Chapter 15 – Forward, Futures, and Swap Contracts
(rounded to the nearest integer)?
a.
sell 70 contracts
b.
buy 70 contracts
c.
buy 87 contracts
d.
buy 98 contracts
e.
sell 67 contracts
103. Refer to Exhibit 15.11. How many contracts should you buy or sell in order to reduce the portfolio beta to 0.80
(rounded to the nearest integer)?
a.
sell 162 contracts
b.
buy 162 contracts
c.
sell 324 contracts
d.
buy 324 contracts
e.
buy 234 contracts
Exhibit 15.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The S&P 500 stock index is at 1300. The annualized interest rate is 4.0 percent, and the annualized dividend is 2 percent.
You are currently considering purchasing a two-month futures contract for your portfolio.
104. Refer to Exhibit 15.12. Calculate the current price of the futures contract.
a.
b.
c.
Chapter 15 – Forward, Futures, and Swap Contracts
d.
e.
105. Refer to Exhibit 15.12. If the futures contract was currently available for 1280, indicate the appropriate strategy that
would earn an arbitrage profit.
a.
long futures and short the index
b.
short futures and long the index
c.
long futures and long the index
d.
short futures and short the index
e.
None of these are correct.
106. Refer to Exhibit 15.12. If the futures contract was currently available for 1350, calculate the arbitrage profit.
a.
$8.33
b.
$28.45
c.
$45.67
d.
$50.00
e.
$54.33
Chapter 15 – Forward, Futures, and Swap Contracts
Exhibit 15.13
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a portfolio manager with a $10,000,000 equity portfolio under management. The manager wishes to hedge
against a decline in share values using stock index futures. Currently a stock index future is priced at 1350 and has a
multiplier of 250. The portfolio beta is 1.50.
107. Refer to Exhibit 15.13. Calculate the number of contract required to hedge the risk exposure and indicate whether the
manager should be short or long.
a.
100 contracts long
b.
44 contracts long
c.
44 contracts short
d.
100 contracts short
e.
75 contracts short
108. Refer to Exhibit 15.13. Assume that a month later the equity portfolio has a market value of $9,500,000 and the stock
index future is priced at 1300 with a multiplier of 250. Calculate the profit on the equity position.
a.
$100,000
b.
$200,000
c.
−$200,000
d.
−$500,000
e.
−$600,000
109. Refer to Exhibit 15.13. Assume that a month later the equity portfolio has a market value of $10,000,000 and the
stock index future is priced at 1300 with a multiplier of 250. Calculate the profit (loss) on the stock index futures position.
a.
−$1,050,000
b.
−$550,000
c.
−$50,000
d.
$550,000
e.
$1,050,000
110. Refer to Exhibit 15.13. Calculate the overall profit.
a.
−$50,000
b.
−$150,000
c.
$50,000
d.
$150,000
e.
$550,000
Exhibit 15.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
December futures on the S&P 500 stock index trade at 250 times the index value of 1187.70. Your broker requires an
initial margin of 10 percent on futures contracts. The current value of the S&P 500 stock index is 1178.
111. Refer to Exhibit 15.14. How much must you deposit in a margin account if you wish to purchase one contract?
a.
$267,232.5
b.
$29,450
c.
$29,692.50
d.
$30,000
e.
$265,050
112. Refer to Exhibit 15.14. Suppose at expiration the futures contract price is 250 times the index value of 1170.
Disregarding transaction costs, what is your percentage return?
a.
1.87%
b.
−0.68%
c.
−14.90%
d.
10.36%
e.
13.58%
113. Refer to Exhibit 15.14. Calculate the return on a cash investment in the S&P 500 stock index if the ending index
value is 1170 over the same time period.
a.
1.87%
b.
−0.68%
c.
−14.90%
d.
10.36%
e.
13.58%
114. In the strategy known as _____, the arbitrageur will always hold the security denominated in the currency that is the
least expensive to deliver in the futures market.
a.
stock index arbitrage
b.
covered interest arbitrage
c.
put call parity
d.
interest rate parity
e.
program trading
115. Assume the exchange rate is GBP 1.35/USD, the US risk-free rate is 3.0 percent, and the UK risk-free rate is 6.5
percent. What is the implied one-year forward rate?
a.
GBP 1.40/USD
b.
GBP 1.35/USD
c.
GBP 1.30/USD
d.
GBP 1.25/USD
e.
GBP 1.20/USD
116. Assume the exchange rate is GBP 1.35/USD, the US risk-free rate is 3.0 percent, and the UK risk-free rate is 3.0
percent. What is the implied one-year forward rate?
a.
GBP 1.40/USD
b.
GBP 1.35/USD
c.
GBP 1.30/USD
d.
GBP 1.25/USD
e.
GBP 1.20/USD
117. Assume the exchange rate is GBP 1.35/USD, the US risk-free rate is 7.0 percent, and the UK risk-free rate is 3.0
percent. What is the implied one-year forward rate?
a.
GBP 1.40/USD
b.
GBP 1.35/USD
c.
GBP 1.30/USD
d.
GBP 1.25/USD
e.
GBP 1.20/USD
118. Which of the following is NOT true about interest rate swaps?
a.
Payments are based on a notional principal.
b.
Floating rate payers profit if interest rates fall.
c.
Payments can be quarterly as well as semi-annually.
d.
Parities exchange debt obligations.
e.
Default risk is a possibility in the swaps market.
119. A ____ contract can be viewed as a prepackaged series of forward rate agreements to buy or sell LIBOR at the same
fixed rate.
a.
swap
b.
cap
c.
floor
d.
collar
e.
ceiling
120. A pay-fixed interest rate swap can be viewed as equivalent to
a.
a long position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
b.
a long position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
c.
a short position in a par-valued FRN and a long position in a par-valued, fixed-rate note.
d.
a short position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
e.
a flat position in a par-valued FRN and a short position in a par-valued, fixed-rate note.
121. Consider a pension fund manager who wishes to convert $10 million from notes paying LIBOR to stocks using an
Chapter 15 – Forward, Futures, and Swap Contracts
equity swap. The equity swap should be structured so that
a.
pension fund receives LIBOR and pays an equity return based on a notional principal of $5 million.
b.
pension fund pays LIBOR and receives an equity return based on a notional principal of $5 million.
c.
pension fund receives LIBOR and pays an equity return based on a notional principal of $10 million.
d.
pension fund pays LIBOR and receives an equity return based on a notional principal of $10 million.
e.
pension fund pays LIBOR and receives an equity return based on a notional principal of $15 million.
122. The following are all advantages of having an equity swap market EXCEPT:
a.
These agreements allow investors to take advantage of overall price movements in a specific country’s stock
market.
b.
Creating a direct equity investment in a foreign country may be difficult for some investors where it is
prohibited by law.
c.
These agreements eliminate the need for a counterparty because they are traded on the NYSE.
d.
An investment fund wanting to accumulate foreign index returns denominated in their domestic currency may
not be legally permitted to obtain sufficient exchange-traded derivative contracts to hedge a direct equity
investment.
e.
Equity swaps can reduce both the transaction costs and the tracking error.
Exhibit 15.15
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Darden Industries has decided to borrow $25,000,000.00 for six months in two three-month issues. As the Treasurer, you
are concerned that interest rates will rise over the next three months and the rate upon which the second payment will be
based will be undesirable. (The amount of Darden’s first payment will be known at origination.) To reduce the company’s
interest rate exposure, you decide to purchase a 3 6 FRA whereby you pay the dealer’s quoted fixed rate of 4.5 percent
in exchange for receiving three-month LIBOR at the settlement date. In order to hedge her exposure, the dealer buys
Chapter 15 – Forward, Futures, and Swap Contracts
LIBOR from McIntire Industries at its bid rate of 4 percent. (Assume a notional principal of $25,000,000.00 and that there
are 60 days between month 3 and month 6.)
123. Refer to Exhibit 15.15. Assuming that three-month LIBOR is 5.00 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and Darden.
a.
The dealer is obligated to pay Darden $19,500.
b.
The dealer is obligated to pay Darden $31,250.
c.
Darden is obligated to pay the dealer $19,500.
d.
Darden is obligated to pay the dealer $31,250.
e.
Darden is obligated to pay the dealer $32,150.
124. Refer to Exhibit 15.15. Assuming that three-month LIBOR is 5.00 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and Darden.
a.
The dealer is obligated to pay Darden $30,864.20.
b.
The dealer is obligated to pay Darden $19,359.61.
c.
Darden is obligated to pay the dealer $19,359.61.
d.
Darden is obligated to pay the dealer $30,864.20.
e.
Darden is obligated to pay the dealer $35,648.20.
125. Refer to Exhibit 15.15. Assuming that three-month LIBOR is 5.00 percent on the rate determination day, and the
contract specified settlement in arrears at month 6, describe the transaction that occurs between the dealer and McIntire.
a.
The dealer is obligated to pay McIntire $62,500.
b.
The dealer is obligated to pay McIntire $57,500.
c.
McIntire is obligated to pay the dealer $62,500.
Chapter 15 – Forward, Futures, and Swap Contracts
d.
McIntire is obligated to pay the dealer $57,500.
e.
McIntire is obligated to pay the dealer $55,700.
126. Refer to Exhibit 15.15. Assuming that three-month LIBOR is 5.00 percent on the rate determination day, and the
contract specified settlement in advance, describe the transaction that occurs between the dealer and McIntire.
a.
The dealer is obligated to pay McIntire $61,728.40.
b.
The dealer is obligated to pay McIntire $56,389.16.
c.
McIntire is obligated to pay the dealer $56,389.16.
d.
McIntire is obligated to pay the dealer $61,728.40.
e.
McIntire is obligated to pay the dealer $66,728.40.
127. Refer to Exhibit 15.15. How much compensation does the dealer receive for transaction costs, credit risk, and other
costs associated with matching the FRAs?
a.
b.
c.
d.
e.