Question 1

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 0.899 
C) DJIA and Russell 2000 the correlation was 0.758 
D) S&P and NYSE; the correlation was 0.973 
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 0.899 
C) DJIA and Russell 2000 the correlation was 0.758 
D) S&P and NYSE; the correlation was 0.973 
E) NYSE and DJIA; the correlation was 0.931

Question 2

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 3

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?

Accepted Answer

A) $0.009999/yen 
B) $0.009981/yen 
C) $0.008981/yen 
D) $0.008891/yen 
E) none of the above 
A) $0.009999/yen 
B) $0.009981/yen 
C) $0.008981/yen 
D) $0.008891/yen 
E) none of the above

Question 4

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 5

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 6

If interest rate parity holds

Accepted Answer

A) covered interest arbitrage opportunities will exist 
B) covered interest arbitrage opportunities will not exist 
C) arbitragers will be able to make risk-free profits 
D) A and C 
E) B and C 
A) covered interest arbitrage opportunities will exist 
B) covered interest arbitrage opportunities will not exist 
C) arbitragers will be able to make risk-free profits 
D) A and C 
E) B and C

Question 7

Covered interest arbitrage ____________.

Accepted Answer

A) ensures that currency futures prices are set correctly 
B) ensures that commodity futures prices are set correctly 
C) ensures that interest rate futures prices are set correctly 
D) A and B 
E) none of the above 
A) ensures that currency futures prices are set correctly 
B) ensures that commodity futures prices are set correctly 
C) ensures that interest rate futures prices are set correctly 
D) A and B 
E) none of the above

Question 8

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) A and C. 
E) none of the above. 
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) A and C. 
E) none of the above.

Question 9

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. $$\begin{array} { | l | l | } 
\hline \text { Portfolio Value } & \$ 1 \text { million } \
\hline \text { Portfolio's Beta } & 0.86 \
\hline \text { Current S\&P500 Value } & 990 \
\hline \text { Anticipated S\&P500 Value } & 915 \
\hline
\end{array}$$
-If the anticipated market value materializes,what will be your expected loss on the portfolio?

Accepted Answer

A) 7.58% 
B) 6.52% 
C) 15.43% 
D) 8.57% 
E) 6.42% 
A) 7.58% 
B) 6.52% 
C) 15.43% 
D) 8.57% 
E) 6.42%

Question 10

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.

Accepted Answer

A) $1.00/ C$ 
B) $1.70/ C$ 
C) $0.88/ C$ 
D) $0.78/ C$ 
E) $1.22/ C$ 
A) $1.00/ C$ 
B) $1.70/ C$ 
C) $0.88/ C$ 
D) $0.78/ C$ 
E) $1.22/ C$

Question 11

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

Question 12

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.

Accepted Answer

A) $1.00/ C$ 
B) $0.82/ C$ 
C) $0.88/ C$ 
D) $0.78/ C$ 
E) $1.22/ C$ 
A) $1.00/ C$ 
B) $0.82/ C$ 
C) $0.88/ C$ 
D) $0.78/ C$ 
E) $1.22/ C$

Question 13

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 14

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 15

The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.

Accepted Answer

A) CAPM, will be 
B) CAPM, will not be 
C) APT, will not be 
D) APT, will be 
E) A and D 
A) CAPM, will be 
B) CAPM, will not be 
C) APT, will not be 
D) APT, will be 
E) A and D

Question 16

You purchased one S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947,you incurred:

Accepted Answer

A) a loss of $1,500. 
B) a gain of $1,500. 
C) a loss of $750. 
D) a gain of $750. 
E) None of the above. 
A) a loss of $1,500. 
B) a gain of $1,500. 
C) a loss of $750. 
D) a gain of $750. 
E) None of the above.

Question 17

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 above. 
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 above.

Question 18

If interest rate parity does not hold

Accepted Answer

A) covered interest arbitrage opportunities will exist 
B) covered interest arbitrage opportunities will not exist 
C) arbitragers will be able to make risk-free profits 
D) A and C 
E) B and C 
A) covered interest arbitrage opportunities will exist 
B) covered interest arbitrage opportunities will not exist 
C) arbitragers will be able to make risk-free profits 
D) A and C 
E) B and C

Question 19

A hedge ratio can be computed as ____________.

Accepted Answer

A) profit derived from one futures position for a given change in the exchange rate divided by the change in value of the unprotected position for the same exchange rate 
B) the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate 
C) profit derived from one futures position for a given change in the exchange rate plus the change in value of the unprotected position for the same exchange rate 
D) the change in value of the unprotected position for a given change in the exchange rate plus by the profit derived from one futures position for the same exchange rate 
E) none of the above 
A) profit derived from one futures position for a given change in the exchange rate divided by the change in value of the unprotected position for the same exchange rate 
B) the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate 
C) profit derived from one futures position for a given change in the exchange rate plus the change in value of the unprotected position for the same exchange rate 
D) the change in value of the unprotected position for a given change in the exchange rate plus by the profit derived from one futures position for the same exchange rate 
E) none of the above

Question 20

You hold a $50 million portfolio of par value bonds with a coupon rate of 10 percent 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 percent and that T-bond futures contracts call for delivery of an 8 percent 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 
E) none of the above 
A) 398 contracts long 
B) 524 contracts short 
C) 1048 contracts short 
D) 398 contracts short 
E) none of the above

Exam 23: Financial Statement Analysis

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

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

What is the dollar value of your expected loss?

If interest rate parity holds

Covered interest arbitrage ____________.

Credit risk in the swap market

Arbitrage proofs in futures market pricing relationships

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

The value of a futures contract for storable commodities can be determined by the _______ and the model __________ consistent with parity relationships.

You purchased one S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947,you incurred:

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

If interest rate parity does not hold

A hedge ratio can be computed as ____________.

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

The value of a futures contract for storable commodities can be determined by the _ and the model ____ consistent with parity relationships.