Question 1

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ________.

Accepted Answer

A)   buy the September contract and sell the June contract
B)   sell the September contract and buy the June contract
C)   sell the September contract and sell the June contract
D)   buy the September contract and buy the June contractE) All of the above
F) C) and D)

Question 2

A futures contract ________.

Accepted Answer

A)   is a contract to be signed in the future by the buyer and the seller of a commodity
B)   is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract
C)   is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract
D)   gives the buyer the right, but not the obligation, to buy an asset some time in the futureE) All of the above
F) A) and D)

Question 3

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have ________.

Accepted Answer

A)   an arbitrage
B)   a cross-hedge
C)   an over hedge
D)   a spread hedgeE) All of the above
F) B) and D)

Question 4

If an asset price declines, the investor with a ________ is exposed to the largest potential loss.

Accepted Answer

A)   long call option
B)   long put option
C)   long futures contract
D)   short futures contractE) None of the above
F) C) and D)

Question 5

Margin requirements for futures contracts can be met by ________.

Accepted Answer

A)   cash only
B)   cash or highly marketable securities such as Treasury bills
C)   cash or any marketable securities
D)   cash or warehouse receipts for an equivalent quantity of the underlying commodityE) A) and B)
F) All of the above

Question 6

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or 0.05%. What is the price value of a basis point?

Accepted Answer

A)   $10,400
B)   $14,300
C)   $16,500
D)   $21,300E) B) and D)
F) A) and B)

Question 7

An investor who goes long in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.

Accepted Answer

A)   pay; pay
B)   pay; receive
C)   receive; pay
D)   receive; receiveE) A) and B)
F) B) and C)

Question 8

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.
Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

Accepted Answer

A)   $0
B)   $2,000
C)   $31,875
D)   $33,875E) B) and C)
F) A) and B)

Question 9

The use of leverage is practiced in the futures markets due to the existence of ________.

Accepted Answer

A)   banks
B)   brokers
C)   clearinghouses
D)   marginE) B) and C)
F) A) and B)

Question 10

The ________ and the ________ have the lowest correlations with the large-cap indexes.

Accepted Answer

A)   Nasdaq Composite; Russell 2000
B)   NYSE; DJIA
C)   S&P 500; DJIA
D)   Russell 2000; S&P 500E) B) and C)
F) A) and C)

Question 11

A long hedger will ________ from an increase in the basis; a short hedger will ________.

Accepted Answer

A)   be hurt; be hurt
B)   be hurt; profit
C)   profit; be hurt
D)   profit; profitE) All of the above
F) B) and C)

Question 12

The ________ contract dominates trading in stock-index futures.

Accepted Answer

A)   S&P 500
B)   DJIA
C)   Nasdaq 100
D)   Russell 2000E) B) and D)
F) A) and D)

Question 13

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Accepted Answer

A)   convergence
B)   margin
C)   basis
D)   volatilityE) A) and D)
F) C) and D)

Question 14

The clearing corporation has a net position equal to ________.

Accepted Answer

A)   the open interest
B)   the open interest times 2
C)   the open interest divided by 2
D)   zeroE) B) and C)
F) All of the above

Question 15

Which one of the following is a true statement?

Accepted Answer

A)   A margin deposit can be met only by cash.
B)   All futures contracts require the same margin deposit.
C)   The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
D)   The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.E) None of the above
F) A) and C)

Question 16

Forward contracts ________ traded on an organized exchange, and futures contracts ________ traded on an organized exchange.

Accepted Answer

A)   are; are
B)   are; are not
C)   are not; are
D)   are not; are notE) A) and C)
F) A) and B)

Question 17

If the risk-free rate is greater than the dividend yield, then we know that ________.

Accepted Answer

A)   the futures price will be higher as contract maturity increases
B)   F0 0
C)   FT > ST
D)   arbitrage profits are possibleE) A) and B)
F) A) and C)

Question 18

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as ________.

Accepted Answer

A)   F1 = S0(1 + rf) 
B)   F0 = S0(1 + rf − d) T
C)   F0 = S0(1 + rf + d) T
D)   F0 = S0(1 + rf) TE) All of the above
F) C) and D)

Question 19

Futures contracts are said to exhibit the property of convergence because ________.

Accepted Answer

A)   the profits from long positions and short positions must ultimately be equal
B)   the profits from long positions and short positions must ultimately net to zero
C)   price discrepancies would open arbitrage opportunities for investors who spot them
D)   the futures price and spot price of any asset must ultimately net to zeroE) A) and B)
F) B) and C)

Question 20

Synthetic stock positions are commonly used by ________ because of their ________.

Accepted Answer

A)   market timers; lower transaction cost
B)   banks; lower risk
C)   wealthy investors; tax treatment
D)   money market funds; limited exposureE) A) and B)
F) None of the above

Exam 17: Futures Markets and Risk Management

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ________.

Correct Answer
verified

Synthetic stock positions are commonly used by because of their .

Correct Answer
verified

If an asset price declines, the investor with a ________ is exposed to the largest potential loss.

Correct Answer
verified

An investor who goes long in a futures contract will any increase in value of the underlying asset and will any decrease in value in the underlying asset.

Correct Answer
verified

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or 0.05%. What is the price value of a basis point?

Correct Answer
verified

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Correct Answer
verified

Futures contracts are said to exhibit the property of convergence because ________.

Correct Answer
verified

Forward contracts traded on an organized exchange, and futures contracts traded on an organized exchange.

Correct Answer
verified

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as ________.

Correct Answer
verified

Correct Answer
verified

The use of leverage is practiced in the futures markets due to the existence of ________.

Correct Answer
verified

Which one of the following is a true statement?

Correct Answer
verified

If the risk-free rate is greater than the dividend yield, then we know that ________.

Correct Answer
verified

The and the have the lowest correlations with the large-cap indexes.

Correct Answer
verified

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have ________.

Correct Answer
verified

Margin requirements for futures contracts can be met by ________.

Correct Answer
verified

A futures contract ________.

Correct Answer
verified

A long hedger will from an increase in the basis; a short hedger will .

Correct Answer
verified

The ________ contract dominates trading in stock-index futures.

Correct Answer
verified

The clearing corporation has a net position equal to ________.

Correct Answer
verified

Exam 17: Futures Markets and Risk Management

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ________.

Correct AnswerverifiedShow Answer

Synthetic stock positions are commonly used by ________ because of their ________.

Correct AnswerverifiedShow Answer

If an asset price declines, the investor with a ________ is exposed to the largest potential loss.

Correct AnswerverifiedShow Answer

An investor who goes long in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.

Correct AnswerverifiedShow Answer

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or 0.05%. What is the price value of a basis point?

Correct AnswerverifiedShow Answer

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Correct AnswerverifiedShow Answer

Futures contracts are said to exhibit the property of convergence because ________.

Correct AnswerverifiedShow Answer

Forward contracts ________ traded on an organized exchange, and futures contracts ________ traded on an organized exchange.

Correct AnswerverifiedShow Answer

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The use of leverage is practiced in the futures markets due to the existence of ________.

Correct AnswerverifiedShow Answer

Which one of the following is a true statement?

Correct AnswerverifiedShow Answer

If the risk-free rate is greater than the dividend yield, then we know that ________.

Correct AnswerverifiedShow Answer

The ________ and the ________ have the lowest correlations with the large-cap indexes.

Correct AnswerverifiedShow Answer

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have ________.

Correct AnswerverifiedShow Answer

Margin requirements for futures contracts can be met by ________.

Correct AnswerverifiedShow Answer

A futures contract ________.

Correct AnswerverifiedShow Answer

A long hedger will ________ from an increase in the basis; a short hedger will ________.

Correct AnswerverifiedShow Answer

The ________ contract dominates trading in stock-index futures.

Correct AnswerverifiedShow Answer

The clearing corporation has a net position equal to ________.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Synthetic stock positions are commonly used by because of their .

Correct Answer
verified

Correct Answer
verified

An investor who goes long in a futures contract will any increase in value of the underlying asset and will any decrease in value in the underlying asset.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Forward contracts traded on an organized exchange, and futures contracts traded on an organized exchange.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The and the have the lowest correlations with the large-cap indexes.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A long hedger will from an increase in the basis; a short hedger will .

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified