Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
51. An investor establishes a long position in a futures contract now (time 0) and holds the
position until maturity (time
T
). The sum of all daily settlements will be __________.
52. A short hedge is a simultaneous __________ position in the spot market and a __________
position in the futures market.
53. Approximately __________ of futures contracts result in actual delivery.
54. A long hedger will __________ from an increase in the basis; a short hedger will
__________.
55. At year-end, taxes on a futures position _______________.
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.
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.)
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 __________.
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 __________.
60. If you expect a stock market downturn, one potential defensive strategy would be to
__________.
61. At contract maturity the basis should equal ___________.
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 ______________.
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 _____________.
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?
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?
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?
67. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$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.
After Monday's close the balance on your margin account will be ________.
68. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$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.
At the close of day on Tuesday your cumulative rate of return on your investment is _____.
69. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$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.
On which of the given days do you get a margin call?
70. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for
$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.
The cumulative rate of return on your investment after Wednesday is a ____.
71. The volume of interest rate swaps increased from almost zero in 1980 to over __________
today.
72. If the risk-free rate is greater than the dividend yield, then we know that _______________.
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 __________.
74. Interest rate swaps involve the exchange of ________________.
75. From the perspective of determining profit and loss, the long futures position most closely
resembles a levered investment in a ____________.
76. The _________ contract dominates trading in stock-index futures.
77. The ________ and the _______ have the lowest correlations with the large-cap indexes.
78. The use of leverage is practiced in the futures markets due to the existence of _________.
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.
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 .05%. What is the price value of a basis point?
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?
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
_________________.
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?
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?
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 ________.
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 ________________.
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
III. Buy T-bond futures
IV. Sell T-bond futures
