Deck 23: Futures, Swaps, and Risk Management

Question 1

Consider the following: Assume the current market futures price is 1.66 CAD$/$.You borrow 167,000 CAD$, convert the proceeds to U.S.dollars, and invest them in the U.S.at the risk-free rate.You simultaneously enter a contract to purchase 170,340 CAD$ at the current futures price (maturity of 1 year).What would be your profit (loss)?

A)Profit of 630 CAD$
B)Loss of 2300 CAD$
C)Profit of 2300 CAD$
D)Loss of 630 CAD$

Answer 1

A

Question 2

Which of the following is(are) example(s) of interest rate futures contracts?

A)Corporate bonds
B)Treasury bonds
C)Eurodollars
D)Treasury bonds and Eurodollars

Answer 2

D

Question 3

Foreign exchange futures markets are __________, and the foreign exchange forward markets are __________.

A)informal; formal
B)formal; formal
C)formal; informal
D)informal; informal

Answer 3

C

Question 4

Which one of the following stock index futures has a multiplier of 10 euros times the index?

A)CAC 40
B)Hang Seng
C)Nikkei
D)DAX-30

Question 5

Which one of the following stock index futures has a multiplier of $50 times the index value?

A)Russell 2000
B)S&P 500 (E-mini)
C)Nikkei
D)DAX-30

Question 6

Consider the following: If the futures market price is 1.63 A$/$, how could you arbitrage?

A)Borrow Australian dollars in Canada convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Canadian dollars at the current futures price.
B)Borrow U.S.dollars in the United States, convert them to Canadian dollars, lend the proceeds in Canada, and enter futures positions to sell Australian dollars at the current futures price.
C)Borrow U.S.dollars in the United States, invest them in the U.S., and enter futures positions to purchase Canadian dollars at the current futures price.
D)Borrow Canadian dollars in Canada and invest them there, then convert back to U.S.dollars at the spot price.

Question 7

Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%, respectively.The spot exchange rate between the dollar and the pound is $1.80/BP.What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

A)$1.62/BP
B)$1.72/BP
C)$1.82/BP
D)$1.92/BP

Question 8

Consider the following: What should be the proper futures price for a 1-year contract?

A)1.703 A$/$
B)1.654 A$/$
C)1.638 A$/$
D)1.778 A$/$

Question 9

Which one of the following stock index futures has a multiplier of $10 times the index value?

A)Russell 2000
B)Dow Jones Industrial Average
C)Nikkei
D)DAX-30

Question 10

If a stock index futures contract is overpriced, you would exploit this situation by

A)selling both the stock index futures and the stocks in the index.
B)selling the stock index futures and simultaneously buying the stocks in the index.
C)buying both the stock index futures and the stocks in the index.
D)buying the stock index futures and selling the stocks in the index.

Question 11

Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively.The spot exchange rate between the dollar and the pound is $1.60/BP.What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

A)$1.60/BP
B)$1.70/BP
C)$1.66/BP
D)$1.63/BP
E)$1.57/BP

Question 12

Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index?

A)FTSE 100
B)Hang Seng
C)Nikkei
D)DAX-30

Question 13

Which one of the following stock index futures has a multiplier of $100 times the index value?

A)CAC 40
B)S&P 500 Index
C)Nikkei
D)DAX-30
E)NASDAQ 100

Question 14

Consider the following: If the market futures price is 1.69 A$/$, how could you arbitrage?

A)Borrow Canadian dollars in Canada, convert them to dollars, lend the proceeds in the United States, and enter futures positions to purchase Canadian dollars at the current futures price.
B)Borrow U.S.dollars in the United States, convert them to Canadian dollars, lend the proceeds in Canada, and enter futures positions to sell Canadian dollars at the current futures price.
C)Borrow U.S.dollars in the United States, invest them in the U.S., and enter futures positions to purchase Canadian dollars at the current futures price.
D)Borrow Canadian dollars in Canada and invest them there, then convert back to U.S.dollars at the spot price.

Question 15

If you purchased one S&P 500 Index futures contract at a price of 1,550 and closed your position when the index futures was 1,547, you incurred

A)a loss of $1,500.
B)a gain of $1,500.
C)a loss of $750.
D)a gain of $750.

Question 16

Which one of the following stock index futures has a multiplier of 25 euros times the index?

A)FTSE 100
B)Hang Seng
C)Nikkei
D)DAX-30

Question 17

If you took a short position in two S&P 500 futures contracts at a price of 1,510 and closed the position when the index futures was 1,492, you incurred

A)a gain of $9,000.
B)a loss of $9,000.
C)a loss of $18,000.
D)a gain of $18,000.

Question 18

Which one of the following stock index futures has a multiplier of $50 times the index value?

A)Mini-Russell 2000
B)FTSE 100
C)S&P Mid-Cap
D)DAX-30

Question 19

Which one of the following stock index futures has a multiplier of $50 times the index value?

A)Russell 2000
B)FTSE 100
C)Nikkei
D)NASDAQ 100
E)Mini-Russell 2000 and NASDAQ 100

Question 20

Suppose that the risk-free rates in the United States and in Japan are 5.25% and 4.5%, respectively.The spot exchange rate between the dollar and the yen is $0.008828/yen.What should the futures price of the yen for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs?

A)$0.009999/yen
B)$0.009981/yen
C)$0.008981/yen
D)$0.008891/yen

Question 21

Hedging one commodity by using a futures contract on another commodity is called

A)surrogate hedging.
B)cross hedging.
C)alternative hedging.
D)correlative hedging.

Question 22

Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively.The spot exchange rate between the dollar and the pound is $1.60/BP.What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

A)$1.60/BP
B)$1.70/BP
C)$1.66/BP
D)$1.63/BP

Question 23

Suppose that the risk-free rates in the United States and in Canada are 3% and 5%, respectively.The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$.What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

A)$1.00/C$
B)$1.70/C$
C)$0.88/C$
D)$0.78/C$

Question 24

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. What is the dollar value of your expected loss?

A)$142,900
B)$16,670
C)$85,700
D)$30,000

Question 25

The value of a futures contract for storable commodities can be determined by the _______, and the model __________ consistent with parity relationships.

A)CAPM; will be
B)CAPM; will not be
C)APT; will not be
D)APT; will be
E)CAPM and APT; will be

Question 26

Which two indices had the highest correlation between them during the 2008-2012 period?

A)S&P and DJIA; the correlation was 0.979
B)S&P and Russell 2000; the correlation was 0.948
C)DJIA and Russell 2000; the correlation was 0.908
D)S&P and NASDAQ 100; the correlation was 0.928

Question 27

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio?

A)14.29%
B)16.67%
C)15.43%
D)8.57%

Question 28

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. For a 200-point drop in the S&P 500, by how much does the value of the futures position change?

A)$200,000
B)$50,000
C)$250,000
D)$500,000

Question 29

If you sold an S&P 500 Index futures contract at a price of 950 and closed your position when the index futures was 947, you incurred

A)a loss of $1,500.
B)a gain of $1,500.
C)a loss of $750.
D)a gain of $750.

Question 30

Commodity futures pricing

A)must be related to spot prices.
B)includes cost of carry.
C)converges to spot prices at maturity.
D)All of the options are correct.

Question 31

Trading in stock index futures

A)now exceeds buying and selling of shares in most markets.
B)reduces transactions costs as compared to trading in stocks.
C)increases leverage as compared to trading in stocks.
D)generally results in faster execution than trading in stocks.
E)All of the options are correct.

Question 32

Suppose that the risk-free rates in the United States and in Canada are 5% and 3%, respectively.The spot exchange rate between the dollar and the Canadian dollar (C$) is $0.80/C$.What should the futures price of the C$ for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.

A)$1.00/C$
B)$0.82/C$
C)$0.88/C$
D)$0.78/C$

Question 33

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.

A)sell 1.714
B)buy 1.714
C)sell 4.236
D)buy 4.236

Question 34

A swap

A)obligates two counterparties to exchange cash flows at one or more future dates.
B)allows participants to restructure their balance sheets.
C)allows a firm to convert outstanding fixed rate debt to floating rate debt.
D)obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets.
E)All of the options are correct.

Question 35

In the equation Profits = a + b * ($/₤ exchange rate), b is a measure of

A)the firm's beta when measured in terms of the foreign currency.
B)the ratio of the firm's beta in terms of dollars to the firm's beta in terms of pounds.
C)the sensitivity of profits to the exchange rate.
D)the sensitivity of the exchange rate to profits.

Question 36

Credit risk in the swap market

A)is extensive.
B)is limited to the difference between the values of the fixed rate and floating rate obligations.
C)is equal to the total value of the payments that the floating rate payer was obligated to make.
D)is extensive and equal to the total value of the payments that the floating rate payer was obligated to make.

Question 37

Arbitrage proofs in futures market pricing relationships

A)rely on the CAPM.
B)demonstrate how investors can exploit misalignments.
C)incorporate transactions costs.
D)All of the options are correct.

Question 38

If you took a short position in three S&P 500 futures contracts at a price of 900 and closed the position when the index futures was 885, you incurred

A)a gain of $11,250.
B)a loss of $11,250.
C)a loss of $8,000.
D)a gain of $8,000.

Question 39

Which two indices had the lowest correlation between them during the 2008-2012 period?

A)S&P and DJIA; the correlation was 0.979
B)S&P and NASDAQ 100; the correlation was 0.928
C)DJIA and Russell 2000; the correlation was 0.908
D)S&P and Russell 2000; the correlation was 0.948
E)NASDAQ 100 and DJIA; the correlation was 0.876

Question 40

One reason swaps are desirable is that

A)they are free of credit risk.
B)they have no transactions costs.
C)they increase interest rate volatility.
D)they increase interest rate risk.
E)they offer participants easy ways to restructure their balance sheets.

Question 41

If interest rate parity holds,

A)covered interest arbitrage opportunities will exist.
B)covered interest arbitrage opportunities will not exist.
C)arbitragers will be able to make risk-free profits.
D)covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.

Question 42

A hedge ratio can be computed as

A)profit derived from one futures position for a given change in the exchange rate divided by the change in value of the unprotected position for the same exchange rate.
B)the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate.
C)profit derived from one futures position for a given change in the exchange rate plus the change in value of the unprotected position for the same exchange rate.
D)the change in value of the unprotected position for a given change in the exchange rate plus by the profit derived from one futures position for the same exchange rate.

Question 43

If covered interest arbitrage opportunities exist,

A)interest rate parity does not hold.
B)interest rate parity holds.
C)arbitragers will be able to make risk-free profits.
D)interest rate parity does not hold, and arbitragers will be able to make risk-free profits.

Question 44

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. What is the dollar value of your expected loss?

A)$142,900
B)$65,200
C)$85,700
D)$30,000

Question 45

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. For a 75-point drop in the S&P 500, by how much does the futures position change?

A)$200,000
B)$50,000
C)$250,000
D)$500,000
E)$18,750

Question 46

The most common short-term interest rate used in the swap market is

A)the U.S.discount rate.
B)the U.S.prime rate.
C)the U.S.fed funds rate.
D)LIBOR.

Question 47

If covered interest arbitrage opportunities do not exist,

A)interest rate parity does not hold.
B)interest rate parity holds.
C)arbitragers will be able to make risk-free profits.
D)interest rate parity does not hold, and arbitragers will be able to make risk-free profits.

Question 48

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. If the anticipated market value materializes, what will be your expected loss on the portfolio?

A)7.58%
B)6.52%
C)15.43%
D)8.57%

Question 49

Covered interest arbitrage

A)ensures that currency futures prices are set correctly.
B)ensures that commodity futures prices are set correctly.
C)ensures that interest rate futures prices are set correctly.
D)ensures that currency futures prices and commodity futures prices are set correctly.

Question 50

If interest rate parity does not hold,

A)covered interest arbitrage opportunities will exist.
B)covered interest arbitrage opportunities will not exist.
C)arbitragers will be able to make risk-free profits.
D)covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.

Question 51

You are given the following information about a portfolio you are to manage.For the long term, you are bullish, but you think the market may fall over the next month. How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.

A)Sell 3.477
B)Buy 3.477
C)Sell 4.236
D)Buy 4.236