Quiz 1 - Review Flashcards

0
Q

The spot price is also called the ________________.

A

Cash Price

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1
Q

In _____________ market, the spot price exceeds the futures price and the two prices converge over time.

A

A normal backwardation

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2
Q
Derivative markets are primarily for all of the following except:
 A.  Price Discovery
 B.  Arbitrage
 C.  Hedging
 D.  Speculation
A

B. Arbitrage

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3
Q

What is the primary difference between forwards and futures?

A

Futures are marked-to-market

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4
Q
A characteristic of Eurodollar features is:
  A.  They require delivery
  B.  They pay coupons monthly.
  C.  They are settled in cash.
  D.  They have a beta of zero.
A

C. They are settled in cash.

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5
Q

An FRA that expires in 180 days and is based on 180-day LIBOR is referred to as a __________________.

A

6 x 12

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6
Q

A treasurer expects short-term interest rates to fall. What position should be taken to protect against this?

A. Long position in a FRA.
B. Short position in a FRA.
C. Short position in a T-bond futures contract.
D. Short position in a T-note futures contract.

A

B. Short position in a FRA.

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7
Q

A speculator bought 200 T-bond futures contracts. In order to close the position the speculator must _____________________.

A

sell 200 T-bond futures

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8
Q

Which of the following is true?

A. In a futures contract, money is exchanged up front.
B. In a forward contract, money is exchanged up front.
C. In forward and futures contracts, money is typically not
exchanged up-front.
D. In forward and futures contracts, money is always exchanged
up-front.

A

C. In forward and futures contracts, money is typically not
exchanged up front.

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9
Q

Gold futures contracts have an initial margin requirement of $2,025/contract and a maintenance margin of $1,500/contract for speculators. If a speculator sells 3 contracts, what is the initial margin that must be deposited in an account?

A

$6,075

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10
Q

Gold futures contracts have an initial margin requirement of $2,025/contract and a maintenance margin of $1,500/contract for speculators. Assume each contract is for 100 troy ounces. If the gold futures price was $1600 when the investor bought the 5 contracts, what futures price will first trigger a margin call?

A

Above $1605.25

$2025 - $1600 = 525 => 525/100 = 5.25
$1600 + 5.25 = $1605.25

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11
Q

If the June Eurodollar futures contract is trading for 96.50, what is the annualized LIBOR rate priced into this contract?

A

3.50%

100 - 96.50 = 3.50

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12
Q

You own a security worth $800. There are no coupons or dividends. You enter into a forward contract to sell the security in 150 days. The risk-free rate is 2%. What is the forward price? Assume a 365-day year.

A

$806.54

800(1.02)(150/365) = 806.54

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13
Q

All of the following are contingent claims, except:

A.  futures
B.  stock options
C.  options on futures
D.  interest rate options
A

A. futures

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14
Q

A U.S company transacts in London and expects to receive a payment in pounds in the next three months and wants to protect against a decline in the value of the pound. The U.S. risk-free rate is 4%. The British risk-free rate is 3%. If the current spot rate is $0.48, what would the price of a 180-day forward contract be for the U.S company? Assume a 360-day basis.

A

0.4823

F(0,T) = ((So/(1+r^f)^T))(1+r)^T
F(0,T) = ((0.48/1.03)^.5)(1.04)^.5
= (0.48/1.0149)(1.0198)
= 0.4823

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15
Q

A $100 face value bond is currently selling for $103.00. The underlying bond matures in exactly 10 years has an annual coupon rate of 8% (paid semiannually). If the risk-free rate is 6%, what is the price of a futures contract that matures in 6 months? Assume a 360-day year.

A

$102.04

= ((103)(1.06)^(180/360)) - (8/2)
= ((103)(1.06)^.5) - 4
= 102.64

16
Q

The price of a 30-day T-Bill is 0.9985 and the price of a 120-day T-Bill is 0.9864. What is the price of a T-Bill futures contract that expires in 30 days?

A
  1. 9879

(0. 9864/0.9985) = 0.9879

17
Q

You need to borrow $10 million for 90-days in the LIBOR market 90-day LIBOR is 3.50%. How much will you owe in 90 days? Assume a 360-day year.

A

$10,087,500.00

= $10,000,000((0.0350)(90/360)+ 1)
= $10,087,500.00

18
Q

A stock index is currently at 2,230.50. A futures contract on the index expires in 90 days and the risk free rate is 3%. The future value of dividends over the life of the contract is 6.35. What is the futures price? Assume a 365-day year.

A

2,240.47

fo = So (1+r)^T - FV (D, 0, T)
fo(0.2466) = 2,230.50((1.03)^0.2466) - 6.35
= 2,240.47

19
Q

The municipal note futures contract introduced in 2003 most likely failed because __________________________.

A

The underlying index was confusing.

20
Q

Deliverability is important in the futures market because ___________________.

A

it forces efficient pricing relative to the spot asset

21
Q

The S&P 500 index is currently at $1500. The continuously compounded dividend yield and the risk-free rates are 2.60% and 3.15% respectively. What is the price of a 90-day forward on the index assuming a 365-day year?

A

$1502.04

= 1500e^((-0.026)(90/365)) e^((0.0315)(90/365))
= 1500e^(-0.0064) e^(0.0078)
= 1502.04

22
Q

You own a security worth $800. There are no coupons or dividends. You enter into a forward contract to sell the security in 60 days at a price of $803.50. After 15 days the security sells for $790 and the risk-free rate is 2%. What is the value of the forward position assuming a 365 day year?

A

= -11.54

= 790 - ((803.50/(1.02)((60-15)/365)))
= - 11.54

23
Q

A treasurer went short a 3x6 FRA with a notional amount of $15,000,000 at a quoted rate of 5%. At expiration LIBOR is 4.5%. What is the gain or loss to the company at expiration?

A

= $ - 18,541.41

= 15,000,000(((0.045 - 0.05)(90/360))/(1+0.045)(90/360))
= - 18,541.41

24
Q

Assume that an equity futures contract has a dividend yield of 2.75% and the current risk-free rate is 1%. If the futures contract is properly priced, the market is ___________________.

A

about to converge to the spot price.