40) Credit default swaps:
A) have no standardized agreement template.
B) are traded on international exchanges.
C) are traded only on national exchanges.
D) are rarely used in actual practice.
E) must follow the structure outlined by the SEC.
41) Credit default swaps are most like:
A) inverse floaters.
B) call options on fixed assets.
C) an insurance policy.
D) an interest rate swap.
E) a delinquent loan.
42) There are always at least ________ counterparties in a credit default swap.
A) 0
B) 1
C) 2
D) 3
E) more than three
43) Which one of the following is true about the use of derivatives?
A) Derivatives usually appear explicitly in the financial statements.
B) Academic surveys account for much of our knowledge of corporate derivatives use.
C) Small firms are more likely to use derivatives than large firms.
D) The most frequently used derivatives are commodity and equity futures.
E) Derivatives are primarily used by firms that have easy access to capital markets.
44) Today, you purchased two natural gas futures contracts at the settle price for a May delivery.
The contract size is 10,000 MMBtu with quotes in dollars per MMBtu. The day’s high was
2.954, the low was 2.939, and the settle was 2.948. What was the total amount you had to pay
today?
A) $14,740
B) $14,695
C) $14,770
D) $14,755
E) $0
45) Assume you write a futures contract on corn at $4.05 per bushel. Over the next 5 trading
days the contract settled at $4.07, $4.05, $4.04, $4.02, and $4.04. You then decide to reverse
your position in the futures market on the fifth day at close. What is the net amount you receive
on this contract per bushel?
A) $4.04
B) $4.05
C) $4.07
D) $4.02
E) $4.06
46) Assume you write a futures contract on corn at $3.74 per bushel. Over the next 5 days the
contract settles at $3.68, $3.71, $3.67, $3.64, and $3.61. Before you can reverse your position in
the futures market you are notified to complete delivery on Day 5. What will you receive on
delivery per bushel and what is the net amount per bushel you receive in total?
A) $3.74; −$.13
B) $3.74; $.13
C) $3.64; $3.74
D) $3.61; $3.61
E) $3.61; $3.74
47) You bought a futures contract on corn for $3.55 per bushel and closed the contract five days
later at $3.56. The daily closing prices were $3.57, $3.54, $3.53, $3.58, and $3.56. What was the
mark-to–market sequence of payments per bushel from (+) and to (−) the clearing house?
A) +$.02, −.03, −.01, +.05, −.02
B) +$.01, −.03, −.01, +.05, −.02
C) +$.02, +.01, −.02, −.06, +.04
D) −$.02, +.03, +.01, −.05, +.02
E) −$.01, +.03, +.01, −.05, +.02
48) Today, you purchased a futures contract obligating you to purchase 100 troy ounces of gold
for $1,218 per ounce any time over the next month. Assume the spot price of gold falls to $1,216
tomorrow. What will be your cash flow tomorrow for this contract?
A) −$400
B) $200
C) $0
D) −$200
E) $400
49) Last week, you sold a futures contract on 5,000 troy ounces of silver at a settle price of
$16.59. Today, you made delivery and the daily settle price was $16.62. What amount will you
receive at the time of delivery? Assume yesterday’s settle price was $16.66.
A) $82,950
B) −$200
C) $300
D) $83,100
E) $83,300
50) Assume a futures contract on gold is based on 100 troy ounces with prices quoted in dollars
per troy ounce. Assume one contract called for delivery some time during the month of April.
The price of gold opened the month at $1,194. The low quote for April was $1,189, the high was
$1,212, and the end of month settle quote was $1,197. By what amount did the value on one
contract vary over the month of April?
A) $30
B) $23
C) $3,000
D) $2,300
E) $300
51) Assume the futures contracts on silver are quoted in dollars per troy ounce with a contract
size of 5,000 troy ounces. Contract quotes for the day included an open value of $16.650, a high
of $16.660, a low of $16.620, and a settle of $16.645. If you purchased three contracts at the
closing price what was the dollar cost of your purchase ignoring all transaction costs?
A) $83,250
B) $82,500
C) $249,675
D) $249,750
E) $83,225
52) Assume a bank has a $25 million mortgage bond risk position which it hedges in the
Treasury bond futures market. Approximately how many futures contracts would be needed for
this hedge if you assumed mortgage bonds and Treasury bonds were perfectly correlated?
A) 5
B) 25
C) 250
D) 500
E) 2,500
53) A mortgage banker has forward contracts to lend $12 million at 4.5 percent for 15 years.
What position in Treasury bond futures does this banker need to hedge the interest rate risk?
A) Short position in 12 contracts
B) Short position in 120 contracts
C) Long position in 12 contracts
D) Long position in 120 contracts
E) Long position in 1,200 contracts
54) Assume a bond matures in 2 years, has a coupon rate of 6 percent, pays interest annually, and
has a face value of $1,000. What is the duration of this bond if it is priced at par?
A) 1.00 year
B) 1.94 years
C) 1.97 years
D) 1.91 years
E) 2.03 years
55) Firm A is paying $300,000 in fixed interest payments a year while Firm B is paying LIBOR
plus 30 basis points on $5 million loans. The current LIBOR rate is 5.5 percent. Firm A and B
have agreed to swap interest payments. What is the net payment between these firms this year?
A) Firm A pays $10,000 to Firm B
B) Firm B pays $10,000 to Firm A
C) Firm B pays $12,500 to Firm A
D) Firm A pays $15,000 to Firm B
E) Firm B pays $15,000 to Firm A
56) Calculate the duration of a $1,000 zero-coupon bond with a current price of $455.59, a
maturity of 6 years, and a yield to maturity of 14 percent.
A) 5.29 years
B) 5.76 years
C) 6.00 years
D) 5.47 years
E) 5.86 years
57) Calculate the duration of a $1,000 face value bond with annual coupon payments, a coupon
rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent.
A) 3.49 years
B) 3.62 years
C) 3.69 years
D) 3.81 years
E) 3.74 years
58) Small Town Bank has total assets with a market value of $14.23 million and a duration of
2.64 years. The bank’s liabilities equal $12.87 million and its equity is $1.36 million on a market
value basis. To hedge interest rate risk, what duration should the bank seek for its liabilities?
A) 2.86 years
B) 2.78 years
C) 2.39 years
D) 2.48 years
E) 2.92 years
59) You have gathered the following market value and duration information on the Eastern
Bank:
Assets:
Market value
(in millions)
Duration
Overnight money
$
3.1
.0
1-year Treasury Securities
7.4
.6
Loans
18.6
2.1
Mortgages
9.3
7.6
$
38.4
Liabilities:
Checking accounts
$
14.6
.0
Short-term CD’s
4.1
.3
Long-term CD’s
11.6
3.1
$
30.3
Calculate the duration of the bank’s assets and of its liabilities.
A) 2.86 years; 1.23 years
B) 2.97 years; 1.06 years
C) 2.86 years; 1.06 years
D) 2.48 years; 1.06 years
E) 2.97 years; 1.23 years
60) You have gathered the following market value and duration information on Northern Bank:
Assets:
Market value
(in millions)
Duration
Overnight money
$
3.7
.0
1-year Treasury securities
8.2
.5
Loans
11.6
1.8
Mortgages
11.9
7.9
$
35.4
Liabilities:
Checking accounts
$
13.9
.0
Short-term CD’s
4.5
.4
Long-term CD’s
10.9
3.5
$
29.3
What new asset duration will immunize the balance sheet?
A) 1.22 years
B) .99 years
C) 1.36 years
D) 1.48 years
E) 1.13 years
61) The futures markets are considered by some to be highly risky and equivalent to gambling.
Why is this an inaccurate portrayal of the market’s function?
62) Identify several of the differences between a forward contract and a futures contract.
63) Duration is defined as the weighted average time to maturity of a financial instrument. List at
least four other key things you know about duration.
64) Explain why credit default swaps act like an insurance policy.