54) A long hedger will ________ from an increase in the basis; a short hedger will ________.
A) be hurt; be hurt
B) be hurt; profit
C) profit; be hurt
D) profit; profit
55) At year-end, taxes on a futures position ________.
A) must be paid if the position has been closed out
B) must be paid if the position has not been closed out
C) must be paid regardless of whether the position has been closed out or not
D) need not be paid if the position supports a hedge
56) A speculator will often prefer to buy a futures contract rather than the underlying asset
because:
I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.
A) I and II only
B) II and III only
C) I and III only
D) I, II, and III
57) 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.)
A) −$12,500
B) −$15,000
C) $15,000
D) $12,500
58) The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The
risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire
6 months from now should be ________.
A) 1,274.33
B) 1,286.95
C) 1,268.61
D) 1,291.29
59) The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The
risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be
________.
A) $1,504.99
B) $1,569.08
C) $1,554.04
D) $1,557.73
60) If you expect a stock market downturn, one potential defensive strategy would be to
________.
A) buy stock-index futures
B) sell stock-index futures
C) buy stock-index options
D) sell foreign exchange futures
61) At contract maturity the basis should equal ________.
A) 1
B) 0
C) the risk-free interest rate
D) −1
62) 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 ________.
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 contract
63) 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%.
The arbitrage profit implied by these prices is ________.
A) $3.27
B) $4.39
C) $5.24
D) $6.72
64) 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?
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.
65) 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?
A) $95.24
B) $100
C) $105
D) $107
66) A hypothetical futures contract on a nondividend-paying stock with a current spot price of
$100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?
A) $76.29
B) $93.46
C) $107
D) $131.08
67) 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.
Day
Settle
Monday
$
97,406.25
Tuesday
$
98,000.00
Wednesday
$
100,000.00
After Monday’s close the balance on your margin account will be ________.
A) $2,700
B) $2,000
C) $3,137.50
D) $2,262.50
68) 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.
Day
Settle
Monday
$
97,406.25
Tuesday
$
98,000.00
Wednesday
$
100,000.00
At the close of day on Tuesday your cumulative rate of return on your investment is ________.
A) 16.2%
B) −5.8%
C) −0.16%
D) −2.2%
69) 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.
Day
Settle
Monday
$
97,406.25
Tuesday
$
98,000.00
Wednesday
$
100,000.00
On which of the given days do you get a margin call?
A) Monday
B) Tuesday
C) Wednesday
D) none of these options
70) 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.
Day
Settle
Monday
$
97,406.25
Tuesday
$
98,000.00
Wednesday
$
100,000.00
The cumulative rate of return on your investment after Wednesday is a ________.
A) 79.9% loss
B) 2.6% loss
C) 33% gain
D) 53.9% loss
71) The swap market is a huge component of the derivatives market, with around ________ in
interest rate and exchange rate swap agreements outstanding.
A) $40 million
B) $400 million
C) $400 billion
D) $400 trillion
72) If the risk-free rate is greater than the dividend yield, then we know that ________.
A) the futures price will be higher as contract maturity increases
B) F0 < S0
C) FT > ST
D) arbitrage profits are possible
73) Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of
9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and
receive a fixed 8% on a notional principal of $100 million. After all these transactions are
considered, Sahali’s cost of funds is ________.
A) 17%
B) LIBOR
C) LIBOR + 1%
D) LIBOR − 1%
74) Interest rate swaps involve the exchange of ________.
A) actual fixed-rate bonds for actual floating-rate bonds
B) actual floating-rate bonds for actual fixed-rate bonds
C) net interest payments and an actual principal swap
D) net interest payments based on notional principal, but no exchange of principal
75) From the perspective of determining profit and loss, the long futures position most closely
resembles a levered investment in a ________.
A) long call
B) short call
C) short stock position
D) long stock position
76) The ________ contract dominates trading in stock-index futures.
A) S&P 500
B) DJIA
C) Nasdaq 100
D) Russell 2000
77) The ________ and the ________ have the lowest correlations with the large-cap indexes.
A) Nasdaq Composite; Russell 2000
B) NYSE; DJIA
C) S&P 500; DJIA
D) Russell 2000; S&P 500
78) The use of leverage is practiced in the futures markets due to the existence of ________.
A) banks
B) brokers
C) clearinghouses
D) margin
79) 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.
A) 31%
B) 41%
C) 52%
D) 64%
80) 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?
A) $10,400
B) $14,300
C) $16,500
D) $21,300
81) 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?
A) convergence
B) margin
C) basis
D) volatility
82) A corporation will be issuing bonds in 6 months, and the treasurer is concerned about
unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to
________.
A) buy T-bond futures
B) sell T-bond futures
C) buy stock-index futures
D) sell stock-index futures
83) 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?
A) $27,500
B) $31,875
C) $33,875
D) $35,950
84) 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?
A) $0
B) $2,000
C) $31,875
D) $33,875
85) A bank has made long-term fixed-rate mortgages and has financed them with short-term
deposits. To hedge out its interest rate risk, the bank could ________.
A) sell T-bond futures
B) buy T-bond futures
C) buy stock-index futures
D) sell stock-index futures
86) A market timer now believes that the economy will soften over the rest of the year as the
housing market slump continues, and she also believes that foreign investors will stop buying
U.S. fixed-income securities in the large quantities that they have in the past. One way the timer
could take advantage of this forecast is to ________.
A) buy T-bond futures and sell stock-index futures
B) sell T-bond futures and buy stock-index futures
C) buy stock-index futures and buy T-bond futures
D) sell stock-index futures and sell T-bond futures
87) The Student Loan Marketing Association (SLMA) has short-term student loans funded by
long-term debt. To hedge out this interest rate risk, SLMA could:
I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
II. Buy T-bond futures
IV. Sell T-bond futures
A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
88) The only money exchanged by both the long and short at the creation of a futures contract is
called the ________.
A) spot price
B) futures price
C) margin
D) collateral
89) The overwhelming majority of trading in futures contracts is done via ________.
A) trading pits
B) phone
C) open outcry
D) electronic networks
90) 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) arbitrage
B) hedging
C) speculation
D) loss leading
91) 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) $19.50
B) $31.50
C) $63.00
D) $39.00
92) A stock index spot price is $1,350. The zero coupon interest rate is 2.6%. What is the
potential arbitrage profit if the 6-month futures contract on the index is priced at $1,342?
A) $8
B) $25
C) $32
D) $39