444 Midterm 1

A company enters into a long futures contract to buy 1000 units of a commodity for $60 per unit. The initial margin is $6000 and the maintenance margin is $4000. What futures price will allow $2000 to be withdrawn from the margin account?

$62

Which of the following is NOT true about duration?

The prices of two bonds with the same duration change by the same percentage

It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12% per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?

$105.98

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?

$150

You sell one December futures contracts when the futures price is $1010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2000. The maintenance margin per contract is $1500. During the next day the futures price rises to $1012 per unit. What is the balance of your margin account at the end of the day?

$1800

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

$35

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?

$40.50

An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain?

$400

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?

-$1.96

How much is a basis point?

.01%

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 .9. What hedge ration should be used when hedging a one month exposure to the price of commodity A?

.60

An exchange rate is .7000 and the six month domestic and foreign risk free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate?

.6930

Which of the following is applicable to corporate bonds in the United States?

30/360

An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semiannual compounding?

5.06%

An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding?

5.83%

A company invests $1000 in a five year zero coupon bond and $4000 in a ten year zero coupon bond. What is the duration of the portfolio?

9 years

The compounding frequency for an interest rate defines

A unit measurement for the interest rate

Which of the following are cash settled

Futures on stock indices

Margin accounts have the effect of

All the above (reducing the risk of one party regretting the deal and backing out, ensuring funds are available to pay traders when they make a profit, reducing systematic risk due to collapse of futures markets)

Clearing houses are

Always used in futures markets and sometimes used in OTC markets

The bonds that can be delivered in a Treasury bond futures contract are

Assets that provide a known cash income

Which of the following is NOT true? (investment assets)

Investment assets are never held for consumption

The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a strike price of $40 when the option price is $2. The options are exercised when the stock price is $39. The trader's net profit or loss is

Gain of $200

Which entity in the United States takes primary responsibility for regulating futures markets?

Commodities Futures Trading Commission CFTC

Which of the following is a consumption asset?

Copper

Which of the following best describes "stack and roll"?

Creates long-term hedges from short term futures contracts.

A limit order

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

The frequency with which futures margin accounts are adjusted for gains and losses is

Daily

The modified duration of a bond portfolio worth $1 million is 5 years. By approximately how much does the value of the portfolio change if all yields increase by 5 basis points?

Decrease of $2500

Which of the following increases basis risk?

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

Which of the following describes forward rates?

Interest rates implied by current zero rates for future period of time

Which of the following describes European options?

Exercisable only at maturity

Which of the following is NOT true about forward and futures contracts?

Forward contracts are more liquid than futures contracts

Under liquidity preference theory, which of the following is always true?

Forward rates are higher than expected future spot rates

Which of the following is true of LIBOR

It is a rate used when borrowing and lending takes place between banks

Which of the following is true of the fed funds rate

It is an overnight interbank rate

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?

It is liable to experience liquidity problems if the price of silver rises dramatically

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging?

It leads to a more predictable exchange rate being paid

Which of the following describes a central clearing party

It stands between two parties in the OTC market

Which of the following does NOT describe beta?

Measures correlation between futures prices and spot prices for a commodity

Which of the following is true? (bond prices)

None of the above (When IR in the economy increase, all bond prices increase; As its coupon increases, a bond's price decreases; Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same

A one year forward contract is an agreement where

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

Which of the following best describes central clearing parties

Perform a similar function to exchange clearing houses

The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?

Quoted bond price = 131; conversion factor = 1.2500

Duration matching immunizes a portfolio against

Small parallel shifts in the yield curve

Which of the following describes the way the forward price of a foreign currency is quoted?

Some forward prices are quoted as the number of U.S. dollars per unit of the foreign currency and some are quoted the other way round.

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?

The July contract

Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets

The OTC market is ten times as big as the exchange traded market

Which of the following is true about a long forward contract

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

The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true?

The forward price is less than the expected future spot price.

Which of the following describes contango?

The futures price is above the expected future spot price

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 hedgers position improves

Which of the following is true? (gold producers)

The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold

What is the quoted discount rate on a money market instrument?

The interest rate earned as a percentage of the final face value of a bond

Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract?

The interest rate used in the calculation of the conversion factor

Which of the following is a reason for hedging a portfolio with an index futures?

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

An investor sells a futures contract an asset when the futures price is $1500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1540. Which of the following is true

The investor has made a loss of $4000

Who initiates delivery in a corn futures contract

The party with the short position

Which of the following best describes the term "spot price"

The price for immediate delivery

Which of the following is NOT true (Options)

When a CBOE call option on IBM is exercised, IBM issues more stock