Exam 23: Futures, Swaps, and Risk Management

Suppose that the risk-free rates in the United States and in the Canada are 3% and 5%, respectively.The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$.What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

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(Multiple Choice)

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Question 1

Correct Answer:

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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.

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Question 2

Correct Answer:

Verified

The firm can enter a swap arrangement, committing to pay .06 × $1 million = $60,000 in exchange for receiving payments equal to $1 million times the LIBOR rate.If the LIBOR rate is 5, the cash inflow would be $1 million × .05 = $50,000.The net cash flow would be -$10,000 in this case, which is unfavorable.If the LIBOR rate is 8%, the firm will have a cash inflow of $1 million × .08 = $80,000.The net cash flow in this case is $20,000, which is favorable.
Feedback: This is a basic question about the mechanics of a swap agreement.

Suppose that the risk-free rates in the United States and in the Canada are 5% and 3%, respectively.The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$.What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

Free

(Multiple Choice)

5.0/5

(77)

Question 3

Correct Answer:

Verified

Suppose that the risk-free rates in the United States and in Japan are 5.25% and 4.5%, respectively.The spot exchange rate between the dollar and the yen is $0.008828/yen.What should the futures price of the yen for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs

(Multiple Choice)

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Question 4

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. $You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. How many contracts should you buy or sell to hedge your position Allow fractions of contracts in your answer.$ How many contracts should you buy or sell to hedge your position Allow fractions of contracts in your answer.

(Multiple Choice)

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Question 5

A hedge ratio can be computed as

(Multiple Choice)

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Question 6

The most common short term interest rate used in the swap market is

(Multiple Choice)

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Question 7

Which one of the following stock index futures has a multiplier of 10 euros times the index

(Multiple Choice)

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Question 8

Commodity futures pricing

(Multiple Choice)

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Question 9

Foreign exchange futures markets are and the foreign exchange forward markets are .

(Multiple Choice)

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Question 10

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio

(Multiple Choice)

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Question 11

Which one of the following stock index futures has a multiplier of $250 times the index value

(Multiple Choice)

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Question 12

If you took a short position in three S&P 500 futures contracts at a price of 900 and closed the position when the index futures was 885, you incurred:

(Multiple Choice)

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Question 13

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. What is the dollar value of your expected loss

(Multiple Choice)

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Question 14

Which one of the following stock index futures has a multiplier of $10 times the index value

(Multiple Choice)

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Question 15

Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively.The spot exchange rate between the dollar and the pound is $1.60/BP.What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

(Multiple Choice)

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Question 16

One reason swaps are desirable is that

(Multiple Choice)

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Question 17

Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index

(Multiple Choice)

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Question 18

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio

(Multiple Choice)

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Question 19

If you purchased one S&P 500 Index futures contract at a price of 1,550 and closed your position when the index futures was 1,547, you incurred:

(Multiple Choice)

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Question 20

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Exam 23: Futures, Swaps, and Risk Management

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.

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. How many contracts should you buy or sell to hedge your position Allow fractions of contracts in your answer.

A hedge ratio can be computed as

The most common short term interest rate used in the swap market is

Which one of the following stock index futures has a multiplier of 10 euros times the index

Commodity futures pricing

Foreign exchange futures markets are __________ and the foreign exchange forward markets are __________.

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio

Which one of the following stock index futures has a multiplier of $250 times the index value

If you took a short position in three S&P 500 futures contracts at a price of 900 and closed the position when the index futures was 885, you incurred:

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. What is the dollar value of your expected loss

Which one of the following stock index futures has a multiplier of $10 times the index value

One reason swaps are desirable is that

Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index

You are given the following information about a portfolio you are to manage.For the long-term you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio

If you purchased one S&P 500 Index futures contract at a price of 1,550 and closed your position when the index futures was 1,547, you incurred:

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Foreign exchange futures markets are and the foreign exchange forward markets are .