Advanced Investments Practice Test 1

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

6

A haircut of 20% means that: A. A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request. B. A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral request. C. A bond with a market value of $100 is considered to be worth $83.30 when used to satisfy a collateral request. D. A bond with a face value of $100 is considered to be worth $83.30 when used to satisfy a collateral request.

A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request.

Margin accounts have the effect of: A. Reducing the risk of one party regretting the deal and backing out. B. Ensuring funds are available to pay traders when they make a profit. C. Reducing systematic risk due to collapse of futures markets. D. All of the above.

All of the above.

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.

Always used in futures markets and sometimes used in OTC markets.

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

Commodities Futures Trading Commission (CFTC)

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.

Creates long-term hedges from short term futures contracts.

On the floor of a futures exchange 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.

Decrease by one.

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

Daily.

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.

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

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.

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

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 contracts often have a range of delivery dates.

Futures contracts nearly always last longer than forward contracts.

Which of the following are cash settled? A. All futures contracts. B. All option contracts. C. Futures on commodities. D. Futures on stock indexes.

Futures on stock indexes.

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

Higher.

A limit order: A. Is an order to trade up to a certain number of futures contracts at a certain 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.

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

A company due to pay a certain amount of a foreign currency in the future decides to hedge with future contracts. Which of the following best describes the advantage of hedging? A. It leads to a better exchange rate being paid. B. It leads to more predictable exchange rate being paid. C. It caps the exchange rate that will be paid. D. It provides a floor for the exchange rate that will be paid.

It leads to more predictable exchange rate being paid.

Which of the following best describes the capital asset pricing model? A. Determines the amount of capital that is needed in particular situations. B. It's used to determine the price of futures contracts. C. It relates the return on an asset to the return of the stock index. D. It's used to determine the volatility of a stock index.

It relates the return on an asset to the return of the stock index.

Which of the following does NOT describe beta? A. A measure of the sensitivity of the return on an asset to the return on an index. B. The slope of the best fit line when the return on an asset is regressed against the return on the market. C. The hedge ratio necessary to remove market risk from a portfolio. D. Measures correlation between futures prices and spot prices for a commodity.

Measures correlation between futures prices and spot prices for a commodity.

Which of the following best describes central clearing parties? A. Help market participants to value derivative transactions. B. Must be used for all OTC derivative transactions. C. Are used for futures transactions. D. Perform a similar function to exchange clearing houses.

Perform a similar function to exchange clearing houses.

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.

The July contract.

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 weakens. C. The hedger's position sometimes worsens and sometimes improves. D. The hedger's position stays the same.

The hedger's position improves.

Which of the following is a reason for hedging a portfolio with an index futures? A. The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market. B. The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well. C. The portfolio is not well diversified and so its return is uncertain. D. All of the above.

The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market.

Who initiates delivery in a corn futures contract? A. The party with the long position. B. The party with the short position. C. Either party. D. The exchange.

The party with the short position.

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 to increase the futures price. B. This flexibility tends to decrease the futures price. C. This flexibility may increase and may decrease the futures price. D. This has no effect on the futures price.

This flexibility tends to decrease the futures price.