility for regulating futures market? A. Federal Reserve Board B. Commodities Futures Trading Commission (CFTC) C. Security and Exchange Commission (SEC) D. US Treasury

b. Commodities Futures Trading Commission (CFTC)

One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest? A. No change B. Decrease by one C. Decrease by two D. Increase by one

b. Decrease by one

One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest? a.) No change b.) Decrease by one c.) Decrease by two d.) Increase by one

b. Decrease by one

Which of the following increases basis risk? a.) A large difference between the futures prices when the hedge is put in place and when it is closed out b.) Dissimilarity between the underlying asset of the futures contract and the hedger's exposure c.) A reduction in the time between the date when the futures contract is closed and its delivery month d.) None of the above

b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure

A limit order a.) Is an order to trade up to a certain number of futures contracts immediately at the prevailing price b.) Is an order that can be executed at a specified price or one more favorable to the investor c.) Is an order that must be executed within a specified period of time d.) None of the above

b. Is an order that can be executed a specified price or one more favorable to the investor

1. A one-year forward contract is an agreement where A. One side has the right to buy an asset for a certain price in one year's time. B. One side has the obligation to buy an asset for a certain price in one year's time. C. One side has the obligation to buy an asset for a certain price at some time during the next year. D. One side has the obligation to buy an asset for the market price in one year's time.

b. One side has the obligation to buy an asset for a certain price in one year's time.

A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contract trade on the index with one contract being on 250 times the index. To remove market risk from the portfolio the trader should A. Buy 16 contracts B. Sell 16 contracts C. Buy 20 contracts D. Sell 20 contracts

b. Sell 16 contracts

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? a.) The June contract b.) The July contract c.) The May contract d.) The August contract

b. The July contract

Which of the following is true about a long forward contract A. The contract becomes more valuable as the price of the asset declines B. The contract becomes more valuable as the price of the asset rises C. The contract is worth zero if the price of the asset declines after the contract has been entered into D. The contract is worth zero if the price of the asset rises after the contract has been entered into

b. The contract becomes more valuable as the price of the asset rises

Which of the following is true about a long forward contract a.) The contract becomes more valuable as the price of the asset declines b.) The contract becomes more valuable as the price of the asset rises c.) The contract is worth zero if the price of the asset declines after the contract has been entered into d.) The contract is worth zero if the price of the asset rises after the contract has been entered into

b. The contract becomes more valuable as the price of the asset rises

An investor sells a futures contract on an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true A. The investor has made a gain of $4,000 B. The investor has made a loss of $4,000 C. The investor has made a gain of $2,000 D. The investor has made a loss of $2,000

b. The investor has made a loss of $4,000

A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The futures price on November 1, 2012 is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year 2013? Each contract is on 1000 units of the commodity. a.) $0 b.) $1,000 c.) $3,000 d.) $4,000

c. $3,000

Which of the following is true a.) Both forward and futures contracts are traded on exchanges. b.) Forward contracts are traded on exchanges, but futures contracts are not. c.) Futures contracts are traded on exchanges, but forward contracts are not. d.) Neither futures contracts nor forward contracts are traded on exchanges.

c. Futures contracts are traded on exchanges, but forward contracts are not.

Which of the following is true A. Both forward and futures contracts are traded on exchanges. B. Forward contracts are traded on exchanges, but futures contracts are not. C. Futures contracts are traded on exchanges, but forward contracts are not. D. Neither futures contracts nor forward contracts are traded on exchanges.

c. Futures contracts are traded on exchanges, forward contracts are not.

Which of the following is NOT true a.) A call option gives the holder the right to buy an asset by a certain date for a certain price b.) A put option gives the holder the right to sell an asset by a certain date for a certain price c.) The holder of a call or put option must exercise the right to sell or buy an asset d.) The holder of a forward contract is obligated to buy or sell an asset

c. The holder of a call or put option must exercise the right to sell or buy an asset

Which of the following is true? a.) The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis). b.) The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis). c.) The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis). d.) The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).

c. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis).

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? A. 78 cents B. 76 cents C. 74 cents D. 72 cents

d. 72 cents

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? a.) 78 cents b.) 76 cents c.) 74 cents d.) 72 cents

d. 72 cents

Under liquidity preference theory, which of the following is always true? a.) The forward rate is higher than the spot rate when both have the same maturity. b.) Forward rates are unbiased predictors of expected future spot rates. c.) The spot rate for a certain maturity is higher than the par yield for that maturity. d.) Forward rates are higher than expected future spot rates.

d. Forward rates are higher than expected future spot rates