Quiz 1 - Review Flashcards
The spot price is also called the ________________.
Cash Price
In _____________ market, the spot price exceeds the futures price and the two prices converge over time.
A normal backwardation
Derivative markets are primarily for all of the following except: A. Price Discovery B. Arbitrage C. Hedging D. Speculation
B. Arbitrage
What is the primary difference between forwards and futures?
Futures are marked-to-market
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.
C. They are settled in cash.
An FRA that expires in 180 days and is based on 180-day LIBOR is referred to as a __________________.
6 x 12
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.
B. Short position in a FRA.
A speculator bought 200 T-bond futures contracts. In order to close the position the speculator must _____________________.
sell 200 T-bond futures
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.
C. In forward and futures contracts, money is typically not
exchanged up front.
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?
$6,075
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?
Above $1605.25
$2025 - $1600 = 525 => 525/100 = 5.25
$1600 + 5.25 = $1605.25
If the June Eurodollar futures contract is trading for 96.50, what is the annualized LIBOR rate priced into this contract?
3.50%
100 - 96.50 = 3.50
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.
$806.54
800(1.02)(150/365) = 806.54
All of the following are contingent claims, except:
A. futures B. stock options C. options on futures D. interest rate options
A. futures
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.
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
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.
$102.04
= ((103)(1.06)^(180/360)) - (8/2)
= ((103)(1.06)^.5) - 4
= 102.64
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?
- 9879
(0. 9864/0.9985) = 0.9879
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.
$10,087,500.00
= $10,000,000((0.0350)(90/360)+ 1)
= $10,087,500.00
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.
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
The municipal note futures contract introduced in 2003 most likely failed because __________________________.
The underlying index was confusing.
Deliverability is important in the futures market because ___________________.
it forces efficient pricing relative to the spot asset
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?
$1502.04
= 1500e^((-0.026)(90/365)) e^((0.0315)(90/365))
= 1500e^(-0.0064) e^(0.0078)
= 1502.04
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?
= -11.54
= 790 - ((803.50/(1.02)((60-15)/365)))
= - 11.54
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?
= $ - 18,541.41
= 15,000,000(((0.045 - 0.05)(90/360))/(1+0.045)(90/360))
= - 18,541.41
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 ___________________.
about to converge to the spot price.
