Deck 5: Financial Forwards and Futures

Question 1

HAW,Inc.plans to pay a $1.10 dividend per share in 3 months and a $1.15 dividend in 6 months.HAW's share price today is $45.60 and the continuously compounded quarterly interest rate is 2.1%.What is the price of a forward contract,which expires immediately after the second dividend?

A) $45.28
B) $45.96
C) $45.60
D) $46.24

Answer 1

A

Question 2

The S&P 500 Index is priced at $950.46.The annualized dividend yield on the index is 1.40%.What is the price of a 6-month prepaid forward contract on the S&P 500 Index?

A) $943.83
B) $950.00
C) $964.26
D) $984.21

Answer 2

A

Question 3

The current currency spot rate is $1.31 per euro.If dollar denominated interest rates are 3.0% and euro denominated interest rates are 4.0%,what is the likely dollar per euro exchange rate for a 2-year forward contract?

A) $1.28
B) $1.30
C) $1.31
D) $1.33

Answer 3

A

Question 4

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position.When the position is closed the futures price is $930.32.If there are no settlement requirements,what is your percentage gain or loss under a 15.0% margin requirement? (Ignore opportunity costs.)

A) 39% gain
B) 39% loss
C) 43% gain
D) 43% loss

Question 5

KMW,Inc.plans to pay a dividend of $0.50 per share both 3 and 6 months from today.KMW's share price today is $36.00 and the continuously compounded quarterly interest rate is 1.5%.What is the price of a 6-month prepaid forward contract,which expires immediately after the second dividend?

A) $35.00
B) $35.02
C) $36.98
D) $37.00

Question 6

Name some advantages that futures contracts have over forward contracts.

Question 7

What is the process involved in creating a cash-and-carry strategy?

Question 8

Consider an investment in five S&P 500 Index futures contracts at a price of $924.80.The initial margin requirement is 15.0% and the maintenance margin is 10.0%.If the continuously compounded interest rate is 5.0% what will the futures price need to be for a margin call to occur 10 days from now? Assume no settlement within the 10 days.

A) $852.64
B) $872.79
C) $898.63
D) $905.25

Question 9

An investor wants to hold 200 euro two years from today.The spot exchange rate is $1.31 per euro.If the euro denominated annual interest rate is 3.0% what is the price of a currency prepaid forward?

A) $200
B) $206
C) $231
D) $247

Question 10

The annualized dividend yield on the S&P 500 Index is 1.40%.The continuously compounded interest rate is 6.4%.If the 9-month forward price is $925.28 and the index is priced at $950.46,what is the profit/loss from a cash-and-carry strategy?

A) $25.18 loss
B) $25.18 gain
C) $61.50 loss
D) $61.50 gain

Question 11

Interest rates on the U.S.dollar are 6.5% and euro rates are 5.5%.The dollar per euro spot rate is 0.950.What is the arbitrage profit on a required 1 million euro payment if the forward rate is 0.980 dollars per euro and the exchange occurs in one year?

A) $10,000
B) $21,000
C) $28,000
D) $34,000

Question 12

Interest rates on the U.S.dollar are 5.4% and euro rates are 4.6%.Given a dollar per euro spot rate of 0.918,what is the 6-month forward rate ($/E)?

A) 0.912
B) 0.917
C) 0.922
D) 0.934

Question 13

The S&P 500 Index is priced at $950.46.The annualized dividend yield on the index is 1.40%.The continuously compounded annual interest rate is 8.40%.What is the price of a forward contract that expires 9 months from today?

A) $937.48
B) $942.66
C) $984.36
D) $1001.69

Question 14

What are some uses for index futures contracts?

Question 15

Explain the impact transaction costs have on the ability to make arbitrage profits in forward and futures markets.

Question 16

Which of the following statements does NOT accurately reflect the relationship between securities and synthetic forward contracts?

A) Forward = stock - zero coupon bond
B) Zero coupon bond = stock - forward
C) Prepaid forward = forward - zero coupon bond
D) Stock = forward + zero coupon bond

Question 17

The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position.When the position is closed the futures price is $930.32.If there are no settlement requirements,what is your dollar gain or loss? (Ignore opportunity costs.)

A) $14,485 loss
B) $14,485 gain
C) $57.94 loss
D) $57.94 gain

Question 18

The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year.The current price of the S&P 500 Index futures contract is 1200.If the mutual fund has a beta of 1.24,how many contracts will be needed to hedge the fund?

A) 1,083
B) 3,033
C) 242,963
D) 541,666

Question 19

The S&P 500 Index price is $925.28 and its annualized dividend yield is 1.40%.LIBOR is 4.2%.How many futures contracts will you need to hedge a $25 million portfolio with a beta of 0.9 for one year?

A) 105
B) 120
C) 80
D) 95

Question 20

Explain the steps necessary to take advantage of an arbitrage opportunity,which may exist between the dollar and yen,when a future yen payment is required.

Question 21

Throughout the chapter the topic of arbitrage is mentioned.Ask the class to explain arbitrage.Follow-up the answers by asking what role arbitrage plays in futures and forward markets.Finish up the Q & A with a group discussion of why arbitrage exists,given the limited opportunity for arbitrage profits.Guide students towards an understanding of the necessity of the arbitrage function,despite the limited opportunity for profit.