Question 1

You own a diversified investment portfolio and wish to hedge it against market declines. Which one of the following would be best suited as a cross-hedge for this purpose?

Accepted Answer

A) going long on Treasury bonds in the spot market 
B) going long on DJIA futures 
C) going short on S&P 500 index futures 
D) going long on an index fund 
E) going short on Eurodollar futures 
A) going long on Treasury bonds in the spot market 
B) going long on DJIA futures 
C) going short on S&P 500 index futures 
D) going long on an index fund 
E) going short on Eurodollar futures

Question 2

You purchased six DJIA index futures at a price of 20,342. The contract size is $10 times the level of the index. The futures are maturing today when the price is 20,129. What is the amount of your profit or loss?

Accepted Answer

A) −$12,780 
B) −$1,278 
C) −$12,720 
D) $1,278 
E) $12,780 
A) −$12,780 
B) −$1,278 
C) −$12,720 
D) $1,278 
E) $12,780

Question 3

You own four November crude oil futures contracts. What is the settlement value of those contracts at the end day?
$$\begin{array}{l}
\begin{array} { l l c c c } 
\text { Contract } & \text { Open } & \text { High } & \text { Low } & \text { Close } \
\text { Nov, crude ail, 1, gad } & 123.01 & 124.3 & 122.93 & 123.90
\end{array}\
\text { bbls. \$ and cents/bbl }
\end{array}$$

Accepted Answer

A) $356,200 
B) $363,600 
C) $416,400 
D) $445,500 
E) $495,600 
A) $356,200 
B) $363,600 
C) $416,400 
D) $445,500 
E) $495,600

Question 4

You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you will be taking which one of the following positions?

Accepted Answer

A) short hedge 
B) long hedge 
C) program trade 
D) short arbitrage 
E) long arbitrage 
A) short hedge 
B) long hedge 
C) program trade 
D) short arbitrage 
E) long arbitrage

Question 5

Corn is currently selling for $6.15 a bushel while the 3-month futures price is $6.20. Carl believes that corn will actually sell for $6.45 a bushel 3 months from now. Which one of the following positions in corn should he take today, given this belief?

Accepted Answer

A) sell in the spot market 
B) sell in the futures market 
C) take a long position in the futures market 
D) take a short position in the futures market 
E) take a short position in the spot market 
A) sell in the spot market 
B) sell in the futures market 
C) take a long position in the futures market 
D) take a short position in the futures market 
E) take a short position in the spot market

Question 6

Southern Fuel has an inventory of 756,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts?

Accepted Answer

A) long on 16 
B) long on 17 
C) short on 18 
D) short on 19 
E) short on 20 
A) long on 16 
B) long on 17 
C) short on 18 
D) short on 19 
E) short on 20

Question 7

You manage a $225 million bond portfolio that has a duration of 7.1 years. You want to hedge this portfolio with Treasury note futures that have a duration of 7.2 years and a futures price of 114. U.S. Treasury notes futures contracts are based on a par value of $100,000 and quoted as a percentage of par. How many contracts do you need to sell to complete this hedge?

Accepted Answer

A) 1,371 contracts 
B) 1,400 contracts 
C) 1,689 contracts 
D) 1,864 contracts 
E) 1,946 contracts 
A) 1,371 contracts 
B) 1,400 contracts 
C) 1,689 contracts 
D) 1,864 contracts 
E) 1,946 contracts

Question 8

The 5-month futures price on a non-dividend-paying stock is $85.85. The risk-free rate is 1.0% and the market rate is 11.75%. What is the spot rate for this stock if spot-futures parity exists?

Accepted Answer

A) $82.42 
B) $82.51 
C) $82.99 
D) $83.32 
E) $83.52 
A) $82.42 
B) $82.51 
C) $82.99 
D) $83.32 
E) $83.52

Question 9

A fully hedged stock portfolio will have a beta equal to which one of the following?

Accepted Answer

A) an average asset 
B) U.S. Treasury bill 
C) S&P 500 
D) the beta of the stock portfolio exclusive of the hedge 
E) one-half of the beta of the stock portfolio exclusive of the hedge 
A) an average asset 
B) U.S. Treasury bill 
C) S&P 500 
D) the beta of the stock portfolio exclusive of the hedge 
E) one-half of the beta of the stock portfolio exclusive of the hedge

Question 10

The T-Shirt Factory purchased seven futures contracts on cotton at a quoted price of 63.70 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 64.50. Cotton futures are based on 50,000 pounds and quoted in cents per pound. How much did the Shirt Factory save by hedging cotton?

Accepted Answer

A) $40 
B) $400 
C) $2,600 
D) $2,400 
E) $2,800 
A) $40 
B) $400 
C) $2,600 
D) $2,400 
E) $2,800

Question 11

You have 50,000 pounds of cotton in storage. You don't want to sell the cotton today as you believe the price of cotton will be higher six months from now than what the markets currently predict. However, you also realize that the price could decline. Which one of the following would hedge your risk of owning the cotton for the next few months?

Accepted Answer

A) short futures position 
B) long futures position 
C) short spot position 
D) long spot position 
E) long futures position combined with a short spot position 
A) short futures position 
B) long futures position 
C) short spot position 
D) long spot position 
E) long futures position combined with a short spot position

Question 12

The spot price on orange juice is 121.55 cents per pound. The futures price is 124.30. The basis is ________ and the market is a(n)________ market.

Accepted Answer

A) −2.75; carrying-charge 
B) −2.75; inverted 
C) 1.75; inverted 
D) 2.75; carrying-charge 
E) 2.75; inverted 
A) −2.75; carrying-charge 
B) −2.75; inverted 
C) 1.75; inverted 
D) 2.75; carrying-charge 
E) 2.75; inverted

Question 13

The T-Shirt Factory purchased 12 futures contracts on cotton at a quoted price of 55.50 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 56.10. Cotton futures are based on 50,000 pounds and quoted in cents per pound. How much did the Shirt Factory save by hedging cotton?

Accepted Answer

A) $90 
B) $560 
C) $1,280 
D) $2,400 
E) $3,600 
A) $90 
B) $560 
C) $1,280 
D) $2,400 
E) $3,600

Question 14

Jackie manages a $620 million bond portfolio which has a duration of 4.05 years. She wants to hedge the portfolio with Treasury note futures that have a duration of 4.53 years and a futures price of 112. U.S. Treasury notes futures contracts are based on a par value of $100,000 and quoted as a percentage of par. How many contracts does she need to sell to complete this hedge?

Accepted Answer

A) 4,667 contracts 
B) 4,868 contracts 
C) 4,949 contracts 
D) 5,183 contracts 
E) 5,216 contracts 
A) 4,667 contracts 
B) 4,868 contracts 
C) 4,949 contracts 
D) 5,183 contracts 
E) 5,216 contracts

Question 15

The spot rate on a non-dividend-paying stock is $42.30. The risk-free rate is 3.75% and the market rate is 11.50%. What is the 3-month futures rate if spot-futures parity exists?

Accepted Answer

A) $42.14 
B) $42.54 
C) $42.69 
D) $42.82 
E) $43.89 
A) $42.14 
B) $42.54 
C) $42.69 
D) $42.82 
E) $43.89

Question 16

Which one of the following is a notification to a futures contract holder that additional margin funds are needed?

Accepted Answer

A) marking to market 
B) deposit call 
C) shortage notice 
D) margin call 
E) marking call 
A) marking to market 
B) deposit call 
C) shortage notice 
D) margin call 
E) marking call

Question 17

You own a portfolio that is valued at $6.4 million and has a beta of 1.27. You would like to create a riskless portfolio by hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts are needed if the current S&P 500 index is 1414?

Accepted Answer

A) short 16 contracts 
B) short 18 contracts 
C) short 23 contracts 
D) long 18 contracts 
E) long 23 contracts 
A) short 16 contracts 
B) short 18 contracts 
C) short 23 contracts 
D) long 18 contracts 
E) long 23 contracts

Question 18

Which of the following are needed to determine the number of stock index futures required to cross-hedge a stock portfolio?
I. standard deviation of the stock portfolio
II. beta of the stock portfolio
III. value of the index futures contract
IV. value of the stock portfolio

Accepted Answer

A) I and III only 
B) II and IV only 
C) I, II, and III only 
D) II, III, and IV only 
E) I, III, and IV only 
A) I and III only 
B) II and IV only 
C) I, II, and III only 
D) II, III, and IV only 
E) I, III, and IV only

Question 19

What is the highest price at which the May coffee futures contract traded during this day?
$\begin{array}{lrr}
&\text { Contract } & \text { High }& \text { Low }& \text { Close}& \text { Chg }\
\text { May, Coffee, }& 37,500 \text { lbs., cents } & 138.00& 135.50 & 137.15 & 2.20\
 \text { per  I b } &\
\text { Dec, Cotton, }&\text { 50,000 lbs., cents } & 80.59 & 78.85 & 80.63 & .27\
 \text {per  I b  } &\
\end{array}$

Accepted Answer

A) $1.3715 
B) $1.3800 
C) $137.15 
D) $138.00 
E) $140.20 
A) $1.3715 
B) $1.3800 
C) $137.15 
D) $138.00 
E) $140.20

Question 20

Southern Fields has an inventory of 838,000 pounds of sugar. The firm placed a partial hedge on this inventory by selling 6 futures contracts at 9.56. The futures contracts are based on 112,000 pounds and are quoted in cents per pound. At the time the firm sold the sugar, the spot rate was 9.63. How much profit did the firm lose because of the hedge?

Accepted Answer

A) $470.40 
B) $586.60 
C) $688.20 
D) $4,704.00 
E) $5,866.00 
A) $470.40 
B) $586.60 
C) $688.20 
D) $4,704.00 
E) $5,866.00

You own a diversified investment portfolio and wish to hedge it against market declines. Which one of the following would be best suited as a cross-hedge for this purpose?

You purchased six DJIA index futures at a price of 20,342. The contract size is $10 times the level of the index. The futures are maturing today when the price is 20,129. What is the amount of your profit or loss?

You own four November crude oil futures contracts. What is the settlement value of those contracts at the end day? Contract Open High Low Close Nov, crude ail, 1, gad 123.01 124.3 122.93 123.90 bbls. \ and cents/bbl

You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you will be taking which one of the following positions?

Corn is currently selling for $6.15 a bushel while the 3-month futures price is $6.20. Carl believes that corn will actually sell for $6.45 a bushel 3 months from now. Which one of the following positions in corn should he take today, given this belief?

Southern Fuel has an inventory of 756,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts?

The 5-month futures price on a non-dividend-paying stock is $85.85. The risk-free rate is 1.0% and the market rate is 11.75%. What is the spot rate for this stock if spot-futures parity exists?

A fully hedged stock portfolio will have a beta equal to which one of the following?

The spot price on orange juice is 121.55 cents per pound. The futures price is 124.30. The basis is and the market is a(n) market.

The spot rate on a non-dividend-paying stock is $42.30. The risk-free rate is 3.75% and the market rate is 11.50%. What is the 3-month futures rate if spot-futures parity exists?

Which one of the following is a notification to a futures contract holder that additional margin funds are needed?

You own a portfolio that is valued at $6.4 million and has a beta of 1.27. You would like to create a riskless portfolio by hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts are needed if the current S&P 500 index is 1414?

Which of the following are needed to determine the number of stock index futures required to cross-hedge a stock portfolio? I. standard deviation of the stock portfolio II. beta of the stock portfolio III. value of the index futures contract IV. value of the stock portfolio

What is the highest price at which the May coffee futures contract traded during this day? Contract High Low Close Chg May, Coffee, 37,500 lbs., cents 138.00 135.50 137.15 2.20 per I b Dec, Cotton, 50,000 lbs., cents 80.59 78.85 80.63 .27 per I b

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

Exam 14: Futures Contracts

You own a diversified investment portfolio and wish to hedge it against market declines. Which one of the following would be best suited as a cross-hedge for this purpose?

You purchased six DJIA index futures at a price of 20,342. The contract size is $10 times the level of the index. The futures are maturing today when the price is 20,129. What is the amount of your profit or loss?

You own four November crude oil futures contracts. What is the settlement value of those contracts at the end day? Contract Open High Low Close Nov, crude ail, 1, gad 123.01 124.3 122.93 123.90 bbls. \ and cents/bbl

You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you will be taking which one of the following positions?

Corn is currently selling for $6.15 a bushel while the 3-month futures price is $6.20. Carl believes that corn will actually sell for $6.45 a bushel 3 months from now. Which one of the following positions in corn should he take today, given this belief?

Southern Fuel has an inventory of 756,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts?

The 5-month futures price on a non-dividend-paying stock is $85.85. The risk-free rate is 1.0% and the market rate is 11.75%. What is the spot rate for this stock if spot-futures parity exists?

A fully hedged stock portfolio will have a beta equal to which one of the following?

The spot price on orange juice is 121.55 cents per pound. The futures price is 124.30. The basis is ________ and the market is a(n)________ market.

The spot rate on a non-dividend-paying stock is $42.30. The risk-free rate is 3.75% and the market rate is 11.50%. What is the 3-month futures rate if spot-futures parity exists?

Which one of the following is a notification to a futures contract holder that additional margin funds are needed?

You own a portfolio that is valued at $6.4 million and has a beta of 1.27. You would like to create a riskless portfolio by hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts are needed if the current S&P 500 index is 1414?

Which of the following are needed to determine the number of stock index futures required to cross-hedge a stock portfolio? I. standard deviation of the stock portfolio II. beta of the stock portfolio III. value of the index futures contract IV. value of the stock portfolio

What is the highest price at which the May coffee futures contract traded during this day? Contract High Low Close Chg May, Coffee, 37,500 lbs., cents 138.00 135.50 137.15 2.20 per I b Dec, Cotton, 50,000 lbs., cents 80.59 78.85 80.63 .27 per I b

A Brief History of Risk and Return

The Investment Process

Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

Stock Options

Option Valuation

Alternative Investments

Corporate and Government Bonds

Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

Mortgage-Backed Securities

Filters

The spot price on orange juice is 121.55 cents per pound. The futures price is 124.30. The basis is and the market is a(n) market.