Q&A Hero

Q: 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? A. MondayB. TuesdayC. WednesdayD. None of these options

Q: 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 _____. A. 16.2%B. -5.8%C. -.16%D. -2.2%

Q: 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 ________. A. $2,700B. $2,000C. $3,137.50D. $2,262.50

Q: 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

Q: 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

Q: 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.

Q: 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

Q: 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

Q: At contract maturity the basis should equal ___________. A. 1 B. 0 C. the risk-free interest rate D. -1

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: Approximately __________ of futures contracts result in actual delivery. A. 0% B. less than 1% to 3% C. less than 5% to 15% D. less than 60% to 80%

Q: A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

Q: 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 __________. A. F0 - FT B. F0 - S0 C. FT - F0 D. FT - S0

Q: When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________. A. F1 = S0(1 + rf) B. F0 = S0(1 + rf - d)T C. F0 = S0(1 + rf + d)T D. F0 = S0(1 + rf)T

Q: Violation of the spot-futures parity relationship results in _______________. A. fines and other penalties imposed by the SEC B. arbitrage opportunities for investors who spot them C. suspension of delivery privileges D. suspension of trading

Q: The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform. A. CBOE B. CBOT C. CME D. Eurex

Q: In the context of a futures contract, the basis is defined as ______________. A. the futures price minus the spot price B. the spot price minus the futures price C. the futures price minus the initial margin D. the profit on the futures contract

Q: Futures contracts are said to exhibit the property of convergence because _______________. A. the profits from long positions and short positions must ultimately be equal B. the profits from long positions and short positions must ultimately net to zero C. price discrepancies would open arbitrage opportunities for investors who spot them D. the futures price and spot price of any asset must ultimately net to zero

Q: An investor would want to __________ to hedge a long position in Treasury bonds. A. buy interest rate futures B. buy Treasury bonds in the spot market C. sell interest rate futures D. sell S&P 500 futures

Q: Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity. A. make; make B. make; take C. take; make D. take; take

Q: A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

Q: If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________. A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index C. sell S&P 500 Index futures and buy all the stocks in the S&P 500 D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

Q: Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. A. are; are B. are; are not C. are not; are D. are not; are not

Q: An investor would want to __________ to exploit an expected fall in interest rates. A. sell S&P 500 Index futures B. sell Treasury-bond futures C. buy Treasury-bond futures D. buy wheat futures

Q: On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____. A. that the market believed that Obama had a 57% chance of winning B. that the market believed that Obama would not win the election C. nothing about the market's belief concerning the odds of Obama winning D. that the market believed Obama's chances of winning were about 43%

Q: A hog farmer decides to sell hog futures. This is an example of __________ to limit risk. A. cross-hedging B. short hedging C. spreading D. speculating

Q: Futures markets are regulated by the __________. A. CFA Institute B. CFTC C. CIA D. SEC

Q: A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk. A. cross-hedging B. long hedging C. spreading D. speculating

Q: You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________. A. a cross-hedge B. a reversing trade C. a speculation D. marking to market

Q: Single stock futures, as opposed to stock index futures, are _______________. A. not yet being offered by any exchanges B. offered overseas but not in the United States C. currently trading on One Chicago, a joint venture of several exchanges D. scheduled to begin trading in 2015 on several exchanges

Q: The CME weather futures contract is an example of ______________. A. a cash-settled contract B. an agricultural contract C. a financial future D. a commodity future

Q: The most actively traded interest rate futures contract is for ___________. A. LIBOR B. Treasury bills C. Eurodollars D. Treasury bonds

Q: Which one of the following refers to the daily settlement of obligations on future positions? A. Marking to market B. The convergence property C. The open interest D. The triple witching hour

Q: Which one of the following exploits differences between actual future prices and their theoretically correct parity values? A. Index arbitrage B. Marking to market C. Reversing trades D. Settlement transactions

Q: A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

Q: At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________. A. marking to market B. the convergence property C. the open interest D. the triple witching hour

Q: Which one of the following is a true statement? A. A margin deposit can be met only by cash. B. All futures contracts require the same margin deposit. C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

Q: An established value below which a trader's margin may not fall is called the ________. A. daily limit B. daily margin C. maintenance margin D. convergence limit

Q: Margin requirements for futures contracts can be met by ______________. A. cash only B. cash or highly marketable securities such as Treasury bills C. cash or any marketable securities D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

Q: Which of the following provides the profit to a short position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

Q: The daily settlement of obligations on futures positions is called _____________. A. a margin call B. marking to market C. a variation margin check D. the initial margin requirement

Q: Margin must be posted by ________. A. buyers of futures contracts only B. sellers of futures contracts only C. both buyers and sellers of futures contracts D. speculators only

Q: Initial margin is usually set in the region of ________ of the total value of a futures contract. A. 5%-15% B. 10%-20% C. 15%-25% D. 20%-30%

Q: Interest rate futures contracts exist for all of the following except __________. A. federal funds B. Eurodollars C. banker's acceptances D. repurchase agreements

Q: You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________. A. cross-hedge B. reversing trade C. spread position D. straddle

Q: Which of the following provides the profit to a long position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

Q: A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. A. sell wheat futures B. buy wheat futures C. buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

Q: In the futures market the short position's loss is ___________ the long position's gain. A. greater than B. less than C. equal to D. sometimes less than and sometimes greater than

Q: The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. market B. credit C. interest rate D. basis

Q: The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. A. liquidity; all traders must trade a small set of identical contracts B. credit risk; all traders understand the risk of the contracts C. pricing; convergence is more likely to take place with fewer contracts D. trading cost; trading volume is reduced

Q: An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

Q: An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

Q: The open interest on silver futures at a particular time is the number of __________. A. all outstanding silver futures contracts B. long and short silver futures positions counted separately on a particular trading day C. silver futures contracts traded during the day D. silver futures contracts traded the previous day

Q: An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______. A. an arbitrage B. a cross-hedge C. an over hedge D. a spread hedge

Q: Futures contracts have many advantages over forward contracts except that _________. A. futures positions are easier to trade B. futures contracts are tailored to the specific needs of the investor C. futures trading preserves the anonymity of the participants D. counterparty credit risk is not a concern on futures

Q: _____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery. A. Investors; regulators B. Hedgers; speculators C. Speculators; hedgers D. Regulators; investors

Q: Synthetic stock positions are commonly used by ______ because of their ______. A. market timers; lower transaction cost B. banks; lower risk C. wealthy investors; tax treatment D. money market funds; limited exposure

Q: Which one of the following contracts requires no cash to change hands when initiated? A. Listed put option B. Short futures contract C. Forward contract D. Listed call option

Q: The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract. A. cash; cash B. cash; actual C. actual; cash D. actual; actual

Q: The clearing corporation has a net position equal to ______. A. the open interest B. the open interest times 2 C. the open interest divided by 2 D. zero

Q: If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract

Q: A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

Q: Today's futures markets are dominated by trading in _______ contracts. A. metals B. agriculture C. financial D. commodity

Q: Hedge ratios for long puts are always __________. A. between -1 and 0 B. between 0 and 1 C. 1 D. greater than 1

Q: A put option has a strike price of $35 and a stock price of $38. If the call option is trading at $1.25, what is the time value embedded in the option? A. $0 B. $.75 C. $1.25 D. $3

Q: The option smirk in the Black-Scholes option model indicates that __________. A. implied volatility changes unpredictably as the exercise price rises B. stock prices may fall by a larger amount than the model assumes C. stock prices evolve continuously in today's actively traded markets D. stocks with lower exercise prices are more likely to pay dividends

Q: A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you construct a riskless arbitrage to exploit the mispriced puts, your arbitrage profit will be _____. A. $5.75 B. $6.17 C. $.96 D. $.42

Q: A stock priced at $65 has a standard deviation of 30%. Three-month calls and puts with an exercise price of $60 are available. The calls have a premium of $7.27, and the puts cost $1.10. The risk-free rate is 5%. Since the theoretical value of the put is $1.525, you believe the puts are undervalued. If you want to construct a riskless arbitrage to exploit the mispriced puts, you should ____________. A. buy the call and sell the put B. write the call and buy the put C. write the call and buy the put and buy the stock and borrow the present value of the exercise price D. buy the call and buy the put and short the stock and lend the present value of the exercise price

Q: Suppose you purchase a call and write a put on the same stock with the same exercise price and expiration. If prices are at equilibrium, the value of this portfolio is ________. A. S0 - Xe-rt B. S0 - X C. S0 + Xe-rt D. S0 + X

Q: What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula? A. Annual compounding B. Compounding at the expiration time frame C. Continuous compounding D. Daily compounding

Q: A call option has an exercise price of $35 and a stock price of $36.50. If the call option is trading at $2.25, what is the time value embedded in the option? A. $0 B. $.75 C. $1.50 D. $2.25

Q: A call option has an exercise price of $30 and a stock price of $34. If the call option is trading for $5.25, what is the intrinsic value of the option? A. $0 B. $1.25 C. $4 D. $5.25

Q: The intrinsic value of an out-of-the-money call option ___________. A. is negative B. is positive C. is zero D. cannot be determined

Q: Calculate the price of a European call option using the Black Scholes model and the following data: stock price = $56.80, exercise price = $55, time to expiration = 15 days, risk-free rate = 2.5%, standard deviation = 22%, dividend yield = 8%. A. $1.49 B. $1.79 C. $2.04 D. $2.19