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Investments & Securities
Q:
Program trading generally involves positions in both stocks and stock-index futures.
Q:
Index arbitrage attempts to exploit the differences between the prices on two different stock indices.
Q:
A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in interest rate, the pension fund should use a short hedge in T-bond futures.
Q:
An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.
Q:
The DJIA is the most popular stock-index futures contract.
Q:
price bubbles may be evidence that 1> financial markets are inefficient 2> financial markets are rational 3> the investors have a herd instinct 4> investors do not have a herd instinct a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
even if financial markets have elements of inefficiency, the individual may still be unable to outperform the market.
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the tendency of investors to follow a herd mentality helps explain financial bubbles.
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since virtually all investments involve risk, the individual should develop a diversified portfolio.
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while the investor is able to reduce assetspecific risk, other sources of risk remain.
Q:
in a well-diversified portfolio, the risk associated with fluctuations in securities prices (i.e., the market) is reduced.
Q:
the futures price of a commodity such as wheat is $2.50 a bushel. futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. the maintenance market requirement is $1,000. a speculator expects the price of the commodity to rise and enters into a contract to buy wheat. a. how much must the speculator initially remit? b. if the futures price rises to $2.60, what is the profit and return on the position? c. if the futures price declines to $2.47, what is the loss on the position? d. if the futures price rises to $2.70, what must the speculator do? e. if the futures price continues to decline to $2.32, how much does the speculator have in the account?
Q:
the futures price of gold is $1,000. futures contracts are for 100 ounces of gold, and the margin requirement is $3,000 a contract. the maintenance market requirement is $1,500. a speculator expects the price of gold to rise and enters into a contract to buy gold. a. how much must the speculator initially remit? b. if the futures price of gold rises to $1,005, what is the profit and return on the position? c. if the futures price of gold declines to $998, what is the loss on the position? d. if the futures price declines to $984, what must the speculator do? e. if the futures price continues to decline to $982, how much does the speculator have in the account?
Q:
one use for futures markets is "price discovery," that is, the futures price mirrors the current consensus of the future price. if the current price of corn is $2.00 a bushel and the cost of carry is 7 percent, explain what an investor would do if futures price of wheat were $2.40. is the investor at risk?
Q:
a swap agreement may be used to convert a. variable payments into fixed payments b. short-term gains into long-term gains c. bonds into stock d. futures prices into spot prices
Q:
if an individual expected securities prices to fall, that investor could 1> buy put options 2> sell a stock index futures contract 3> sell stock short a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
an individual with a large stock portfolio can hedge the position by a. buying a stock index futures b. selling a stock index futures c. selling the stocks d. maintaining the position
Q:
purchasers of gold futures contracts a. do not have to meet margin requirements b. may anticipated an increase in inflation c. are considered to have unleveraged positions d. have less speculative positions
Q:
if a speculator is short and the price of the commodity rises, the individual 1> can expect a margin call 2> may take profits out of the position 3> may close the position at a loss a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
futures contracts offer the advantage of a. potential leverage b. liquidity c. safety d. tax savings
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speculators who are short a. expect prices to rise b. are not seeking capital gains c. are hedging their long positions d. anticipate lower prices
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hedging with commodity futures a. reduces the risk of loss b. results when an investor buys a contract c. occurs when the individual takes delivery d. is the opposite of selling short
Q:
investing in futures is a. investing in physical goods b. entering into contracts for future delivery c. executing contracts for prior delivery d. selling a contract in anticipation of price increases
Q:
the maximum daily price increase that is permitted in the futures markets is a. the daily limit b. the daily range c. $1 per contract d. 5% per contract
Q:
if the commodity's futures price declines 1> the long position profits 2> the short position profits 3> the buyer of the contract profits 4> the seller of the contract profits a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
commodity contracts are 1> bought and sold through commodity exchanges 2> considered to be speculative investments 3> permit investors to take either long or short positions a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
a futures contract to take delivery is canceled by a. entering into a contract to make delivery b. refusing to take delivery c. refusing to make delivery d. letting the contract expire
Q:
a currency swap is an agreement to convert payments in a foreign currency to payments in the domestic currency.
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a swap agreement may be used by a financial manager to reduce risk exposure.
Q:
a swap agreement converts a futures contract into a spot contract.
Q:
programmed trading (index arbitrage) transfers changes in the futures markets to the stock market.
Q:
if an individual has a long position in bond futures, that investor is anticipating lower interest rates.
Q:
if an investor expects the stock market to rise, that individual enters into a short position in stock index futures.
Q:
the cost of carrying a commodity suggests that the futures price will be less than the spot price.
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if speculators anticipate interest rates will rise, they enter into contracts to sell bonds.
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currency futures refer to contracts to buy and sell foreign moneys (i.e., foreign exchange).
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speculators take the opposite positions of hedgers.
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hedging using commodity futures locks in a price for the supplier of a commodity.
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if a firm expects to buy a commodity in the future, it may hedge against a price increase by taking a short position in the futures contract.
Q:
a farmer hedges by simultaneously buying and selling futures contracts.
Q:
the investor must maintain a minimum amount of equity (i.e., maintenance margin) to maintain a futures position.
Q:
the daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.
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margin is required only of those investors who take long positions in futures contracts.
Q:
the amount of margin required to enter into a futures contract is at least 50 percent of the value of the contract.
Q:
the futures trading commission enforces the federal laws regulating commodity transactions.
Q:
since neither the sec nor the federal reserve have jurisdiction over commodity trading, these markets are unregulated.
Q:
when an investor sells a contract and subsequently offsets (closes) the position, the individual experiences neither losses nor profits.
Q:
if an investor has a short position in corn, the position is closed by buying corn.
Q:
if an investor enters into a contract to sell corn, that position is closed by delivering the contract.
Q:
a position in a futures contract is canceled (offset) by entering into the opposite position.
Q:
since there are many grades of corn, the seller of a contract may deliver any type of corn.
Q:
buying a futures contract is a long position.
Q:
selling a commodity contract is a long position.
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futures contracts are bought and sold in organized markets such as the chicago board of trade.
Q:
investors can only buy futures, since these contracts cannot be sold.
Q:
an important advantage offered investors (speculators) by commodity futures is the large amount of leverage.
Q:
investing in futures contracts is considered to be among the riskiest of all investment alternatives.
Q:
when an investor enters (also referred to as purchases) commodity contracts, the individual takes physical delivery of the goods.
Q:
put-call parity asserts that a combination of a long position in the stock and the put produces the same return as a comparable position in a call and a risk-free bond. if not, at least one market is in disequilibrium. the resulting arbitrage alters the securities' prices until the value of the stock plus the put equals the prices of the call and the bond. the successful use of arbitrage assumes the investor of a profit no matter what happens to the price of the stock. put-call parity also asserts that if an arbitrage opportunity does not exist, then a combination of the stock and the put produces the same return as the comparable position in the call and the risk-free bond. currently, the price of a stock is $70 while the price of a call option at $70 is $6; the price of the put option at $70 is $2, and the price of a discounted bond is $66. verify that a long position in the stock and the put produces the same performance as a long position in the call and the bond for the following prices of the stock: $60, 65, 70, 75, and 80.
Q:
put-call parity basically says that combination of a put, a call, and a risk-free bond must be the same value as the underlying stock. if not, at least one market is in disequilibrium. the resulting arbitrage alters the securities' prices until the value of the call plus the bond is equal to the prices of the put plus the stock. currently, the price of a stock is $100 while the price of a call option at $100 is $10; the price of the put option is $4.59, and the rate of interest is 8 percent, so that the investor may purchase a $100 discounted note for $92.59. a. do these prices indicate that the financial markets are in equilibrium? show me how you derived your answer. b. an arbitrage opportunity should exist, but if you set up the position incorrectly, you will always sustain losses. verify to me that if you do set up an incorrect arbitrage, you will always sustain a loss. please use prices of the stock at $80, $100, and $120 as of the expiration date of the options.
Q:
if a stock is selling for $33 and you expect the price not to fluctuate, what are the potential profits and losses from writing a straddle if a call option at $35 sells for $3 and the put option at $35 sells for $4?
Q:
the price of a stock is $46 and the prices of call options to buy the stock at $45 and $50 are $6 and $3, respectively. what are the potential profits and losses when the price of the stock is $40, $45, $50, and $55 if the investor buys the call at $45 and sells the call at $50?
Q:
a put and a call have the following terms: call: strike price $30 term three months price $3 put: strike price $30 term three months price $4 the price of the stock is currently $29. you sell the stock short and purchase the call. complete the following table and answer the questions. price of profit on profit on net profit the stock stock put $20 25 30 35 40 a. what is the maximum possible profit on the position? b. what is the maximum possible loss on the position? c. what is the range of stock prices that generates a profit? d. what advantage does this position offer?
Q:
the investor owns 1,000 shares of stock but anticipates its price may decline. to reduce the risk of loss, how many call options must be sold if the hedge ratio is 0.7?
Q:
if the price of a stock is $100 while the price of a call option at $100 is $3, the price of the put option is $2, and the rate of interest is 10 percent so the investor can purchase a $100 discounted note for $90.90 (i.e., $91). what should you do and verify the potential losses and profits from the position.
Q:
a call option is the right to buy stock at $25 a share. according to the black/scholes option valuation model, what is the value of the call a. if the price of the stock is $25, the interest rate is 8 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)? b. if the price of the stock is $25, the interest rate is 6 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)? c. if the price of the stock is $27, the interest rate is 8 percent, the option expires in three months, and the standard deviation of the stock's return is 0.20 (20 percent)?
Q:
if the investor buys a bull spread, the individual anticipates a. higher call price b. higher stock prices c. lower stock prices d. lower call prices
Q:
if the investor buys a bear spread, the individual anticipates a. higher interest rates b. higher option prices c. lower stock prices d. lower put prices
Q:
if the investor anticipates that the price of a stock will fluctuate, this individual may a. sell a call and sell a put b. buy a call and buy a put c. buy a call and sell a put d. sell a call and buy a put
Q:
if the investor anticipates that the price of stock will be stable, he or she may a. sell a straddle b. buy a straddle c. buy a call d. buy a put
Q:
to acquire a straddle, the investor a. buys stock and a call b. buys two calls with different strike prices c. buys a put and sells a call with the same strike price d. buys a put and buys a call with the same strike price
Q:
if an investor sells a stock short, that individual reduces the risk of loss by a. buying a put b. buying a call c. entering a limit order to sell the stock if its price declines d. increasing the collateral with the broker
Q:
the hedge ratio determines a. the number of call options to offset movements in the price of the stock b. the number of call options to offset a straddle c. the number of put options to offset movements in the price of a call option d. the number of call options to offset the impact of changes in interest rates
Q:
if a call is overvalued, put-call parity suggests that the investor should a. sell the call and the stock and buy the put and the bond b. sell the call and the bond and buy the put and the stock c. sell the bond and the put and buy the stock and the call d. sell the stock and the put and buy the call and the bond
Q:
put-call parity suggests that a. the sum of the prices of a stock and a call equal zero b. the sum of the prices of a put and a call equal zero c. the sum of the prices of a stock, a call, a put, and a bond equal zero d. sum of the prices of a stock and a put must equal the sum of the prices of a call and a discounted bond with the maturity date as the expiration date of the options
Q:
according to the black/scholes option valuation model, a call option's value decreases if a. interest rates increase as the option approaches expiration b. the variability of the stock's return declines and the interest rate decreases c. an increase in the price of the stock results in a two for one stock split d the option is exercised
Q:
according to the black/scholes option valuation model, a call option's value increases if a. stock prices increase and interest rates decrease b. the time to expiration decreases and interest rates increase c. the variability of the stock's return increases and stock prices increase d. interest rates decrease and the variability of the stock's return increases
Q:
according to the black/scholes option valuation model, the value of a call option increases if a. the option approaches expiration b. the return on the stock is more certain c. interest rates on a discounted bond decline d. the standard deviation of the stock's return increases
Q:
selling a call and purchasing a treasury bill produces the same returns as buying a stock.
Q:
buying a call and a treasury bill produces similar results as buying a stock and a put.