Futures and Options Test

4. An interest rate is 12% per annum with semiannual compounding. What is the equivalent rate with quarterly compounding? -- A. 11.83% B. 11.66% C. 11.77% D. 11.92%

A

1. 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

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

A

12. Which of the following best describes "stack and roll"? -- A. Creates long-term hedges from short term futures contracts B. Can avoid losses on futures contracts by entering into further futures contracts C. Involves buying a futures contract with one maturity and selling a futures contract with a different maturity D. Involves two different exposures simultaneously

A

14. 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

14. The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a strike price of $90 when the option price is $10. The options are exercised when the stock price is $85. The trader's net profit or loss is A. Loss of $1,000 B. Loss of $2,000 C. Gain of $200 D. Gain of $1000

A

14. Which of following describes forward rates? -- A. Interest rates implied by current zero rates for future periods of time B. Interest rate earned on an investment that starts today and last for n-years in the future without coupons C. The coupon rate that causes a bond price to equal its par (or principal) value D. A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows

A

14. Which of the following is NOT true about forward and futures contracts? -- A. Forward contracts are more liquid than futures contracts B. The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market C. In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates D. Taxes and transaction costs can lead to forward and futures prices being different

A

14. Which of the following is true of a covariance matrix? -- A. The numbers on the diagonal are variances B. The numbers on the diagonal are standard deviations C. The numbers on the diagonal are all one. D. The numbers on the diagonal are all zero

A

16. The conversion factor for a bond is approximately -- A. The price it would have if all cash flows were discounted at 6% per annum B. The price it would have if it paid coupons at 6% per annum C. The price it would have if all cash flows were discounted at 8% per annum D. The price it would have if it paid coupons at 8% per annum

A

2. Which of the following is NOT true -- A. Futures contracts nearly always last longer than forward contracts B. Futures contracts are standardized; forward contracts are not. C. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. D. Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.

A

3. A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one put option. The breakeven stock price above which the trader makes a profit is - A. $35 B. $40 C. $30 D. $36

A

3. 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? -- A. $59.50 B. $60.50 C. $61.50 D. $63.50

A

3. The gain from a project is equally likely to have any value between −$0.15 million and +$0.85 million. What is the 99% expected shortfall? -- A. $0.145 million B. $0.14 million C. $0.13 million D. $0.10 million

A

3. The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price? -- A. $40.50 B. $22.22 C. $33.00 D. $33.16

A

5. 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? -- A. 0.60 B. 0.67 C. 1.45 D. 0.90

A

6. 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

8. 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

9. The zero curve is upward sloping. Define X as the 1-year par yield, Y as the 1-year zero rate and Z as the forward rate for the period between 1 and 1.5 year. Which of the following is true? -- A. X is less than Y which is less than Z B. Y is less than X which is less than Z C. X is less than Z which is less than Y D. Z is less than Y which is less than X

A

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

1. The compounding frequency for an interest rate defines -- A. The frequency with which interest is paid B. A unit of measurement for the interest rate C. The relationship between the annual interest rate and the monthly interest rate D. None of the above

B

10. Which of the following is true of the fed funds rate -- A. It is the same as the Treasury rate B. It is an overnight interbank rate C. It is a rate for which collateral is posted D. It is a type of repo rate

B

10. Which of the following is true? -- A. The futures rates calculated from a Eurodollar futures quote are always less than the corresponding forward rate B. The futures rates calculated from a Eurodollar futures quote are always greater than the corresponding forward rate C. The futures rates calculated from a Eurodollar futures quote should equal the corresponding forward rate D. The futures rates calculated from a Eurodollar futures quote are sometimes greater than and sometimes less than the corresponding forward rate

B

11. Which of the following is NOT a reason why a short position in a stock is closed out? -- A. The investor with the short position chooses to close out the position B. The lender of the shares issues instructions to close out the position C. The broker is no longer able to borrow shares from other clients D. The investor does not maintain margins required on his/her margin account

B

12. Which of the following day count conventions applies to a US Treasury bond? -- A. Actual/360 B. Actual/Actual (in period) C. 30/360 D. Actual/365

B

13. 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

13. 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

15. As the convenience yield increases, which of the following is true? -- A. The one-year futures price as a percentage of the spot price increases B. The one-year futures price as a percentage of the spot price decreases C. The one-year futures price as a percentage of the spot price stays the same D. Any of the above can happen

B

18. A trader uses 3-month Eurodollar futures to lock in a rate on $5 million for six months. How many contracts are required? -- A. 5 B. 10 C. 15 D. 20

B

19. A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true? -- A. It is liable to experience liquidity problems if the price of silver falls dramatically B. It is liable to experience liquidity problems if the price of silver rises dramatically C. It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically D. The operation of futures markets protects it from liquidity problems

B

19. A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The stock index is currently 1,250. Futures contracts 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

2. 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

2. The gain from a project is equally likely to have any value between -$0.15 million and +$0.85 million. What is the 99% value at risk? -- A. $0.145 million B. $0.14 million C. $0.13 million D. $0.10 million

B

20. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. The spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity? -- A. $92 B. $96 C. $102 D. $106

B

20. Which of the following best describes a central clearing party -- A. It is a trader that works for an exchange B. It stands between two parties in the over-the-counter market C. It is a trader that works for a bank D. It helps facilitate futures trades

B

20. Which of the following is true -- A. Expected shortfall is always less than VaR B. Expected shortfall is always greater than VaR C. Expected shortfall is sometimes greater than VaR and sometimes less than VaR D. Expected shortfall is a measure of liquidity risk wheras VaR is a measure of market risk

B

3. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true -- A. This flexibility tends increase the futures price. B. This flexibility tends decrease the futures price. C. This flexibility may increase and may decrease the futures price. D. This flexibility has no effect on the futures price

B

5. 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

6. A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points? -- A. $6 B. $150 C. $60 D. $600

B

6. 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

7. 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

8. An investor sells a futures contract 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

1. Which of the following is a consumption asset? -- A. The S&P 500 index B. The Canadian dollar C. Copper D. IBM stock

C

1. 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

1. Which of the following is true of the 99.9% value at risk? -- A. There is 1 chance in 10 that the loss will be greater than the value of risk B. There is 1 chance in 100 that the loss will be greater than the value of risk C. There is 1 chance in 1000 that the loss will be greater than the value of risk D. None of the above

C

10. 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 initial futures price 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 January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. -- A. $0 B. $1,000 C. $3,000 D. $4,000

C

10. 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

12. The price of a stock on July 1 is $57. 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

13. Which of the following is true of LIBOR -- A. The LIBOR rate is free of credit risk B. A LIBOR rate is lower than the Treasury rate when the two have the same maturity C. It is a rate used when borrowing and lending takes place between banks D. It is subject to favorable tax treatment in the U.S.

C

15. Clearing houses are -- A. Never used in futures markets and sometimes used in OTC markets B. Used in OTC markets, but not in futures markets C. Always used in futures markets and sometimes used in OTC markets D. Always used in both futures markets and OTC markets

C

17. With bilateral clearing, the number of agreements between four dealers, who trade with each other, is -- A. 12 B. 1 C. 6 D. 2

C

18. A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to -- A. A short position in a call option B. A short position in a put option C. A long position in a put option D. None of the above

C

2. An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding? -- A. 5.79% B. 6.21% C. 5.83% D. 6.18%

C

4. Which of the following is true of the historical simulation method for calculating VaR? -- A. It fits historical data on the behavior of variables to a normal distribution B. It fits historical data on the behavior of variables to a lognormal distribution C. It assumes that what will happen in the future is a random sample from what has happened in the past D. It uses Monte Carlo simulation to create random future scenarios

C

7. 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 increase beta to 1.8? -- A. Long 192 contracts B. Short 192 contracts C. Long 96 contracts D. Short 96 contracts

C

8. The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true? -- A. The forward price equals the expected future spot price. B. The forward price is greater than the expected future spot price. C. The forward price is less than the expected future spot price. D. The forward price is sometimes greater and sometimes less than the expected future spot price.

C

9. Which of the following describes European options? -- A. Sold in Europe B. Priced in Euros C. Exercisable only at maturity D. Calls (there are no European puts)

C

11. Which of the following is NOT true about call and put options: -- A. An American option can be exercised at any time during its life B. A European option can only be exercised only on the maturity date C. Investors must pay an upfront price (the option premium) for an option contract D. The price of a call option increases as the strike price increases

D

12. A company invests $1,000 in a five-year zero-coupon bond and $4,000 in a ten-year zero-coupon bond. What is the duration of the portfolio? -- A. 6 years B. 7 years C. 8 years D. 9 years

D

13. The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a strike price of $120 when the option price is $5. The options are exercised when the stock price is $110. The trader's net profit or loss is A. Gain of $1,000 B. Loss of $2,000 C. Loss of $2,800 D. Loss of $1,000

D

15. Which of the following is NOT true about duration? -- A. It equals the years-to-maturity for a zero coupon bond B. It equals the weighted average of payment times for a bond, where weights are proportional to the present value of payments C. Equals the weighted average of individual bond durations for a portfolio, where weights are proportional to the present value of bond prices D. The prices of two bonds with the same duration change by the same percentage amount when interest rate moves up by 100 basis points

D

20. Duration matching immunizes a portfolio against -- A. Any parallel shift in the yield curve B. All shifts in the yield curve C. Changes in the steepness of the yield curve D. Small parallel shifts in the yield curve

D

4. 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? -- A. $1,016 B. $1,001 C. $981 D. $1,014

D

5. The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded. -- A. 6.75% B. 7.0% C. 7.25% D. 7.5%

D

7. A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? -- A. +$2.00 B. −$2.00 C. +$1.96 D. −$1.96

D

9. A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price 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 January 1 to December 31, 2013? Each contract is on 1000 units of the commodity. -- A. $0 B. $1,000 C. $3,000 D. $4,000

D

Which of the following is true? -- A. Hedging can always be done more easily by a company's shareholders than by the company itself B. If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge C. If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging D. If all companies in an industry do not hedge, a company is liable increase its risk by hedging

D

T/F -> Average mean return from US Stock Market is 8%

True

T/F -> Average standard deviation from the US Stock Market is 16%

True

T/F -> Corr[x, y] = 0: the two variables move independently.

True

T/F -> Expected Shortfall asks if things do get bad, what is the expected loss?

True

T/F -> For credit risk they use a 99.9% confidence level and a 1 year time horizon

True

T/F -> For market risk banks use a 10-day time horizon and a 99% confidence level

True

T/F -> Forward contracts are similar to futures except that they trade in the over-the-counter market

True

T/F -> Standard deviation is a symmetric measure

True

T/F -> Substantial chance each year of losing money (31%)

True

T/F -> Value at Risk asks how bad can things get?

True