Question 1

To exploit an expected increase in interest rates,an investor would most likely

Accepted Answer

A)  sell Treasury bond futures. 
B)  take a long position in wheat futures. 
C)  buy S&P 500 index futures. 
D)  take a long position in Treasury bond futures. 
E)  none of these. 
A)  sell Treasury bond futures. 
B)  take a long position in wheat futures. 
C)  buy S&P 500 index futures. 
D)  take a long position in Treasury bond futures. 
E)  none of these.

Question 2

Expiration-day volatility has been explained by

Accepted Answer

A)  program trading to exploit arbitrage opportunities. 
B)  transactions costs. 
C)  lags in execution of arbitrage strategies. 
D)  a and b. 
E)  b and c. 
A)  program trading to exploit arbitrage opportunities. 
B)  transactions costs. 
C)  lags in execution of arbitrage strategies. 
D)  a and b. 
E)  b and c.

Question 3

You would like to take a position in the S&P500 stock index,but have decided to use market-index futures contracts and T-bills rather than actually purchasing the index.Your strategy will duplicate the payoff you would receive if you held the index and your goal is to time the market.If you want to minimize transactions costs and are bullish you should

Accepted Answer

A)  buy and hold T-bills and shift in and out of futures contracts as you expect the market to turn up or down. 
B)  sell futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down. 
C)  buy futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down. 
D)  buy and hold futures contracts and shift in and out of T-bills as you expect the market to turn up or down. 
E)  sell futures contracts and buy T-bills and shift back and forth between them as you expect the market to turn up or down. 
A)  buy and hold T-bills and shift in and out of futures contracts as you expect the market to turn up or down. 
B)  sell futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down. 
C)  buy futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down. 
D)  buy and hold futures contracts and shift in and out of T-bills as you expect the market to turn up or down. 
E)  sell futures contracts and buy T-bills and shift back and forth between them as you expect the market to turn up or down.

Question 4

If you took a long position in a pork bellies futures contract and then forgot about it,what would happen at the expiration of the contract?

Accepted Answer

A)  Nothing-the seller understands that these thing happen. 
B)  You would wake up to find the pork bellies on your front lawn. 
C)  Your broker would send you a nasty letter. 
D)  You would be notified that you owe the holder of the short position a certain amount of cash. 
E)  You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies. 
A)  Nothing-the seller understands that these thing happen. 
B)  You would wake up to find the pork bellies on your front lawn. 
C)  Your broker would send you a nasty letter. 
D)  You would be notified that you owe the holder of the short position a certain amount of cash. 
E)  You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies.

Question 5

The spot rate for the British pound is $2.00 and the one-year forward rate is $2.039.The one-year Canadian interest rate is 4%.The one-year interest rate in the UK is _____.

Accepted Answer

A)  3% 
B)  4.5% 
C)  2.5% 
D)  2% 
E)  1.5% 
A)  3% 
B)  4.5% 
C)  2.5% 
D)  2% 
E)  1.5%

Question 6

The process of marking-to-market

Accepted Answer

A)  posts gains or losses to each account daily. 
B)  may result in margin calls. 
C)  impacts only long positions. 
D)  all of these are true. 
E)  both a and b are true. 
A)  posts gains or losses to each account daily. 
B)  may result in margin calls. 
C)  impacts only long positions. 
D)  all of these are true. 
E)  both a and b are true.

Question 7

On January 1,the listed spot and futures prices of a Treasury bond were 93 8/32 and 93 13/32.You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract.One month later,the listed spot price and futures prices were 94 and 94.09,respectively.If you were to liquidate your position,your profits would be

Accepted Answer

A)  $500 loss. 
B)  $500 profit. 
C)  $50 loss. 
D)  $5,000 loss. 
E)  none of these. 
A)  $500 loss. 
B)  $500 profit. 
C)  $50 loss. 
D)  $5,000 loss. 
E)  none of these.

Question 8

Which one of the following statements regarding "basis" is not true?

Accepted Answer

A)  the basis is the difference between the futures price and the spot price. 
B)  the basis risk is borne by the hedger. 
C)  a short hedger suffers losses when the basis decreases. 
D)  the basis increases when the futures price increases by more than the spot price. 
E)  none of these. 
A)  the basis is the difference between the futures price and the spot price. 
B)  the basis risk is borne by the hedger. 
C)  a short hedger suffers losses when the basis decreases. 
D)  the basis increases when the futures price increases by more than the spot price. 
E)  none of these.

Question 9

Explain index arbitrage and the triple-witching hour.

Accepted Answer

Index arbitrage exploits the divergences

Question 10

An interest rate cap is

Accepted Answer

A)  an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate exceeds a specified limit. 
B)  an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate falls below a specified limit. 
C)  an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate falls below a specified limit. 
D)  an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate exceeds a specified limit. 
E)  The maximum allowable rate that can be earned on a swap agreement. 
A)  an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate exceeds a specified limit. 
B)  an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate falls below a specified limit. 
C)  an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate falls below a specified limit. 
D)  an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate exceeds a specified limit. 
E)  The maximum allowable rate that can be earned on a swap agreement.

Question 11

Suppose that the risk-free rate is 4% and the market risk premium is 6%.You are interested in a cocoa futures contract.The beta of cocoa is -0.291.
• What is the required annual rate of return on the cocoa contract?
• You plan to hold the contract for three months,then take delivery of the cocoa.At that time you expect the spot price of cocoa to be $900 per ton.What is the present value of this three-month deferred claim?
• What would the proper price be for this contract?

Accepted Answer

The required rate of return is given by

Question 12

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

Accepted Answer

A)  long;increase 
B)  long;decrease 
C)  short;increase 
D)  long;stay the same 
E)  short;stay the same 
A)  long;increase 
B)  long;decrease 
C)  short;increase 
D)  long;stay the same 
E)  short;stay the same

Question 13

You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892,you incurred:

Accepted Answer

A)  A gain of $9,000. 
B)  A loss of $9,000. 
C)  A loss of $18,000. 
D)  A gain of $18,000. 
E)  None of these. 
A)  A gain of $9,000. 
B)  A loss of $9,000. 
C)  A loss of $18,000. 
D)  A gain of $18,000. 
E)  None of these.

Question 14

The expectations hypothesis of futures pricing

Accepted Answer

A)  is the simplest theory of futures pricing. 
B)  states that the futures price equals the expected value of the future spot price of the asset. 
C)  is not a zero sum game. 
D)  a and b. 
E)  a and c. 
A)  is the simplest theory of futures pricing. 
B)  states that the futures price equals the expected value of the future spot price of the asset. 
C)  is not a zero sum game. 
D)  a and b. 
E)  a and c.

Question 15

If a stock index futures contract is overpriced,you would exploit this situation by:

Accepted Answer

A)  Selling both the stock index futures and the stocks in the index. 
B)  Selling the stock index futures and simultaneously buying the stocks in the index. 
C)  Buying both the stock index futures and the stocks in the index. 
D)  Buying the stock index futures and selling the stocks in the index. 
E)  None of these. 
A)  Selling both the stock index futures and the stocks in the index. 
B)  Selling the stock index futures and simultaneously buying the stocks in the index. 
C)  Buying both the stock index futures and the stocks in the index. 
D)  Buying the stock index futures and selling the stocks in the index. 
E)  None of these.

Question 16

Which two indices had the lowest correlation between them during the 2001-2006 period?

Accepted Answer

A)  S&P and DJIA;the correlation was 0.957 
B)  S&P and Nasdaq;the correlation was 0.630 
C)  NYSE and Nasdaq;the correlation was 0.944 
D)  Russell 2000 and DJIA;the correlation was 0.758 
E)  NYSE and DJIA;the correlation was 0.931 
A)  S&P and DJIA;the correlation was 0.957 
B)  S&P and Nasdaq;the correlation was 0.630 
C)  NYSE and Nasdaq;the correlation was 0.944 
D)  Russell 2000 and DJIA;the correlation was 0.758 
E)  NYSE and DJIA;the correlation was 0.931

Question 17

You purchased one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Accepted Answer

A)  $5.50 profit 
B)  $5,500 profit 
C)  $5.50 loss 
D)  $5,500 loss 
E)  none of these. 
A)  $5.50 profit 
B)  $5,500 profit 
C)  $5.50 loss 
D)  $5,500 loss 
E)  none of these.

Question 18

Arbitrage proofs in futures market pricing relationships

Accepted Answer

A)  rely on the CAPM. 
B)  demonstrate how investors can exploit misalignments. 
C)  incorporate transactions costs. 
D)  all of these. 
E)  none of these. 
A)  rely on the CAPM. 
B)  demonstrate how investors can exploit misalignments. 
C)  incorporate transactions costs. 
D)  all of these. 
E)  none of these.

Question 19

An investor with a long position in Canada bond futures will profit if

Accepted Answer

A)  interest rates decline. 
B)  interest rate increase. 
C)  the prices of US bonds increase. 
D)  the prices of T-bills increase. 
E)  none of these. 
A)  interest rates decline. 
B)  interest rate increase. 
C)  the prices of US bonds increase. 
D)  the prices of T-bills increase. 
E)  none of these.

Question 20

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes,one favorable and one unfavorable.

Accepted Answer

The firm can enter a swap arrangement,co

To exploit an expected increase in interest rates,an investor would most likely

Expiration-day volatility has been explained by

If you took a long position in a pork bellies futures contract and then forgot about it,what would happen at the expiration of the contract?

The spot rate for the British pound is $2.00 and the one-year forward rate is $2.039.The one-year Canadian interest rate is 4%.The one-year interest rate in the UK is _____.

The process of marking-to-market

Which one of the following statements regarding "basis" is not true?

Explain index arbitrage and the triple-witching hour.

An interest rate cap is

A trader who has a position in wheat futures believes the price of wheat will in the future.

You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892,you incurred:

The expectations hypothesis of futures pricing

If a stock index futures contract is overpriced,you would exploit this situation by:

Which two indices had the lowest correlation between them during the 2001-2006 period?

You purchased one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Arbitrage proofs in futures market pricing relationships

An investor with a long position in Canada bond futures will profit if

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes,one favorable and one unfavorable.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

Exam 19: Globalization and International Investing

To exploit an expected increase in interest rates,an investor would most likely

Expiration-day volatility has been explained by

If you took a long position in a pork bellies futures contract and then forgot about it,what would happen at the expiration of the contract?

The spot rate for the British pound is $2.00 and the one-year forward rate is $2.039.The one-year Canadian interest rate is 4%.The one-year interest rate in the UK is _____.

The process of marking-to-market

Which one of the following statements regarding "basis" is not true?

Explain index arbitrage and the triple-witching hour.

An interest rate cap is

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892,you incurred:

The expectations hypothesis of futures pricing

If a stock index futures contract is overpriced,you would exploit this situation by:

Which two indices had the lowest correlation between them during the 2001-2006 period?

You purchased one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Arbitrage proofs in futures market pricing relationships

An investor with a long position in Canada bond futures will profit if

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes,one favorable and one unfavorable.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yield

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Performance Evaluation and Active Portfolio Management

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

International Finance and Investments: Understanding Foreign Markets and Risks

Filters

A trader who has a position in wheat futures believes the price of wheat will in the future.