Question 1

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

Question 2

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

Accepted Answer

A)  a gain of $11,250. 
B)  a loss of $11,250. 
C)  a loss of $8,000. 
D)  a gain of $8,000. 
E)  None of the options are correct. 
A)  a gain of $11,250. 
B)  a loss of $11,250. 
C)  a loss of $8,000. 
D)  a gain of $8,000. 
E)  None of the options are correct. A

Question 3

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. D

Question 4

Commodity futures pricing

Accepted Answer

A)  must be related to spot prices. 
B)  includes cost of carry. 
C)  converges to spot prices at maturity. 
D)  All of the options are correct. 
E)  None of the options. 
A)  must be related to spot prices. 
B)  includes cost of carry. 
C)  converges to spot prices at maturity. 
D)  All of the options are correct. 
E)  None of the options.

Question 5

Let RUS be the annual risk-free rate in the United States, RUK be the risk-free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true?

Accepted Answer

A)  If RUS > RUK, then E > 
B)  If RUS UK, then E US > RUK, then E US UK, then F =E. 
A)  If RUS > RUK, then E > 
B)  If RUS UK, then E US > RUK, then E US UK, then F =E.

Question 6

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 7

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

Accepted Answer

A)  informal; formal 
B)  formal; formal 
C)  formal; informal 
D)  informal; informal 
E)  organized; unorganized 
A)  informal; formal 
B)  formal; formal 
C)  formal; informal 
D)  informal; informal 
E)  organized; unorganized

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. $$\begin{array} { l r r } 
\text { Portfolio Value } & \$ \quad 1 \text { million } \
\text { Portfolio's Beta } & 0.86 \
\text { Current S\&P500 Value } & 990 \
\text { Anticipated S\&P500 Value } & 915 \

\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 9

Consider the following: $$\begin{array} { l l } 
\text { Risk-free rate in the United States } & 0.04 / \mathrm { year } \
\text { Risk-free rate in Australia } & 0.03 / \mathrm { year } \
\text { Spot exchange rate } & 1.67 \mathrm {~A} / \$
\end{array}$$ Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$, convert the proceeds to U.S. dollars, and invest them in the U.S. at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures price (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 10

Which one of the following stock index futures has a multiplier of $50 times the index value?

Accepted Answer

A)  Mini-Russell 2000 
B)  FTSE 100 
C)  S&P Mid-Cap 
D)  DAX-30 
E)  Russell 2000 and S&P Mid-Cap 
A)  Mini-Russell 2000 
B)  FTSE 100 
C)  S&P Mid-Cap 
D)  DAX-30 
E)  Russell 2000 and S&P Mid-Cap

Question 11

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 r r } 
\text { Portfolio Value } & \$ \quad 1 \text { million } \
\text { Portfolio's Beta } & 0.86 \
\text { Current S\&P500 Value } & 990 \
\text { Anticipated S\&P500 Value } & 915 \

\end{array}$$ 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 12

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 13

Suppose that the risk-free rates in the United States and in 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 14

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

Question 15

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

Accepted Answer

A)  CAC 40 
B)  Hang Seng 
C)  Nikkei 
D)  DAX-30 
E)  CAC 40 and Hang Seng 
A)  CAC 40 
B)  Hang Seng 
C)  Nikkei 
D)  DAX-30 
E)  CAC 40 and Hang Seng

Question 16

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 are correct. 
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 are correct.

Question 17

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 18

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)  ensures that currency futures prices and commodity futures prices are set correctly. 
E)  None of the options are correct. 
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)  ensures that currency futures prices and commodity futures prices are set correctly. 
E)  None of the options are correct.

Question 19

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

Accepted Answer

A)  Russell 2000 
B)  Dow Jones Industrial Average 
C)  Nikkei 
D)  DAX-30 
E)  NASDAQ 100 
A)  Russell 2000 
B)  Dow Jones Industrial Average 
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 are correct. 
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 are correct.

Exam 23: Futures, Swaps, and Risk Management

Arbitrage proofs in futures market pricing relationships

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

If covered interest arbitrage opportunities exist,

Commodity futures pricing

Let RUS be the annual risk-free rate in the United States, RUK be the risk-free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true?

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

Which one of the following stock index futures has a multiplier of $50 times the index value?

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

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

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

Credit risk in the swap market

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

Covered interest arbitrage

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

Filters

Let R_US be the annual risk-free rate in the United States, R_UK be the risk-free rate in the United Kingdom, F be the futures price of $/BP for a 1-year contract, and E the spot exchange rate of $/BP. Which one of the following is true?

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

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