Exam 5: Financial Forwards and Futures

The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. What is the price of a 6-month prepaid forward contract on the S&P 500 Index?

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Question 1

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What are some uses for index futures contracts?

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Question 2

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In no particular order, the most common uses are index arbitrage, asset allocation, cross-hedging, risk management, and controlling transaction costs. Futures can also speed up the investment process as well as provide quick short-term vehicles.

What is the process involved in creating a cash-and-carry strategy?

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Buy a tailed position in a security and sell it at time T. Borrow the amount necessary to enter the tailed position and repay the loan at time T. Short a forward contract and close the transaction at time T.

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your dollar gain or loss? (Ignore opportunity costs.)

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Question 4

If the prepaid forward contract on a non-dividend paying stock sells for $85.25 and the annual required rate of return on the stock is 6.5%, which of the following 1 year forward contract prices does NOT represent an arbitrage opportunity?

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Question 5

If the price on a 1 year forward contract is $65.92, which of the following prepaid forward contracts on a non-dividend paying stock does NOT represent an arbitrage opportunity if the annual required rate of return on the stock is 8.4%?

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Question 6

KMW, Inc. plans to pay a dividend of $0.50 per share both 3 and 6 months from today. KMWʹs share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%. What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend?

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Question 7

An arbitrage related strategy in which you substitute a low yield position for one with a higher return is called a .

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Question 8

Name some advantages that futures contracts have over forward contracts.

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Question 9

When purchasing a stock, which arrangement allows for payment of the stock today and receipt of the stock at an agreed-upon future date?

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Question 10

The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year. The current price of the S&P 500 Index futures contract is 1200. If the mutual fund has a beta of 1.24, how many contracts will be needed to hedge the fund?

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Question 11

Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

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Question 12

When purchasing a stock, which arrangement allows for both the payment of the stock and receipt of the stock at some specified date in the future?

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Question 13

The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%. LIBOR is 4.2%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year?

(Multiple Choice)

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Question 14

A strategy in which you buy the underlying asset and short the offsetting forward contract is called a .

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Question 15

When purchasing a stock, which arrangement allows for the simultaneous payment of the stock price in cash and receipt of the actual stock certificate?

(Multiple Choice)

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Question 16

HAW, Inc. plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months. HAWʹs share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%. What is the price of a forward contract, which expires immediately after the second dividend?

(Multiple Choice)

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Question 17

Consider an investment in five S&P 500 Index futures contracts at a price of $924.80. The initial margin requirement is 15.0% and the maintenance margin is 10.0%. If the continuously compounded interest rate is 5.0% what will the futures price need to be for a margin call to occur 10 days from now? Assume no settlement within the 10 days.

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Question 18

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your percentage gain or loss under a 15.0% margin requirement? (Ignore opportunity costs.)

(Multiple Choice)

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Question 19

Explain the impact transaction costs have on the ability to make arbitrage profits in forward and futures markets.

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Question 20

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The S&P 500 Index is priced at $950.46. The annualized dividend yield on the index is 1.40%. What is the price of a 6-month prepaid forward contract on the S&P 500 Index?

What are some uses for index futures contracts?

What is the process involved in creating a cash-and-carry strategy?

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your dollar gain or loss? (Ignore opportunity costs.)

If the prepaid forward contract on a non-dividend paying stock sells for $85.25 and the annual required rate of return on the stock is 6.5%, which of the following 1 year forward contract prices does NOT represent an arbitrage opportunity?

If the price on a 1 year forward contract is $65.92, which of the following prepaid forward contracts on a non-dividend paying stock does NOT represent an arbitrage opportunity if the annual required rate of return on the stock is 8.4%?

KMW, Inc. plans to pay a dividend of $0.50 per share both 3 and 6 months from today. KMWʹs share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%. What is the price of a 6-month prepaid forward contract, which expires immediately after the second dividend?

An arbitrage related strategy in which you substitute a low yield position for one with a higher return is called a .

Name some advantages that futures contracts have over forward contracts.

When purchasing a stock, which arrangement allows for payment of the stock today and receipt of the stock at an agreed-upon future date?

Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

When purchasing a stock, which arrangement allows for both the payment of the stock and receipt of the stock at some specified date in the future?

The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%. LIBOR is 4.2%. How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year?

A strategy in which you buy the underlying asset and short the offsetting forward contract is called a .

When purchasing a stock, which arrangement allows for the simultaneous payment of the stock price in cash and receipt of the actual stock certificate?

HAW, Inc. plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months. HAWʹs share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%. What is the price of a forward contract, which expires immediately after the second dividend?

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your percentage gain or loss under a 15.0% margin requirement? (Ignore opportunity costs.)

Explain the impact transaction costs have on the ability to make arbitrage profits in forward and futures markets.

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, Collars, and Other Strategies

Introduction to Risk Management

The Wide World of Futures Contracts

Interest Rates Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing

The Black-Scholes Formula

Financial Engineering and Security Design

Corporate Applications

Real Options

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