Math Flashcards
What investment strategy would best exploit an increase in the Swiss franc in relation to the US dollar at the end of the second quarter of the year if it is currently January?
[A] The best strategy is to buy June futures in Swiss francs.
[B] The best strategy is to sell June futures in Swiss francs.
[C] The best strategy is to buy January futures in Swiss francs.
[D] The best strategy is to buy January futures in Swiss francs and sell June futures in Swiss francs.
[A] The best strategy is to buy June futures in Swiss francs.
EXPLANATION
If you expect an increase in the value of the Swiss franc, you should buy futures of the Swiss franc in order to lock in the current price. This way, you could sell the futures for a profit, or hold the futures until expiration and buy the francs at a discount to the future cash price. Since it is now January and you expect the move to occur at the end of the second quarter you would buy the June contracts.
In South America, the orange harvest is coming to an end and it is becoming more and more apparent as the harvest closes that the harvest will be less than expected. A client of yours speculates that this will drive the cost of frozen orange juice up and so, your client buys 10 November contracts for frozen orange juice (each for 15,000 lbs). His order is filled at 80.5 cents per pound. After holding these futures for three weeks, your client is happy with the profit on the contracts and decides to sell. His position is closed at 95.1 cents. You charge your client $40 per contract in commissions. What was your client’s profit?
[A] $2,150
[B] $17,900
[C] $21,500
[D] $21,900
[C] $21,500
EXPLANATION
To figure out this equation use the following steps:
S 95.1 + (sold contract at 95.1 cents / lb)
B 80.5 - (bought contract at 80.5 cents / lb)
14.6 + (profit per lb on the transaction w/o commissions in cents)
$0.146 x 15,000 (lbs per contract) = 2,190
2,190 x 10 (number of contracts) = $21,900 (gross profit)
$21,900 - $400 ($40 per contract at 10 contracts) = $21,500 profit after commissions
A short hedge is buying futures contracts to protect against possible declining prices of commodities.
[A] True
[B] False
[B] False
EXPLANATION
A short hedge is selling futures contracts to protect against possible declining prices of commodities as defined in the NFA Glossary of Terms.
You are currently engaged in business with a British firm from whom you purchase parts for your final product assembly in your plant in Henderson, Nevada. You need to purchase a bulk order of parts from the British firm in two months and have already agreed to pay $1.9060 / British Pound for the delivery of the equipment. You are currently concerned that the value of the US dollar will further decline in relation to the British Pound and you decide to sell British Pound futures (62,500 British Pounds per contract) when the spot exchange rate has reached $1.8900 / British Pound. If you include the change in spot price of the British Pound, what amount should you expect to pay in gains or losses on the purchase of the contract?
[A] You should expect a gain of $1,000
[B] You should expect a loss of $1,000
[C] You should expect a gain of $2,000
[D] You should expect a loss of $2,000
[B] You should expect a loss of $1,000
EXPLANATION
Your agreed upon price was: B 1.9060 -
Your selling price at the spot rate was: S 1.8900 +
Leaving you with a loss of: 0.0160 -
Multiply this by the size of a single contract
0.0160 x 62,500 = $1,000
This could also be figured using the tick size of the British Pound which is $0.0002 = $12.50.
0.0160 or 160 / 2 = 80 x 12.50 = $1,000.
A hog feeder places a hedge in May and sells 3 live hog futures @ 50.55 cwt (30,000 pounds per contract). Later the hog feeder removes the hedge and buys 1 live hog futures @ 50.00 and buys 2 live hog futures @ 49.79. Ignoring commissions, the hog feeders total profit or loss is? [A] $2.07 gain [B] $621.00 gain [C] $621.00 loss [D] $62,100 gain
[B] $621.00 gain
EXPLANATION
S 50.55 x 3 = 151.65 + B 50.00 x 1 = 50.00 - B 49.79 x 2 = 99.58 - 2.07 + = 0.0207 x 30,000 = $621.00 + Remember for hogs and cattle when you are going to multiply times the contract value you have to move the decimal to the left two spaces!
Selling hedges are used for which of the following?
[A] To determine a price at which the hedger will buy the physical commodity.
[B] To determine a price at which the hedger will sell the physical commodity.
[C] To determine a price at which the hedger will breakeven on physical commodity.
[D] To determine a price at which the hedger will lose money on the hedge.
[B] To determine a price at which the hedger will sell the physical commodity.
EXPLANATION
Buyers of commodities buy futures to hedge and seller of commodities sell futures to hedge. Therefore a selling hedge would be used to establish a price at which the hedger would sell the commodity.
Your company does business in France and imports products from France with payment made in the Euro, which is the French currency. As an importer you would hedge by selling Euro Futures contracts.
[A] True
[B] False
[B] False
EXPLANATION
If you must make payment in a foreign currency, to hedge, you would buy futures on the foreign currency.
The investor that manages a large portfolio for an individual investor, keeps a percentage of the portfolio in high grade municipal bonds. The demand for these bonds is high and supply is tight. The forecast is for continued gains in the municipal bond values. Soon he will have 2.85 million available to invest in municipals. Which of the following futures position should the investor use to hedge: ($100,000 per contract)
[A] sell 3 muni bond futures to capture expected gain until investment of funds
[B] buy 3 muni bond futures to protect against a decline
[C] buy 29 muni bond futures to capture the expected gains until investment of funds
[D] sell 29 muni bond futures to protect against a decline
[C] buy 29 muni bond futures to capture the expected gains until investment of funds
EXPLANATION
Since he will be a “buyer” of municipal bonds, he would “buy” futures to protect against an increase in cost. ($2,850,000 divided by 100,000 = 28.5 or 29 contracts needed). Ordinarily we would NOT want to be over hedged when we use futures to hedge BUT there is not a choice that let’s us be perfectly hedeged or under hedged so we have to go with Buy 29 futures.
On October 15 May plywood futures on the CBT is 145 per MSF and cash plywood at a particular western location is $151 per MSF. On that day, a plywood dealer in that western location places an order for one box car to be shipped in April at the cash price on the day of delivery. Both the miller and the dealer hedge the forward contract on the CBT. On April 14th when the order is shipped, the May future is $161 per MSF and the cash price is $157 per MSF. What is the result of the dealer’s hedge?
[A] $10 loss per MSF.
[B] $10 gain per MSF.
[C] $6 loss per MSF.
[D] $6 gain per MSF.
[B] $10 gain per MSF
EXPLANATION
Use Setup #3
CASH FUTURES S 151 + B 145 - B 157 - S 161 + - 6 + 16 \+ 10 MSF MSF M = Roman Numeral for 1000, therefore MSF = per thousand square feet
During slower economic growth periods, interest rates are expected to decline and bond prices would be expected to rise thus making the purchase of bond futures more attractive.
[A] True
[B] False
[A] True
EXPLANATION
This statement is true. When the economy is sluggish and there is little or not growth it is expected, generally, that interest rates would decline in order to try to stimulate the economy. As interest rates decline outstanding bond prices would rise and with rising bond prices the purchase of bond futures would be more attractive to investors.
One of your clients is a corporation which is planning to sell corporate bonds in the near future. The offering of bonds will be for $5,000,000 and your company is assured a face value cash price for the bond offering. Even though a price is assured and the transaction is less than a month away, the company treasurer wants to hedge the sale with T-bond futures. He enters an order to sell 50 of the current month, July, T-bond futures contracts when they are at a price of 101-16 ($100,000 per contract). Two weeks later, the bond deal is about to go through and the treasurer offsets the hedge with a T-bond price of 100-02. What will the treasurer, with this hedge included receive after the bonds are sold?
[A] The hedge and bond sale will bring in a total of $4,978,125.00.
[B] The hedge and bond sale will bring in a total of $4,998,562.50.
[C] The hedge and bond sale will bring in a total of $5,001,437.50.
[D] The hedge and bond sale will bring in a total of $5,071,875.00.
[D] The hedge and bond sale will bring in a total of $5,071,875.00.
EXPLANATION
The hedge went as follows:
S 101-16 +
B 100-02 -
This results in a gain per T-bond of 1-14
(14/32 = 14x31.24=437.50), so a total of $1,437.50 per bond x 50 bonds = $71,875.00 in gains on the hedge.
The face value cash price of the bonds is $5,000,000.00.
5,000,000 + 71,875 = $5,071,875.00 taken in including the hedge and sale.
You are a distributor in propane. It is priced to the fourth decimal and quoted in dollars. Each contract contains 1,000 barrels, or 42,000 US gallons. You foresee the demand for propane rising, and thus the price rising in the upcoming months. It is May and you decide to buy a contract to be filled at the end of June for 15,000 barrels, or 630,000 gallons of propane which will be sold at the cash price of the propane at the time of delivery at the end of June. In order to hedge the forward contract, you hedge in futures contracts for propane when the price of propane in the cash market is currently $1.1605 per gallon and the price in the propane futures market is currently $1.2225. The end of June has now arrived and as the refinery loads the order, you lift your hedge with the current cash price at $2.0250, and the current futures price at $2.1055. Since you hedged your position in May, what ended up being your “net” cost of propane per gallon?
[A] Your “net” cost per gallon was $0.9450.
[B] Your “net” cost per gallon was $1.1420.
[C] Your “net” cost per gallon was $1.2225.
[D] Your “net” cost per gallon was $1.6238.
[B] Your “net” cost per gallon was $1.1420
To find the “net” cost per gallon, use the following basic formula:
First find the difference in futures prices: S 2.1055 +
B 1.2225 -
Leaving you with a difference of: 0.8830 +
Subtract this difference from the current cash price at which you purchased the propane:
2.0250 - 0.8830 = $1.1420 which is your “net” price per gallon.
To offset a long futures contract one would:
[A] buy futures verses the sale of the actual commodity.
[B] sell an equal number of futures contracts with the same delivery.
[C] sell futures against the actual purchase of the commodity.
[D] Any of the above.
[B] sell an equal number of futures contracts with the same delivery
EXPLANATION
To offset or close a long position you must sell an equal number of contracts with the same delivery.
You are the treasurer of a US Exporter which regularly does business with Japan. You have contracted out with a Japanese importer and you have agreed to take payment upon delivery in Japanese yen. There is concern over a possible rise in the value of the dollar and a subsequent decrease in the value of the yen prior to delivery of your contract. As a hedge, you sell yen futures at 115.550450 (12,500,000 yen per contract). Later you close the position at 115.540450. What is the result of this hedge per contract?
[A] The exporter has gained $1,250.00.
[B] The exporter has lost $1,250.00.
[C] The exporter has gained $125,000.00.
[D] The exporter has lost $125,000.00.
[C] The exporter has gained $125,000.00.
EXPLANATION
S 115.550450 +
B 115.540450 -
+ 0.01 x 12,500,000 = $125,000.00 in profits.
A German company has contracted to buy the rights to a camera in American dollars. The dollar is expected to advanced against the EURO. To hedge, the investor should sell EURO Futures.
[A] True
[B] False
[A] True
EXPLANATION
Is true because if the dollar is strong, the EURO would be expected to decline, thus selling EURO futures would be best.
A customer decides to sell 10 soybean meal futures contracts (each 100 tons) at $250 per ton. A month later prices have gone up to $275 and the customer offsets his position at 276. round-turn commissions are $30 per contract. The result of this trade was:
[A] $25,700 Loss
[B] $26,300 Loss
[C] $2,630 Loss
[D] $2,570 Loss
[B] $26,300 Loss
EXPLANATION
Use Setup #1
S 250.00+
B 276.00-
-26.00 - x 100 = $2,600 loss
x 10
$26,000 loss
300
$26,300 - Total Loss
One of your clients is a small business. This small business has secured a sizeable $2,000,000 loan for operations activities that will be funded in June of 2008. The pricing for the loan is a floating rate to be paid quarterly through December of 2009. The months of payment are March, June, September, and December. Each month of payment, the loan’s interest rate is set at the 90-day T-bill rate. What investment strategy could this small business use to in-effect, lock in a fixed rate for the entire loan period?
[A] The best strategy to fix this rate of interest would be to sell one June 2008 and buy one December 2009 Eurodollar futures contract.
[B] The best strategy to fix this rate of interest would be to sell short one each of every Eurodollar contract successively from the time of funding through the end of payment of the loan, and include the June 2008 and December 2009 contracts.
[C] The best strategy to fix this rate of interest would be to buy one June 2008 and one December 2009 Eurodollar futures contract.
[D] The best strategy to fix this rate of interest would be to buy one of every Eurodollar contract between and including June 2008 and December 2009 and do so successively.
[B] The best strategy to fix this rate of interest would be to sell short one each of every Eurodollar contract successively from the time of funding through the end of payment of the loan, and include the June 2008 and December 2009 contracts.
EXPLANATION
The small business wants to protect from rising interest rates, they would sell Eurodollar futures since if interest rates rise Eurodollar futures prices would go down and to ensure a fixed rate throughout the entire period, you would have to go short a contract for each period.
One of your customers is a speculator in foreign currencies. She recently took a short position in Swiss francs with 8 Swiss franc futures contracts at a price of 1.2320 (each contract for 125,000 Swiss francs). The contracts are liquidated one week later when the Swiss franc has reached 1.2125 which produced which of the following:
[A] The position produced a gain of $2,437.50.
[B] The position produced a loss of $2,437.50.
[C] The position produced a gain of $19,500.00.
[D] The position produced a loss of $19,500.00.
[C] The position produced a gain of $19,500.00
EXPLANATION
The speculator took a short position. This implies that she sold short then bought to cover the original position. Swiss francs are traded in contracts of 125,000, so $0.0001 = $12.50. So:
S 1.2320 +
B 1.2125 -
0.0195 +
.0195 X 125,000 = $2,437.50
or
which equals 195 x $12.50 = $2,437.50.
There were a total of 8 contracts, so:
8 x $2,437.50 = $19,500.00 in gains.
The IMM yen futures market requires delivery of 12.5 million yen which at this time is equal to about $50,000. A U. S. importer of South Japanese goods feels that the dollar will weaken due to a decline in interest rates. He expects to have payables in yen of about $1,000,000 in the next 3 months. He hedges using 20 yen futures contracts with the yen price at .005075 and the futures at .005128. He later closes the hedge when the yen is at .004737 and the futures are at .004518. Assuming that no hedge occurred what would have been the result of the importers exchange rates?
[A] A gain of $84,500
[B] A loss of $84,500
[C] A gain of $4.225
[D] A loss of $4,225
[B] A loss of $84,500
EXPLANATION
Since this question is about an “importer” he would have been a buyer. If the importer had not hedged, we would only consider the changes in the cash market, therefore:
B- .005075
S+ .004737
-.000338 X 12,500,000 = $4,225.00 loss X 20 contracts = $84,500 Loss
In futures trading, a hedger normally pays more attention to:
[A] the probable direction of futures prices.
[B] the changing relationship between the cash and futures price.
[C] the changing spreads between different futures prices.
[D] the changing levels of volume and open interest.
[B] the changing relationship between the cash and futures price
EXPLANATION
The Basis, which is the difference between cash and futures prices, is the most important factor a hedger considers.
A customer of yours is a speculator who puts on the following trades: Sells May T-bond futures at 104-28 at the open of the position. Buys May T-bond futures at 104-10 at the close of the position. The initial margin required per contract is $1,750. Each T-bond futures contract is for $100,000 per contract. Please give the gain or loss on this trader’s position in dollars and as a percentage of the margin required:
[A] The speculator will have a loss of $562.50 and as a percentage of margin it is 32.14%.
[B] The speculator will have a gain of $562.50 and as a percentage of margin it is 32.14%.
[C] The speculator will have a loss of $657.50 and as a percentage of margin it is 37.57%.
[D] The speculator will have a gain of $657.50 and as a percentage of margin it is 37.57%.
[B] The speculator will have a gain of $562.50 and as a percentage of margin it is 32.14%.
EXPLANATION
The following trades took place:
May S 104-28 +
B 104-10 -
+18/32
This leaves us with 18/32 = .5625 which, since we are talking about bonds, would be multiplied by 1000 to arrive at its cash value:
.5625 x 1000 = $562.50 in profit per contract
562.50 / 1750 = .3214385, or 32.14%
A particular hedge position may not give full protection against an adverse price movement because:
[A] cash and futures prices normally move together.
[B] various futures months do not sell at the same price.
[C] during the time the hedge is operative, the basis may change.
[D] All of the above.
[C] during the time the hedge is operative, the basis may change
EXPLANATION
A “perfect hedge” only occurs when there is no change in the basis, therefore if there were a change in the basis during the life of a hedge, there would not always be full protection.
One of your clients is retiring, and plans to receive the lump sum settlement from his IRA. The lump sum is expected to be transferred to his account in approximately two months. He wishes to invest in some S&P 500 securities, but he sees that the market has recently been rallying, and he is concerned that by the time he receives his money, prices will be higher than he would desire. He intends to invest $1,562,500, so for now, in order to protect against big moves in a rallying market, he decides to hedge with S&P 500 futures ($250 x index), when the value of the S&P 500 is at 1,250. What number of contracts are necessary to completely hedge his planned amount of investment?
[A] 5
[B] 50
[C] 500
[D] 1250
[A] 5
$1,562,500 to invest
Current market level: 1,250
(250 x index)= 1,250 x 250 = 312,500
1,562,500 / 312,500 = 5
An investor is short 3 soybean futures $10.25 3/4, and places a stop order $ 9.75. The order is later filled at $9.75 1/2. Commissions are $25 per contract. The investor’s profit is:
[A] $7,537.50
[B] $7,512.25
[C] $7,511.75
[D] $7,462.50
[D] $7,462.50
EXPLANATION
Use Setup #1
S 10.2575 + B 9.7550 - \+.5025 x 5,000 = $2,512.50 + x 3 7,537.50 + ($25 x 3) - 75.00 $7,462.50 +
A French camera manufacturer entered into an agreement to buy manufacturing rights for a new lens from a United States manufacturer in dollars. In recent weeks the United States dollar has been advancing against the French Franc. To protect itself against changes on the relative value of the French Franc and U.S. dollar the French firm should:
[A] buy French Francs futures.
[B] sell French Francs futures.
[C] buy U.S. dollar futures.
[D] sell U.S. dollar futures.
[B] sell French Francs futures
EXPLANATION
Remember first that here in the U.S. we cannot trade our own currency, therefore, we would never hedge in U.S. Dollars, but also keep in mind that we generally expect foreign currency values to move in the opposite direction of the U.S. Dollar, thus if the U.S. Dollar has been advancing, we would expect the French Franc to decline and should therefore sell French Franc futures.
You are a trader in the agricultural sector of the futures market. You anticipate that soybean prices are on the rise. Prices are currently at $5.68 1/4 per bushel for a January contract (5,000 bushels per contract), and you decide to buy 8 contracts at that price. In January, you cover the contract when the price of the soybeans has appreciated to $5.80 3/4 per bushel. The commissions charges on these contracts is $50 per contract, and the initial margin required was $1,013 per contract. What was your overall profit in this situation, both in dollars, and as a percentage of the margin that you had to deposit?
[A] Your overall profit in this situation was $625, and as a percentage of margin required was 61.70%.
[B] Your overall profit in this situation was $575, and as a percentage of margin required was 56.76%.
[C] Your overall profit in this situation was $5,000, and as a percentage of margin required was 61.70%.
[D] Your overall profit in this situation was $4600, and as a percentage of margin required was 56.76%.
[D] Your overall profit in this situation was $4600, and as a percentage of margin required was 56.76%.
EXPLANATION
They are asking for your overall profit (for all 8 contracts), and overall as a percentage of margin required (which will be the same as per contract).
So: S 5.8075 + (3/4 = .75)
B 5.6825 - (1/4 = .25)
(0.1250+) x 5,000 (bushels per contract) = $625
$625 - 50 (commissions per contract) = $575.00.
$575 / 1013 (margin required per contract) = 0.5676209 or 56.76%
$575 x 8 (# of contracts) = $4600 overall profit.
On October 15 May plywood futures on the CBT is 145 per MSF and cash plywood at a particular western location is $151 per MSF. On that day, a plywood dealer in that western location places an order for one box car to be shipped in April at the cash price on the day of delivery. Both the miller and the dealer hedge the forward contract on the CBT. On April 14th when the order is shipped, the May future is $161 per MSF and the cash price is $157 per MSF. What is the result of the dealer’s hedge?
[A] $10 loss per MSF.
[B] $10 gain per MSF.
[C] $6 loss per MSF.
[D] $6 gain per MSF.
[B] $10 gain per MSF.
EXPLANATION
Use Setup #3
CASH FUTURES S 151 + B 145 - B 157 - S 161 + - 6 + 16 \+ 10 MSF
A speculator is long three wheat contracts @ $2.00 per bushel and deposits the required initial margin of $300. A week later the price of wheat has declined to $1.95 per bushel and the speculator closes his/her position. The speculators account will be:
[A] Credited $250
[B] Credited $750
[C] Debited $250
[D] Debited $750
[D] Debited $750
EXPLANATION
The speculator has suffered a loss of $ .05 per bushel, ($2.00 - $1.95), 5,000 bu. x $.05 = $250 loss per contract times 3 contracts = $750 debited to the customer’s account. Use set up #1.
B- 2.00
S+ 1.95
- .05 X 5,000 bushels = -$250 per contract
X 3 contracts
$750 Total Loss
- 0 Commission
$750 Gain Debited to the account
When considering the basis on a long hedge, if the basis strengthens or narrows this would generate a profit.
[A] True
[B] False
[B] False
EXPLANATION
When establishing a long hedge, the hedger wants the basis to weaken, widen or become more negative.
An investor is short 3 soybean futures @ 11.23. Later the investor liquidates 2 soybean futures @ 10.25 and 1 @ 10.22. Commissions per contract at $30. The investor's profit or loss? [A] $14,850 profit [B] $14,760 profit [C] $14,940 loss [D] $14,850 loss
[B] $14,760 profit
EXPLANATION
S 11.23 x 3 = 33.69 + B 10.25 x 2 = 20.50 - B 10.22 x 1 = 10.22 - 2.97 + x 5,000 = $14,850 + - 90 $14,760 +
Mr. Jones sells soybean oil futures since he is concerned about a price decrease in the price of cotton seed oil. This is an example of:
[A] A bull spread.
[B] A bear spread.
[C] A cross hedge.
[D] A synthetic hedge.
[C] A cross hedge.
EXPLANATION
Mr. Jones creates a Cross Hedge by hedging with soybean oil futures, since cotton seed oil and soybean oil are similar commodities used for the same purposes and because there are no futures traded on cotton seed oil.
A hedger decides to short 2 September Eurodollar contracts at 96.44 (.01 = $25). Later he feels that the Eurodollar has stabilized and covers his futures at 96.56. What is the result of the hedger’s trades?
[A] A loss of 12 basis points or $300.00
[B] A gain of 12 basis points or $300.00
[C] A gain of 12 basis points or $600.00
[D] A loss of 12 basis points or $600.00
[D] A loss of 12 basis points or $600.00
EXPLANATION
Use Setup #1
S 96.44 + B 96.56 - .12 - x 25 = -$300 x 2 -$600 - 0 $600 -
