Question 1

The most actively traded interest rate futures contract is for ________.

Accepted Answer

A)  LIBOR 
B)  Treasury bills 
C)  Eurodollars 
D)  Treasury bonds 
A)  LIBOR 
B)  Treasury bills 
C)  Eurodollars 
D)  Treasury bonds D

Question 2

The ________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

Accepted Answer

A)  CBOE 
B)  CBOT 
C)  CME 
D)  Eurex 
A)  CBOE 
B)  CBOT 
C)  CME 
D)  Eurex D

Question 3

On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.
 
After Monday's close the balance on your margin account will be ________.

Accepted Answer

A)  $2,700 
B)  $2,000 
C)  $3,137.50 
D)  $2,262.50 
A)  $2,700 
B)  $2,000 
C)  $3,137.50 
D)  $2,262.50 C

Question 4

A stock index spot price is $1,287. The zero coupon interest rate is 3.8%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,350?

Accepted Answer

A)  $19.50 
B)  $31.50 
C)  $63.00 
D)  $39.00 
A)  $19.50 
B)  $31.50 
C)  $63.00 
D)  $39.00

Question 5

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.
Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Accepted Answer

A)  Buy gold in the spot with borrowed money, and sell the futures contract. 
B)  Buy the futures contract, and sell the gold spot and invest the money earned. 
C)  Buy gold spot with borrowed money, and buy the futures contract. 
D)  Buy the futures contract, and buy the gold spot using borrowed money. 
A)  Buy gold in the spot with borrowed money, and sell the futures contract. 
B)  Buy the futures contract, and sell the gold spot and invest the money earned. 
C)  Buy gold spot with borrowed money, and buy the futures contract. 
D)  Buy the futures contract, and buy the gold spot using borrowed money.

Question 6

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

Accepted Answer

A)  index arbitrage 
B)  marking to market 
C)  reversing trades 
D)  settlement transactions 
A)  index arbitrage 
B)  marking to market 
C)  reversing trades 
D)  settlement transactions

Question 7

The swap market is a huge component of the derivatives market, with around ________ in interest rate and exchange rate swap agreements outstanding.

Accepted Answer

A)  $40 million 
B)  $400 million 
C)  $400 billion 
D)  $400 trillion 
A)  $40 million 
B)  $400 million 
C)  $400 billion 
D)  $400 trillion

Question 8

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be ________ if you close your position. (The contract multiplier is 250.)

Accepted Answer

A)  −$12,500 
B)  −$15,000 
C)  $15,000 
D)  $12,500 
A)  −$12,500 
B)  −$15,000 
C)  $15,000 
D)  $12,500

Question 9

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates ________ risk.

Accepted Answer

A)  market 
B)  credit 
C)  interest rate 
D)  basis 
A)  market 
B)  credit 
C)  interest rate 
D)  basis

Question 10

The open interest on silver futures at a particular time is the number of ________.

Accepted Answer

A)  all outstanding silver futures contracts 
B)  long and short silver futures positions counted separately on a particular trading day 
C)  silver futures contracts traded during the day 
D)  silver futures contracts traded the previous day 
A)  all outstanding silver futures contracts 
B)  long and short silver futures positions counted separately on a particular trading day 
C)  silver futures contracts traded during the day 
D)  silver futures contracts traded the previous day

Question 11

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you ________.

Accepted Answer

A)  that the market believed that Obama had a 57% chance of winning 
B)  that the market believed that Obama would not win the election 
C)  nothing about the market's belief concerning the odds of Obama winning 
D)  that the market believed Obama's chances of winning were about 43% 
A)  that the market believed that Obama had a 57% chance of winning 
B)  that the market believed that Obama would not win the election 
C)  nothing about the market's belief concerning the odds of Obama winning 
D)  that the market believed Obama's chances of winning were about 43%

Question 12

A short hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

Accepted Answer

A)  long; long 
B)  long; short 
C)  short; long 
D)  short; short 
A)  long; long 
B)  long; short 
C)  short; long 
D)  short; short

Question 13

The spot price of a futures contract is different than the price for which an investor can buy the underlying commodity for immediate delivery. This represents an opportunity for ________.

Accepted Answer

A)  arbitrage 
B)  hedging 
C)  speculation 
D)  loss leading 
A)  arbitrage 
B)  hedging 
C)  speculation 
D)  loss leading

Question 14

A long hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

Accepted Answer

A)  long; long 
B)  long; short 
C)  short; long 
D)  short; short 
A)  long; long 
B)  long; short 
C)  short; long 
D)  short; short

Question 15

In the context of a futures contract, the basis is defined as ________.

Accepted Answer

A)  the futures price minus the spot price 
B)  the spot price minus the futures price 
C)  the futures price minus the initial margin 
D)  the profit on the futures contract 
A)  the futures price minus the spot price 
B)  the spot price minus the futures price 
C)  the futures price minus the initial margin 
D)  the profit on the futures contract

Question 16

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

Accepted Answer

A)  $95.24 
B)  $100 
C)  $105 
D)  $107 
A)  $95.24 
B)  $100 
C)  $105 
D)  $107

Question 17

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ________ loss on your money invested.

Accepted Answer

A)  31% 
B)  41% 
C)  52% 
D)  64% 
A)  31% 
B)  41% 
C)  52% 
D)  64%

Question 18

At contract maturity the basis should equal ________.

Accepted Answer

A)  1 
B)  0 
C)  the risk-free interest rate 
D)  −1 
A)  1 
B)  0 
C)  the risk-free interest rate 
D)  −1

Question 19

Initial margin is usually set in the region of ________ of the total value of a futures contract.

Accepted Answer

A)  5%-15% 
B)  10%-20% 
C)  15%-25% 
D)  20%-30% 
A)  5%-15% 
B)  10%-20% 
C)  15%-25% 
D)  20%-30%

Question 20

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.
What are the farmer's proceeds from the sale of corn?

Accepted Answer

A)  $27,500 
B)  $31,875 
C)  $33,875 
D)  $35,950 
A)  $27,500 
B)  $31,875 
C)  $33,875 
D)  $35,950

Exam 17: Futures Markets and Risk Management

The most actively traded interest rate futures contract is for ________.

The ________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

A stock index spot price is $1,287. The zero coupon interest rate is 3.8%. What is the potential arbitrage profit if the 6-month futures contract on the index is priced at $1,350?

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

The swap market is a huge component of the derivatives market, with around ________ in interest rate and exchange rate swap agreements outstanding.

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be ________ if you close your position. (The contract multiplier is 250.)

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates ________ risk.

The open interest on silver futures at a particular time is the number of ________.

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you ________.

A short hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

The spot price of a futures contract is different than the price for which an investor can buy the underlying commodity for immediate delivery. This represents an opportunity for ________.

A long hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

In the context of a futures contract, the basis is defined as ________.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ________ loss on your money invested.

At contract maturity the basis should equal ________.

Initial margin is usually set in the region of ________ of the total value of a futures contract.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn?

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Efficient Diversification

Capital Asset Pricing and Arbitrage Pricing Theory

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Evaluating Investment Performance

International Diversification

Hedge Funds

Taxes, Inflation, and Investment Strategy

Investors and the Investment Process

Filters

A short hedge is a simultaneous position in the spot market and a position in the futures market.

A long hedge is a simultaneous position in the spot market and a position in the futures market.