Question 1

If covered interest arbitrage opportunities do not exist,

Accepted Answer

A) interest rate parity does not hold. 
B) interest rate parity holds. 
C) arbitragers will be able to make risk-free profits. 
D) interest rate parity does not hold and arbitragers will be able to make risk-free profits. 
E) interest rate parity holds and arbitragers will be able to make risk-free profits. 
A) interest rate parity does not hold. 
B) interest rate parity holds. 
C) arbitragers will be able to make risk-free profits. 
D) interest rate parity does not hold and arbitragers will be able to make risk-free profits. 
E) interest rate parity holds and arbitragers will be able to make risk-free profits.

Question 2

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 the options 
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 the options

Question 3

If you took a short position in two S&P 500 futures contracts at a price of 1,510 and closed the position when the index futures was 1,492, 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 the options 
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 the options

Question 4

Which one of the following stock index futures has a multiplier of 25 euros times the index

Accepted Answer

A) FTSE 100 
B) Hang Seng 
C) Nikkei 
D) DAX-30 
E) FTSE 100 and Hang Seng 
A) FTSE 100 
B) Hang Seng 
C) Nikkei 
D) DAX-30 
E) FTSE 100 and Hang Seng

Question 5

If covered interest arbitrage opportunities exist,

Accepted Answer

A) interest rate parity does not hold. 
B) interest rate parity holds. 
C) arbitragers will be able to make risk-free profits. 
D) interest rate parity does not hold and arbitragers will be able to make risk-free profits. 
E) interest rate parity holds and arbitragers will be able to make risk-free profits. 
A) interest rate parity does not hold. 
B) interest rate parity holds. 
C) arbitragers will be able to make risk-free profits. 
D) interest rate parity does not hold and arbitragers will be able to make risk-free profits. 
E) interest rate parity holds and arbitragers will be able to make risk-free profits.

Question 6

Credit risk in the swap market

Accepted Answer

A) is extensive. 
B) is limited to the difference between the values of the fixed rate and floating rate obligations. 
C) is equal to the total value of the payments that the floating rate payer was obligated to make. 
D) is extensive and equal to the total value of the payments that the floating rate payer was obligated to make. 
E) None of the options 
A) is extensive. 
B) is limited to the difference between the values of the fixed rate and floating rate obligations. 
C) is equal to the total value of the payments that the floating rate payer was obligated to make. 
D) is extensive and equal to the total value of the payments that the floating rate payer was obligated to make. 
E) None of the options

Question 7

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.

Accepted Answer

A) sell 1.714 
B) buy 1.714 
C) sell 4.236 
D) buy 4.236 
E) sell 11.235 
A) sell 1.714 
B) buy 1.714 
C) sell 4.236 
D) buy 4.236 
E) sell 11.235

Question 8

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

Accepted Answer

A) $142,900 
B) $65,200 
C) $85,700 
D) $30,000 
E) $64,200 
A) $142,900 
B) $65,200 
C) $85,700 
D) $30,000 
E) $64,200

Question 9

Hedging one commodity by using a futures contract on another commodity is called

Accepted Answer

A) surrogate hedging. 
B) cross hedging. 
C) alternative hedging. 
D) correlative hedging. 
E) proxy hedging. 
A) surrogate hedging. 
B) cross hedging. 
C) alternative hedging. 
D) correlative hedging. 
E) proxy hedging.

Question 10

Consider the following:   If the futures market price is 1.63 A$/$, how could you arbitrage

Accepted Answer

A) Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. 
B) Borrow U.S.dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. 
C) Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian dollars at the current futures price. 
D) Borrow Australian dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price. 
E) There is no arbitrage opportunity. 
A) Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. 
B) Borrow U.S.dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. 
C) Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian dollars at the current futures price. 
D) Borrow Australian dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price. 
E) There is no arbitrage opportunity.

Question 11

Consider the following:   If the market futures price is 1.69 A$/$, how could you arbitrage

Accepted Answer

A) Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. 
B) Borrow U.S.dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. 
C) Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian dollars at the current futures price. 
D) Borrow Australian dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price. 
E) There is no arbitrage opportunity. 
A) Borrow Australian dollars in Australia, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Australian dollars at the current futures price. 
B) Borrow U.S.dollars in the United States, convert them to Australian dollars, lend the proceeds in Australia, and enter futures positions to sell Australian dollars at the current futures price. 
C) Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian dollars at the current futures price. 
D) Borrow Australian dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price. 
E) There is no arbitrage opportunity.

Question 12

Why are commodity futures prices different from other futures prices
 Explain the difference and give an example of a commodity and the factors involved.

Accepted Answer

The price of a futures contract for a co

Question 13

Consider the following:   What should be the proper futures price for a 1-year contract

Accepted Answer

A) 1.703 A$/$ 
B) 1.654 A$/$ 
C) 1.638 A$/$ 
D) 1.778 A$/$ 
E) 1.686 A$/$ 
A) 1.703 A$/$ 
B) 1.654 A$/$ 
C) 1.638 A$/$ 
D) 1.778 A$/$ 
E) 1.686 A$/$

Question 14

Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, 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

Accepted Answer

A) $1.60/BP 
B) $1.70/BP 
C) $1.66/BP 
D) $1.63/BP 
E) $1.57/BP 
A) $1.60/BP 
B) $1.70/BP 
C) $1.66/BP 
D) $1.63/BP 
E) $1.57/BP

Question 15

Consider the following:   Assume the current market futures price is 1.66 A$/$.You borrow 167,000 A$ and convert the proceeds to U.S.dollars and invest them in the U.S.at the risk-free rate.You simultaneously enter a contract to purchase 170,340 A$ at the current futures prices (maturity of 1 year).What would be your profit (loss)

Accepted Answer

A) Profit of 630 A$ 
B) Loss of 2300 A$ 
C) Profit of 2300 A$ 
D) Loss of 630 A$ 
A) Profit of 630 A$ 
B) Loss of 2300 A$ 
C) Profit of 2300 A$ 
D) Loss of 630 A$

Question 16

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.   For a 75-point drop in the S&P 500, by how much does the futures position change

Accepted Answer

A) $200,000 
B) $50,000 
C) $250,000 
D) $500,000 
E) $18,750 
A) $200,000 
B) $50,000 
C) $250,000 
D) $500,000 
E) $18,750

Question 17

You hold a $50 million portfolio of par value bonds with a coupon rate of 10% paid annually and 15 years to maturity.How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18% Assume the market interest rate is 10% and that T-bond futures contracts call for delivery of an 8% coupon (paid annually), 20-year maturity T-bond.

Accepted Answer

A) 398 contracts long 
B) 524 contracts short 
C) 1048 contracts short 
D) 398 contracts short 
A) 398 contracts long 
B) 524 contracts short 
C) 1048 contracts short 
D) 398 contracts short

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 the options 
E) None of the options 
A) rely on the CAPM. 
B) demonstrate how investors can exploit misalignments. 
C) incorporate transactions costs. 
D) All of the options 
E) None of the options

Question 19

Which one of the following stock index futures has a multiplier of $100 times the index value

Accepted Answer

A) CAC 40 
B) S&P 500 Index 
C) Nikkei 
D) DAX-30 
E) NASDAQ 100 
A) CAC 40 
B) S&P 500 Index 
C) Nikkei 
D) DAX-30 
E) NASDAQ 100

Question 20

Trading in stock index futures

Accepted Answer

A) now exceeds buying and selling of shares in most markets. 
B) reduces transactions costs as compared to trading in stocks. 
C) increases leverage as compared to trading in stocks. 
D) generally results in faster execution than trading in stocks. 
E) All of the options 
A) now exceeds buying and selling of shares in most markets. 
B) reduces transactions costs as compared to trading in stocks. 
C) increases leverage as compared to trading in stocks. 
D) generally results in faster execution than trading in stocks. 
E) All of the options

Exam 23: Futures, Swaps, and Risk Management

If covered interest arbitrage opportunities do not exist,

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

If you took a short position in two S&P 500 futures contracts at a price of 1,510 and closed the position when the index futures was 1,492, you incurred

Which one of the following stock index futures has a multiplier of 25 euros times the index

If covered interest arbitrage opportunities exist,

Credit risk in the swap market

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.

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

Hedging one commodity by using a futures contract on another commodity is called

Consider the following: If the futures market price is 1.63 A$/$, how could you arbitrage

Consider the following: If the market futures price is 1.69 A$/$, how could you arbitrage

Why are commodity futures prices different from other futures prices Explain the difference and give an example of a commodity and the factors involved.

Consider the following: What should be the proper futures price for a 1-year contract

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. For a 75-point drop in the S&P 500, by how much does the futures position change

Arbitrage proofs in futures market pricing relationships

Which one of the following stock index futures has a multiplier of $100 times the index value

Trading in stock index futures

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

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