F&O MC

14. 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

$150

5. 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. $1,800

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

22. Which of the following is true for an interest rate swap? A. A swap is usually worth close to zero when it is first negotiated B. Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into C. Comparative advantage is a valid reason for entering into the swap D. None of the above

A. A swap is usually worth close to zero when it is first negotiated

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

A. Daily

9. 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. Forward contracts are more liquid than futures contracts

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. Futures contracts nearly always last longer than forward contracts

9. 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. Higher

2. Which of the following is true? A. The convenience yield is always positive or zero. B. The convenience yield is always positive for an investment asset. C. The convenience yield is always negative for a consumption asset. D. The convenience yield measures the average return earned by holding futures contracts.

A. The convenience yield is always positive or zero.

16. What is the quoted discount rate on a money market instrument? A. The interest rate earned as a percentage of the final face value of a bond B. The interest rate earned as a percentage of the initial price of a bond C. The interest rate earned as a percentage of the average price of a bond D. The risk-free rate used to calculate the present value of future cash flows from a bond

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

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

4. Which of the following describes the way the futures price of a foreign currency is quoted? A. The number of U.S. dollars per unit of the foreign currency B. The number of the foreign currency per U.S. dollar C. Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round D. There are no quotation conventions for futures prices

A. The number of U.S. dollars per unit of the foreign currency

18. 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. The price it would have if all cash flows were discounted at 6% per annum

24. A company enters into an interest rate swap where it is paying fixed and receiving LIBOR. When interest rates increase, which of the following is true? A. The value of the swap to the company increases B. The value of the swap to the company decreases C. The value of the swap can either increase or decrease D. The value of the swap does not change providing the swap rate remains the same

A. The value of the swap to the company increases

23. Which of the following is true for the party paying fixed in an interest rate swap? A. There is more credit risk when the yield curve is upward sloping than when it is downward sloping B. There is more credit risk when the yield curve is downward sloping than when it is upward sloping C. The credit exposure increases when interest rates decline D. There is no credit exposure providing a financial institution is used as the intermediary

A. There is more credit risk when the yield curve is upward sloping than when it is downward sloping

9. A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. Spot price and futures price are currently $100 and $90. The one year futures price of the commodity is $90. If 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. $96

15. 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. Actual/Actual (in period)

8. 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. Commodities Futures Trading Commission (CFTC)

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. Comparing the value of the position being hedged with the value of one futures contract

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

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

2. 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. It leads to a more predictable exchange rate being paid

1. 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. The July contract

6. 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. The lender of the shares issues instructions to close out the position

10. 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. The one-year futures price as a percentage of the spot price decreases

4. 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. The party with the short position

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. This flexibility tends decrease the futures price.

12. Which of following is applicable to corporate bonds in the United States? A. Actual/360 B. Actual/Actual C. 30/360 D. Actual/365

C. 30/360

25. A floating-for-fixed currency swap is equivalent to A. Two interest rate swaps, one in each currency B. A fixed-for-fixed currency swap and one interest rate swap C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency D. None of the above

C. A fixed-for-fixed currency swap and two interest rate swaps, one in each currency

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. Copper

11. Which of the following describes a known dividend yield on a stock? A. The size of the dividend payments each year is known B. Dividends per year as a percentage of today's stock price are known C. Dividends per year as a percentage of the stock price at the time when dividends are paid are known D. Dividends will yield a certain return to a person buying the stock today

C. Dividends per year as a percentage of the stock price at the time when dividends are paid are known

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

7. Which of the following is NOT true? A. Gold and silver are investment assets B. Investment assets are held by significant numbers of investors for investment purposes C. Investment assets are never held for consumption D. The forward price of an investment asset can be obtained from the spot price, interest rates and the income paid on the asset

C. Investment assets are never held for consumption

5. Which of the following describes the way the forward price of a foreign currency is quoted? A. The number of U.S. dollars per unit of the foreign currency B. The number of the foreign currency per U.S. dollar C. Some forward prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round D. There are no quotation conventions for forward prices

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

10. 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. Sometimes used in both futures markets and OTC markets D. Always used in both futures markets and OTC markets

C. Sometimes used in both futures markets and OTC markets

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

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

26. Which of the following describes the five-year swap rate? A. The rate on a five-year loan to a AA-rated company B. The rate on a five-year loan to an A-rated company C. The rate that can be earned over five years from a series of short-term loans to AA-rated companies D. The rate that can be earned over five years from a series of short-term loans to A-rated companies

C. The rate that can be earned over five years from a series of short-term loans to AA-rated companies

20. Which of the following is a use of a currency swap? A. To exchange an investment in one currency for an investment in another currency B. To exchange borrowing in one currency for borrowings in another currency C. To take advantage situations where the tax rates in two countries are different D. All of the above

D. All of the above

21. Which of the following describes an interest rate swap? A. A way of converting a liability from fixed to floating B. A portfolio of forward rate agreements C. An agreement to exchange interest at a fixed rate for interest at a floating rate D. All of the above

D. All of the above

7. 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. All of the above

13. 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. Futures on stock indices

5. 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

D. Measures correlation between futures prices and spot prices

12. 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. Perform a similar function to exchange clearing houses

19. 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. Small parallel shifts in the yield curve

13. Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract? A. The ability to deliver any of a number of different bonds B. The wild card play C. The fact that delivery can be made any time during the delivery month D. The interest rate used in the calculation of the conversion factor

D. The interest rate used in the calculation of the conversion factor

17. 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 move up by 100 basis points

D. The prices of two bonds with the same duration change by the same percentage amount when interest rate move up by 100 basis points

8. What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A. The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B. The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. C. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year D. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

D. The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year