Chapter 17

48. The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform. A. CBOE B. CBOT C. CME D. Eurex

Eurex

65. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be? A. $95.24 B. $100 C. $105 D. $107

$105

76. The _________ contract dominates trading in stock-index futures. A. S&P 500 B. DJIA C. Nasdaq 100 D. Russell 2000

S&P 500

2. A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

increase substantially

4. The clearing corporation has a net position equal to ______. A. theopeninterest B. theopeninteresttimes2 C. the open interest divided by 2 D. zero

zero

80. You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point? A. $10,400 B. $14,300 C. $16,500 D. $21,300

$16,500

84. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts? A. $0 B. $2,000 C. $31,875 D. $33,875

$2,000

26. An established value below which a trader's margin may not fall is called the ________. A. daily limit B. daily margin C. maintenance margin D. convergence limit

maintenance margin

19. You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________. A. cross-hedge B. reversing trade C. spread position D. straddle

spread position

39. On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____. A. that the market believed that Obama had a 57% chance of winning B. that the market believed that Obama would not win the election C. nothing about the market's belief concerning the odds of Obama winning D. that the market believed Obama's chances of winning were about 43%

that the market believed that Obama had a 57% chance of winning

28. At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________. A. marking to market B. the convergence property C. the open interest D. the triple witching hour

the convergence property

47. In the context of a futures contract, the basis is defined as ______________. A. the futures price minus the spot price B. the spot price minus the futures price C. the futures price minus the initial margin D. the profit on the futures contract

the futures price minus the spot price

72. If the risk-free rate is greater than the dividend yield, then we know that _______________. A. the futures price will be higher as contract maturity increases B. F0 < S0 C. FT > ST D. arbitrage profits are possible

the futures price will be higher as contract maturity increases

59. The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________. A. $1,504.99 B. $1,569.08 C. $1,554.04 D. $1,557.73

$1,557.73

57. On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.) A. -$12,500 B. -$15,000 C. $15,000 D. $12,500

$12,500

66. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be? A. $76.29 B. $93.46 C. $107 D. $131.08

$131.08

92. A stock index spot price is $1,350. The zero coupon interest rate is 2.6%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,342? A. $8 B. $25 C. $32 D. $39

$25

83. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn? A. $27,500 B. $31,875 C. $33,875 D. $35,950

$33,875

91. A stock index spot price is $1,287. The zero coupon interest rate is 3.8%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,350? A. $19.50 B. $31.50 C. $63.00 D. $39.00

$39.00

71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today. A. $40 million B. $400 million C. $400 billion D. $400 trillion

$400 trillion

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________. A. $3.27 B. $4.39 C. $5.24 D. $6.72

$5.24

61. At contract maturity the basis should equal ___________. A. 1 B. 0 C. the risk-free interest rate D. -1

0

58. The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________. A. 1,274.33 B. 1,286.95 C. 1,268.61 D. 1,291.29

1,268.61

79. You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested. A. 31% B. 41% C. 52% D. 64%

41%

21. Initial margin is usually set in the region of ________ of the total value of a futures contract. A. 5%-15% B. 10%-20% C. 15%-25% D. 20%-30%

5%-15%

64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits? A. Buy gold in the spot with borrowed money, and sell the futures contract. B. Buy the futures contract, and sell the gold spot and invest the money earned. C. Buy gold spot with borrowed money, and buy the futures contract. D. Buy the futures contract, and buy the gold spot using borrowed money.

Buy gold in the spot with borrowed money, and sell the futures contract.

37. Futures markets are regulated by the __________. A. CFA Institute B. CFTC C. CIA D. SEC

CFTC

50. When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________. A. F1 = S0(1 + rf) B. F0 = S0(1 + rf - d)T C. F0 = S0(1 + rf + d)T D. F0 = S0(1 + rf)T

F0 = S0(1 + rf - d)T

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________. A. F0 - FT B. F0 - S0 C. FT - F0 D. FT - S0

FT - F0

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because: I. Gains in futures contracts can be larger due to leverage. II. Transaction costs in futures are typically lower than those in spot markets. III. Futures markets are often more liquid than the markets of the underlying commodities. A. I and II only B. II and III only C. I and III only D. I, II, and III

I, II, and III

87. The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could: I. Engage in a swap to pay fixed and receive variable interest payments II. Engage in a swap to pay variable and receive fixed interest payments III. Buy T-bond futures IV. Sell T-bond futures A. I and II only B. I and IV only C. II and III only D. II and IV only

II and III only

73. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________. A. 17% B. LIBOR C. LIBOR + 1% D. LIBOR - 1%

LIBOR + 1%

77. The ________ and the _______ have the lowest correlations with the large-cap indexes. A. Nasdaq Composite; Russell 2000 B. NYSE; DJIA C. S&P 500; DJIA D. Russell 2000; S&P 500

Nasdaq Composite; Russell 2000

8. _____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery. A. Investors; regulators B. Hedgers; speculators C. Speculators; hedgers D. Regulators; investors

Speculators; hedgers

Topic: The Futures Contract 27. Which one of the following is a true statement? A. A margin deposit can be met only by cash. B. All futures contracts require the same margin deposit. C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

32. The most actively traded interest rate futures contract is for ___________. A. LIBOR B. Treasury bills C. Eurodollars D. Treasury bonds

Treasury bonds

33. The CME weather futures contract is an example of ______________. A. a cash-settled contract B. an agricultural contract C. a financial future D. a commodity future

a cash-settled contract

10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______. A. an arbitrage B. a cross-hedge C. an over hedge D. a spread hedge

a cross-hedge

35. You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________. A. a cross-hedge B. a reversing trade C. a speculation D. marking to market

a reversing trade

90. The spot price of a futures contract is different than the price for which an investor can buy the underlying commodity for immediate delivery. This represents an opportunity for _____________. A. arbitrage B. hedging C. speculation D. loss leading

arbitrage

49. Violation of the spot-futures parity relationship results in _______________. A. fines and other penalties imposed by the SEC B. arbitrage opportunities for investors who spot them C. suspension of delivery privileges D. suspension of trading

arbitrage opportunities for investors who spot them

41. Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. A. are; are B. are; are not C. are not; are D. are not; are not

are not; are

22. Margin must be posted by ________. A. buyers of futures contracts only B. sellers of futures contracts only C. both buyers and sellers of futures contracts D. speculators only

both buyers and sellers of futures contracts

40. An investor would want to __________ to exploit an expected fall in interest rates. A. sell S&P 500 Index futures B. sell Treasury-bond futures C. buy Treasury-bond futures D. buy wheat futures

buy Treasury-bond futures

25. Margin requirements for futures contracts can be met by ______________. A. cash only B. cash or highly marketable securities such as Treasury bills C. cash or any marketable securities D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

cash or highly marketable securities such as Treasury bills

Topic: The Futures Contract 5. The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract. A. cash; cash B. cash; actual C. actual; cash D. actual; actual

cash; actual

81. The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior? A. convergence B. margin C. basis D. volatility

convergence

15. The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. market B. credit C. interest rate D. basis

credit

36. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk. A. cross-hedging B. long hedging C. spreading D. speculating

cross-hedging

34. Single stock futures, as opposed to stock index futures, are _______________. A. not yet being offered by any exchanges B. offered overseas but not in the United States C. currently trading on OneChicago, a joint venture of several exchanges D. scheduled to begin trading in 2015 on several exchanges

currently trading on OneChicago, a joint venture of several exchanges

89. The overwhelming majority of trading in futures contracts is done via ______. A. trading pits B. phone C. open outcry D. electronic networks

electronic networks

16. In the futures market the short position's loss is ___________ the long position's gain. A. greater than B. less than C. equal to D. sometimes less than and sometimes greater than

equal to

1. Today's futures markets are dominated by trading in _______ contracts. A. metals B. agriculture C. financial D. commodity

financial

6. Which one of the following contracts requires no cash to change hands when initiated? A. listed put option B. short futures contract C. forward contract D. listed call option

forward contract

9. Futures contracts have many advantages over forward contracts except that _________. A. futures positions are easier to trade B. futures contracts are tailored to the specific needs of the investor C. futures trading preserves the anonymity of the participants D. counterparty credit risk is not a concern on futures

futures contracts are tailored to the specific needs of the investor

30. Which one of the following exploits differences between actual future prices and their theoretically correct parity values? A. index arbitrage B. marking to market C. reversing trades D. settlement transactions

index arbitrage

29. A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

53. Approximately __________ of futures contracts result in actual delivery. A. 0% B. less than 1% to 3% C. less than 5% to 15% D. less than 60% to 80%

less than 1% to 3%

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. A. liquidity; all traders must trade a small set of identical contracts B. credit risk; all traders understand the risk of the contracts C. pricing; convergence is more likely to take place with fewer contracts D. trading cost; trading volume is reduced

liquidity; all traders must trade a small set of identical contracts

3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract

long futures contract

75. From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________. A. long call B. short call C. short stock position D. long stock position

long stock position

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

long; short

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity. A. make; make B. make; take C. take; make D. take; take

make; take

78. The use of leverage is practiced in the futures markets due to the existence of _________. A. banks B. brokers C. clearinghouses D. margin

margin

88. The only money exchanged by both the long and short at the creation of a futures contract is called the ___________. A. spot price B. futures price C. margin D. collateral

margin

7. Synthetic stock positions are commonly used by ______ because of their ______. A. market timers; lower transaction cost B. banks; lower risk C. wealthy investors; tax treatment D. money market funds; limited exposure

market timers; lower transaction cost

23. The daily settlement of obligations on futures positions is called _____________. A. a margin call B. marking to market C. a variation margin check D. the initial margin requirement

marking to market

31. Which one of the following refers to the daily settlement of obligations on future positions? A. marking to market B. the convergence property C. the open interest D. the triple witching hour

marking to market

55. At year-end, taxes on a futures position _______________. A. must be paid if the position has been closed out B. must be paid if the position has not been closed out C. must be paid regardless of whether the position has been closed out or not D. need not be paid if the position supports a hedge

must be paid regardless of whether the position has been closed out or not

74. Interest rate swaps involve the exchange of ________________. A. actual fixed-rate bonds for actual floating-rate bonds B. actual floating-rate bonds for actual fixed-rate bonds C. net interest payments and an actual principal swap D. net interest payments based on notional principal, but no exchange of principal

net interest payments based on notional principal, but no exchange of principal

24. Which of the following provides the profit to a short position at contract maturity? A. original futures price - Spot price at maturity B. spot price at maturity - Original futures price C. zero D. basis

original futures price - Spot price at maturity

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

pay; receive

46. Futures contracts are said to exhibit the property of convergence because _______________. A. the profits from long positions and short positions must ultimately be equal B. the profits from long positions and short positions must ultimately net to zero C. price discrepancies would open arbitrage opportunities for investors who spot them D. the futures price and spot price of any asset must ultimately net to zero

price discrepancies would open arbitrage opportunities for investors who spot them

54. A long hedger will __________ from an increase in the basis; a short hedger will __________. A. be hurt; be hurt B. be hurt; profit C. profit; be hurt D. profit; profit

profit; be hurt

13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

receive; pay

20. Interest rate futures contracts exist for all of the following except __________. A. federal funds B. Eurodollars C. banker's acceptances D. repurchase agreements

repurchase agreements

42. If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________. A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index C. sell S&P 500 Index futures and buy all the stocks in the S&P 500 D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

sell S&P 500 Index futures and buy all the stocks in the S&P 500

82. A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________. A. buy T-bond futures B. sell T-bond futures C. buy stock-index futures D. sell stock-index futures

sell T-bond futures

85. A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________. A. sell T-bond futures B. buy T-bond futures C. buy stock-index futures D. sell stock-index futures

sell T-bond futures

Topic: The Futures Contract 45. An investor would want to __________ to hedge a long position in Treasury bonds. A. buy interest rate futures B. buy Treasury bonds in the spot market C. sell interest rate futures D. sell S&P 500 futures

sell interest rate futures

60. If you expect a stock market downturn, one potential defensive strategy would be to __________. A. buy stock-index futures B. sell stock-index futures C. buy stock-index options D. sell foreign exchange futures

sell stock-index futures

86. A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________. A. buy T-bond futures and sell stock-index futures B. sell T-bond futures and buy stock-index futures C. buy stock-index futures and buy T-bond futures D. sell stock-index futures and sell T-bond futures

sell stock-index futures and sell T-bond futures

62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________. A. buy the September contract and sell the June contract B. sell the September contract and buy the June contract C. sell the September contract and sell the June contract D. buy the September contract and buy the June contract

sell the September contract and buy the June contract

17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. A. sell wheat futures B. buy wheat futures C. buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

sell wheat futures

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit risk. A. cross-hedging B. short hedging C. spreading D. speculating

short hedging

43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

short; long

18. Which of the following provides the profit to a long position at contract maturity? A. original futures price - Spot price at maturity B. spot price at maturity - Original futures price C. zero D. basis

spot price at maturity - Original futures price