978-0134083308 Chapter 15 Part 4

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12) Which one of the following statements concerning financial futures is correct?

A) Speculators in the currency markets are generally firms involved with international trading

of goods and services.

B) Portfolio managers wishing to provide downside protection to their portfolios are the

primary speculators in the financial futures markets.

C) Investors who simply play in the futures market with the hope of realizing capital gains are

referred to as the hedgers.

D) International trade often is accompanied by currency hedging via financial futures.

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13) Assume the initial margin on a Swiss franc futures contract is $2,000. If an individual

purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what

return on invested capital will the investor receive if the price per franc moves to $0.80?

A) 3%

B) 50%

C) 100%

D) 125%

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14) Klaus bought a December E-mini Dow contract at 17,750. On the December delivery date,

the Dow closed at 18,035. Klaus’ profit or loss was

A) $1,425.

B) $180,350.

C) $28,500.

D) $285.

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15.6 Learning Goal 6

1) Speculating originally provided the economic rationale to create financial futures.

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2) Speculators are especially interested in financial futures because price volatility can lead to

potentially highly profitable outcomes.

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3) The spreading strategy is particularly attractive to aggressive speculators.

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4) Stock Index futures can substitute for indexed mutual funds in conservative portfolios.

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5) Businesses engaged in foreign trade often invest in currency futures.

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6) Which of the following trading strategies are correct?

I. If you expect the British pound to appreciate in value, you should short the pound.

II. If you expect interest rates to rise, you should go long on interest rate futures.

III. If you expect the stock market to rise, you should go long on stock-index futures.

IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short

stock-index futures.

A) I and II only

B) II and IV only

C) III and IV only

D) I and III only

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7) Assume an investor thinks the stock market is about to undergo a sharp retreat. Under these

conditions, the investor’s best course of action would be to

A) buy stock-index futures contracts.

B) short sell stock-index futures contracts.

C) use single stock futures to sit out the market.

D) use a long hedge against the investor’s existing positions.

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8) Mr. Lecourt sells short one contract for September delivery of 125,000 euro for $134,375.

Mr. Lecourt covers his short when the exchange rate is $1.15 per euro. Mr Lecourt

A) loses $8,375.

B) loses $18,750.

C) loses $143,750.

D) gains $143,750.

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9) The purpose of a spreading strategy with futures contracts is

A) to maximize potential profit.

B) increase leverage.

C) limit potential losses.

D) hedge against price changes in the underlying commodity.

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10) To hedge a bond portfolio, an investor should use

A) a foreign-currency future.

B) a stock-index future.

C) a certificate of deposit.

D) an interest rate future.

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11) To hedge a bond portfolio against rising interest rates, an investor should

A) sell interest rate futures.

B) buy a stock-index future.

C) buy Treasury Notes.

D) buy interest rate futures.

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12) Assume a portfolio manager created a short interest rate hedge for his/her portfolio. Given

this hedge, the manager is

A) essentially eliminating both the downside risk and the upside potential.

B) eliminating the downside risk without hampering the upside potential.

C) partially diminishing the downside risk without impairing the upside potential.

D) eliminating the downside risk and increasing the upside potential.

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13) Suppose you own a portfolio of British securities valued at about $500,000. The exchange

rate is currently at $1 = £0.66. A currency contract on British pounds is set at 62,500 pounds.

How many contracts must you purchase to protect at least 90% of your portfolio from exchange

rate risk?

A) 6

B) 5

C) 4

D) 3

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14) One of the biggest differences between a futures option and a futures contract is that

A) the option limits the loss exposure to the price of the option.

B) the futures contract limits the loss exposure to the price of the contract.

C) an option can be traded on the secondary market, whereas a futures contract cannot.

D) a futures contract can be traded on the secondary market, whereas an option cannot.

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15) The value of a futures option is defined as

A) the difference between the option’s strike price and its original purchase price.

B) the difference between the option’s strike price and the market price of the underlying

futures contract.

C) the strike price of the option multiplied by the mark-to-the-market value.

D) the mark-to-the-market value divided by the strike price.

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16) The major advantages of futures options over futures contracts include

I. positions can be hedged with a smaller commitment of capital.

II. potential losses are limited to the size of the contract.

III. greater leverage and the potential for higher percentage returns.

IV. a greater variety of commodities is available for speculating or hedging purposes.

A) II, III and IV only

B) I, II and III only

C) I, II and IV only

D) I, II, III and IV

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