FIN 431 Midterm
Four 100,000 euro futures contracts are sold at a price of $1.052. The next day the price settles at $1.053. The mark-to-market for this account changes the previous dayâ s margin of long position by: +$400. -$400. +$100. -$100.
A
On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company? $59.50 $60.50 $61.50 $63.50
A
Party A has entered a currency forward contract to purchase 10 million euros at an exchange rate of $0.98 per euro. At settlement, the exchange rate is $0.97 per euro. If the contract is settled in cash, Party A will: Make a payment of $100,000. Receive a payment of $100,000. Receive a payment of $103,090.
A
Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? 0.60 0.67 1.45 0.90
A
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? The hedger's position improves. The hedger's position worsens. The hedger's position sometimes worsens and sometimes improves. The hedger's position stays the same.
A
The frequency with which margin accounts are adjusted for gains and losses is Daily Weekly Monthly Quarterly
A
The spot price of the market index is $1,000. A 3-month forward contract on this index is priced at $1,050. The market index rises to $1,020 by the expiration date. The annual rate of interest on treasuries is 3.6% (0.3% per month). What is the difference in the payoffs between a long index investment and a long forward contract investment? (Assume monthly compounding.) $40.97 $24.59 $36.40 $45.20
A
Which of the following best describes the term "spot price" The price for immediate delivery The price for delivery at a future time The price of an asset that has been damaged The price of renting an asset
A
Which of the following best describes the term "spot price" The price for immediate delivery The price for delivery at a future time The price of an asset that has been damaged The price of renting an asset
A
Which of the following is true about a long forward contract? The contract becomes more valuable as the price of the asset rises The contract becomes more valuable as the price of the asset declines The contract is worth zero if the price of the asset declines after the contract has been entered into The contract is worth zero if the price of the asset rises after the contract has been entered into
A
Which of the following is true? 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). 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).
A
A call option gives the holder: The right to sell at a specific price. The right to buy at a specific price. An obligation to sell at a certain price.
B
A dealer in the forward contract market: Cannot be a bank. May enter into a contract with another dealer. Gets a small payment for each contract at initiation.
B
A futures contract is least likely: Exchange-traded. A contingent claim. Adjusted for profits and losses daily.
B
A one-year forward contract is an agreement where One side has the right to buy an asset for a certain price in one year's time One side has the obligation to buy an asset for a certain price in one year's time One side has the obligation to buy an asset for a certain price at some time during the next year One side has the obligation to buy an asset for the market price in one year's time
B
A swap is: Highly regulated. A series of forward contracts. The exchange of one asset for another.
B
As the convenience yield increases, which of the following is true? The one-year futures price as a percentage of the spot price increases The one-year futures price as a percentage of the spot price decreases The one-year futures price as a percentage of the spot price stays the same Any of the above can happen
B
During the growing season, a corn farmer sells short corn futures contracts in an amount equal to her crop. If upon harvesting and selling her crop she maintains the contracts, she is then considered a(n): Hedger Speculator Arbitrager None of the above
B
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? No change Decrease by one Decrease by two Increase by one
B
The daily process of adjusting the margin in a futures account is called: Variation margin. Marking-to-market. Maintenance margin.
B
The short in a deliverable forward contract: Has no default risk. is obligated to deliver the specified asset. Makes a cash payment to the long at settlement.
B
The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. The market index rises to $920 by the expiration date. The annual rate of interest on treasuries is 2.4% (0.2% per month). What is the difference in the payoffs between a long index investment and a long forward contract investment? (Assume monthly compounding.) $10.84 $24.59 $26.40 $43.20
B
Which of the following increases basis risk? A large difference between the futures prices when the hedge is put in place and when it is closed out Dissimilarity between the underlying asset of the futures contract and the hedgerâ s exposure A reduction in the time between the date when the futures contract is closed and its delivery month None of the above
B
You sell one December futures contracts when the futures price is $1,150 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,500. The maintenance margin per contract is $1,600. During the next day the futures price rises to $1,158 per unit. What is the balance of your margin account at the end of the day? $1,800 $1,700 $2,400 $3,300
B
A company enters into a short futures contract to sell 20,000 units of a commodity for 60 cents per unit. The initial margin is $5,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? 78 cents 66 cents 70 cents 72 cents
C
Party A has entered a currency forward contract to purchase 15 million euros at an exchange rate of $0.96 per euro. At settlement, the exchange rate is $0.97 per euro. If the contract is settled in cash, Party A will: Make a payment of $100,000. Make a payment of $150,000. Receive a payment of $150,000.
C
The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930. What is the profit or loss to a short position if the spot price of the market index rises to $920 by the expiration date? $20 gain $20 loss $10 gain $10 loss
C
Three 125,000 euro futures contracts are sold at a price of $1.0234. The next day the price settles at $1.018. The mark-to-market for this account changes the previous dayâ s margin by: +$675. -$675. +$2,025
C
What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. 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. 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. 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
C
Which of the following describes European options? Sold in Europe Priced in Euros Exercisable only at maturity Calls (there are no puts)
C
Which of the following is true Both forward and futures contracts are traded on exchanges. Forward contracts are traded on exchanges, but futures contracts are not. Futures contracts are traded on exchanges, but forward contracts are not. Neither futures contracts nor forward contracts are traded on exchanges.
C
Which of the following statements about exchange-traded derivatives is least accurate? They are liquid. They are standardized contracts. They carry significant default risk.
C
Which of the following statements about futures market is least accurate? Hedgers trade to reduce some preexisting risk exposure. The clearinghouse guarantees that traders in the futures market will honor their obligations. If an account rises to or exceeds the maintenance margin, the trader must make a deposit.
C
Which of the following statements regarding early termination of a forward contract is most accurate? A party who enters into an offsetting contract to terminate has no risk. A party who terminates a forward contract early must make a cash payment. Early termination through an offsetting transaction with the original counterparty eliminates default risk.
C
Which of the following statements regarding forward contracts on 90-day T-bills is most accurate? The face value must be paid by the long at settlement. There is no default risk on these forwards because T-bills are government-backed. If short-term yields increase unexpectedly after contract initiation, the short will profit on the contract.
C
With bilateral clearing, the number of agreements between four dealers, who trade with each other, is 12 1 6 2
C
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? 78 cents 76 cents 74 cents 72 cents
D
A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9? Long 192 contracts Short 192 contracts Long 48 contracts Short 48 contracts
D
On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity? $1,016 $1,001 $981 $1,014
D
Which of the following are cash settled All futures contracts All option contracts Futures on commodities Futures on stock indices
D
Which of the following is NOT true about call and put options: An American option can be exercised at any time during its life A European option can only be exercised only on the maturity date Investors must pay an upfront price (the option premium) for an option contract The price of a call option increases as the strike price increases
D
