Advanced Investments Exam 1

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true A. A forward contract can be used to lock in the exchange rate B. A forward contract will always give a better outcome than an option C. An option will always give a better outcome than a forward contract D. An option can be used to lock in the exchange rate

A

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 $83.3 when used to satisfy a collateral request D. A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a collateral request

A

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

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

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

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

A

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

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

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

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

Which of the following is NOT true A. When a CBOE call option on IBM is exercised, IBM issues more stock B. An American option can be exercised at any time during its life C. An call option will always be exercised at maturity if the underlying asset price is greater than the strike price D. A put option will always be exercised at maturity if the strike price is greater than the underlying asset price.

A

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

A

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

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? A. It leads to a better exchange rate being paid B. It leads to a 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

B

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

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

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

B

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

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

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

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

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

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

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

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

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

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

Which of the following is necessary for tailing a hedge? A. Comparing the size in units of the position being hedged with the size in units of the futures contract B. Comparing the value of the position being hedged with the value of one futures contract C. Comparing the futures price of the asset being hedged to its forward price D. None of the above

B

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

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

B

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

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

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

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

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 A. Loss of $800 B. Loss of $200 C. Gain of $200 D. Loss of $900

C

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

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

C

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

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

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

Which of the following is true? A. Gold producers should always hedge the price they will receive for their production of gold over the next three years B. Gold producers should always hedge the price they will receive for their production of gold over the next one year C. The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold D. Gold producers can hedge by buying gold in the forward market

C

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

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

15. 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

D

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

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? A. Long 192 contracts B. Short 192 contracts C. Long 48 contracts D. Short 48 contracts

D

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

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 below which the trader makes a profit is A. $25 B. $28 C. $26 D. $20

D

A speculator can choose between buying 100 shares of a stock for $40 per share and buying 1000 European call options on the stock with a strike price of $45 for $4 per option. For second alternative to give a better outcome at the option maturity, the stock price must be above A. $45 B. $46 C. $55 D. $50

D

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 systemic risk due to collapse of futures markets D. All of the above

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

D

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

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

D

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

D

Which of the following describes tailing the hedge? A. A strategy where the hedge position is increased at the end of the life of the hedge B. A strategy where the hedge position is increased at the end of the life of the futures contract C. A more exact calculation of the hedge ratio when forward contracts are used for hedging D. None of the above

D

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

Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets A. The exchange-traded market is twice as big as the over-the-counter market. B. The over-the-counter market is twice as big as the exchange-traded market. C. The exchange-traded market is ten times as big as the over-the-counter market. D. The over-the-counter market is ten times as big as the exchange-traded market.

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

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