Deck 19: Globalization and International Investing

Question 1

Futures contracts __________ traded on an organized exchange,and forward contracts __________ traded on an organized exchange.

A) are not;are
B) are;are
C) are not;are not
D) are;are not
E) are;may or may not be

Answer 1

D

Question 2

The open interest on silver futures at a particular time is the

A) number of silver futures contracts traded during the day.
B) number of outstanding silver futures contracts for delivery within the next month.
C) number of silver futures contracts traded the previous day.
D) number of all silver futures outstanding contracts.
E) none of these.

Answer 2

D

Question 3

To exploit an expected increase in interest rates,an investor would most likely

A) sell Treasury bond futures.
B) take a long position in wheat futures.
C) buy S&P 500 index futures.
D) take a long position in Treasury bond futures.
E) none of these.

Answer 3

A

Question 4

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

A) specified by the buyers and sellers.
B) specified only by the buyers.
C) specified by the futures exchanges.
D) specified by brokers and dealers.
E) none of these.

Question 5

To hedge a long position in Treasury bonds,an investor most likely would

A) buy interest rate futures.
B) sell S&P futures.
C) sell interest rate futures.
D) buy Treasury bonds in the spot market.
E) none of these.

Question 6

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

A) long;increase
B) long;decrease
C) short;increase
D) long;stay the same
E) short;stay the same

Question 7

A short hedge is

A) a short position in the spot market and a simultaneous short position in the futures market.
B) a long position in the spot market and a simultaneous short position in the futures market.
C) a long position in the futures market and a simultaneous long position in the spot market.
D) a short position in the spot market and a simultaneous long position in the futures market.
E) none of these.

Question 8

Which one of the following statements is true?

A) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
B) The maintenance margin determines the value of the margin account below which the holder of a futures contract receives a margin call.
C) A margin deposit can only be met with cash.
D) All futures contracts require the same margin deposit.
E) The maintenance margin is set by the producer of the underlying asset.

Question 9

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures.

A) long;short
B) long;long
C) short;short
D) short;long
E) margined;long

Question 10

You hold one long corn futures contract that expires in April.To close your position in corn futures before the delivery date you must

A) buy one May corn futures contract.
B) buy two April corn futures contract.
C) sell one April corn futures contract.
D) sell one May corn futures contract.
E) none of these.

Question 11

In a futures contract the futures price is

A) determined by the buyer and the seller when the delivery of the commodity takes place.
B) determined by the futures exchange.
C) determined by the buyer and the seller when they initiate the contract.
D) determined independently by the provider of the underlying asset.
E) none of these.

Question 12

A long hedge is

A) a long position in the spot market and a simultaneous short position in the futures market.
B) a long position in the spot market and a simultaneous long position in the futures market.
C) a short position in the spot market and a simultaneous short position in the futures market.
D) a short position in the spot market with a simultaneous long position in the futures market.
E) none of these.

Question 13

Investors who take long positions in futures agree to __________ of the commodity on the delivery date,and those who take the short positions agree to __________ of the commodity.

A) make delivery;take delivery
B) take delivery;make delivery
C) take delivery;take delivery
D) make delivery;pay the price
E) negotiate the price;pay the price

Question 14

Financial futures contracts are actively traded on the following indices except

A) the S&P 500 Index.
B) the New York Stock Exchange Index.
C) the S&P/TSE 60.
D) the Dow Jones Industrial Index.
E) all of these indices have actively traded futures contracts.

Question 15

Which of the following statements is most false?

A) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
B) If the value of the margin account falls below the maintenance margin requirement,the holder of the contract will receive a margin call.
C) A margin deposit can only be met with cash.
D) All futures contracts require the same margin deposit.
E) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract,a margin deposit can only be met with cash,and all futures contracts require the same margin deposit

Question 16

The terms of futures contracts __________ standardized,and the terms of forward contracts __________ standardized.

A) are;are
B) are not;are
C) are;are not
D) are not;are not
E) are;may or may not be

Question 17

A futures contract

A) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract.
B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.
C) gives the buyer the right,but not the obligation,to buy an asset some time in the future.
D) is a contract to be signed in the future by the buyer and the seller of the commodity.
E) none of these.

Question 18

Which one of the following statements regarding delivery is true?

A) Most futures contracts result in actual delivery.
B) Only one to three percent of futures contracts result in actual delivery.
C) Only fifteen percent of futures contracts result in actual delivery.
D) Approximately fifty percent of futures contracts result in actual delivery.
E) futures contracts never result in actual delivery.

Question 19

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

A) long;decrease
B) short;decrease
C) short;stay the same
D) short;increase
E) long;stay the same

Question 20

An investor with a long position in Canada bond futures will profit if

A) interest rates decline.
B) interest rate increase.
C) the prices of US bonds increase.
D) the prices of T-bills increase.
E) none of these.

Question 21

On January 1,you sold one April S&P/TSX 60 index futures contract at a futures price of 840.If on February 1 the April futures price is 850,what would be your profit (loss)if you closed your position (without considering transactions costs)?

A) $2,000 loss
B) $10 loss
C) $2,000 profit
D) $10 profit
E) none of these

Question 22

You purchased one silver future contract at $3 per ounce.What would be your profit (loss)at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

A) $5.50 profit
B) $5,500 profit
C) $5.50 loss
D) $5,500 loss
E) none of these.

Question 23

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 index.
B) selling short all the stocks in the S&P 500 and buying S&P Index futures.
C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 index.
D) selling S&P 500 Index futures and buying all the stocks in the S&P 500.
E) none of these.

Question 24

You purchased a Treasury bond futures contract on the Chicago Board of Trade (CBOT)at a futures price of 96.3125.What would your profit (loss)be at maturity if the futures price increased by 2 points?

A) $2,000 loss
B) $20 loss
C) $20 profit
D) $2,000 profit
E) None of these.

Question 25

The establishment of a futures market in a commodity should not have a major impact on spot prices because

A) the futures market is small relative to the spot market.
B) the futures market is illiquid.
C) futures are a zero-sum game
D) the futures market is large relative to the spot market.
E) most futures contracts do not take delivery.

Question 26

An increase in the basis will __________ a long hedger and __________ a short hedger.

A) hurt;benefit
B) hurt;hurt
C) benefit;hurt
D) benefit;benefit
E) benefit;have no effect upon

Question 27

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract,the party that is hurt by the failure is

A) the offsetting short trader.
B) the corn farmer.
C) the clearinghouse.
D) the broker.
E) the commodities dealer.

Question 28

Given a stock index with a value of $1,500,an anticipated dividend of $62 and a risk-free rate of 5.75%,what should be the value of one futures contract on the index?

A) $1343.40
B) $62.00
C) $1418.44
D) $1524.25
E) None of these is correct

Question 29

Which one of the following statements regarding "basis" is not true?

A) the basis is the difference between the futures price and the spot price.
B) the basis risk is borne by the hedger.
C) a short hedger suffers losses when the basis decreases.
D) the basis increases when the futures price increases by more than the spot price.
E) none of these.

Question 30

The expectations hypothesis of futures pricing

A) is the simplest theory of futures pricing.
B) states that the futures price equals the expected value of the future spot price of the asset.
C) is not a zero sum game.
D) a and b.
E) a and c.

Question 31

On April 1,you bought one S&P 500 index futures contract at a futures price of 950.If on June 15^th the futures price were 1012,what would be your profit (loss)if you closed your position (without considering transactions costs)?

A) $1,550 loss
B) $15,550 loss
C) $15,550 profit
D) $1,550 profit
E) None of these is correct

Question 32

The most recently established category of futures contracts is

A) agricultural commodities.
B) metals and minerals.
C) foreign currencies.
D) financial futures.
E) both b and c.

Question 33

Open interest includes

A) Only contracts with a specified delivery date.
B) the sum of short and long positions.
C) the sum of short,long and clearinghouse positions.
D) the sum of long or short positions and clearinghouse positions.
E) only long or short positions but not both.

Question 34

You purchased one corn future contract at $2.29 per bushel.What would be your profit (loss)at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

A) $950 profit
B) $95 profit
C) $950 loss
D) $95 loss
E) None of these is correct.

Question 35

The process of marking-to-market

A) posts gains or losses to each account daily.
B) may result in margin calls.
C) impacts only long positions.
D) all of these are true.
E) both a and b are true.

Question 36

Normal backwardation

A) maintains that for most commodities,there are natural hedgers who desire to shed risk.
B) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
C) assumes that risk premiums in the futures markets are based on systematic risk.
D) a and b.
E) b and c.

Question 37

On January 1,the listed spot and futures prices of a Treasury bond were 93 8/32 and 93 13/32.You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract.One month later,the listed spot price and futures prices were 94 and 94.09,respectively.If you were to liquidate your position,your profits would be

A) $500 loss.
B) $500 profit.
C) $50 loss.
D) $5,000 loss.
E) none of these.

Question 38

You sold one soybean future contract at $5.13 per bushel.What would be your profit (loss)at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 ounces and there are no transactions costs.

A) $65 profit
B) $650 profit
C) $650 loss
D) $65 loss
E) None of these is correct.

Question 39

Delivery of stock index futures

A) is never made.
B) is made by a cash settlement based on the index value.
C) requires delivery of 1 share of each stock in the index.
D) is made by delivering 100 shares of each stock in the index.
E) is made by delivering a value-weighted basket of stocks.

Question 40

Contango

A) holds that the natural hedgers are the purchasers of a commodity,not the suppliers.
B) is a hypothesis polar to backwardation.
C) holds that F_O must be less than (P_T).
D) a and c.
E) a and b.

Question 41

Consider the following: $$\begin{array}{l}\begin{array} { l l r } \text {Risk-free rate in Canada }&0.04 \text { year } \\\text {Risk-free rate in Switzerland }&0.03 / \text { year } \\\text {Spot exchange rate }&1.67 \mathrm{SF} / \$\end{array}\end{array}$$
If the futures market price is 1.63 SF/$,how could you arbitrage?

A) Borrow Swiss Franks in Switzerland,convert them to dollars,lend the proceeds in Canada and enter futures positions to purchase Swiss Franks at the current futures price.
B) Borrow Canadian dollars in Canada,convert them to Swiss Franks,lend the proceeds in Switzerland and enter futures positions to sell Swiss Franks at the current futures price.
C) Borrow Canadian dollars in Canada and invest them in Canada and enter futures positions to purchase Swiss Franks at the current futures price.
D) Borrow Swiss Franks in Switzerland and invest them there,then convert back to Canadian dollars at the spot price.
E) There is no arbitrage opportunity.

Question 42

Expiration-day volatility has been explained by

A) program trading to exploit arbitrage opportunities.
B) transactions costs.
C) lags in execution of arbitrage strategies.
D) a and b.
E) b and c.

Question 43

Consider the following: $$\begin{array}{l}\begin{array} { l l r } \text {Risk-free rate in Canada }&0.04 \text { year } \\\text {Risk-free rate in Switzerland }&0.03 / \text { year } \\\text {Spot exchange rate }&1.67 \mathrm{SF} / \$\end{array}\end{array}$$
What should be the proper futures price for a 1-year contract?

A) 1.703 SF/$
B) 1.654 SF/$
C) 1.638 SF/$
D) 1.778 SF/$
E) 1.686 SF/$

Question 44

Which of the following are examples of interest rate futures contracts?

A) corporate bonds.
B) Treasury bonds.
C) Eurodollars.
D) b and c
E) a and b

Question 45

Given a stock index with a value of $1,000,an anticipated dividend of $30 and a risk-free rate of 6%,what should be the value of one futures contract on the index?

A) $943.40
B) $970.00
C) $913.40
D) $915.09
E) $1,000.00

Question 46

Consider the following: $$\begin{array}{l}\begin{array} { l l r } \text {Risk-free rate in Canada }&0.04 \text { year } \\\text {Risk-free rate in Switzerland }&0.03 / \text { year } \\\text {Spot exchange rate }&1.67 \mathrm{SF} / \$\end{array}\end{array}$$
If the market futures price is 1.69 SF/$,how could you arbitrage?

A) Borrow Swiss Franks in Switzerland,convert them to dollars,lend the proceeds in Canada and enter futures positions to purchase Swiss Franks at the current futures price.
B) Borrow Canadian dollars in Canada,convert them to Swiss Franks,lend the proceeds in Switzerland and enter futures positions to sell Swiss Franks at the current futures price.
C) Borrow Canadian dollars in Canada and invest them in Canada and enter futures positions to purchase Swiss Franks at the current futures price.
D) Borrow Swiss Franks in Switzerland and invest them there,then convert back to Canadian dollars at the spot price.
E) There is no arbitrage opportunity.

Question 47

Foreign Exchange Futures markets are __________ and the Foreign Exchange Forward markets are _________.

A) informal;formal
B) formal;formal
C) formal;informal
D) informal;informal
E) organized;unorganized

Question 48

Which of the following items is specified in a futures contract?
I)the contract size
II)the maximum acceptable price range during the life of the contract
III)the acceptable grade of the commodity on which the contract is held
IV)the market price at expiration
V)the settlement price

A) I,II,and IV
B) I,III,and V
C) I and V
D) I,IV,and V
E) I,II,III,IV,and V

Question 49

Which one of the following stock index futures has a multiplier of 250?

A) Russell 2000
B) S&P 500 Index
C) Nikkei
D) DAX-30
E) Nasdaq 100

Question 50

Consider the following: $$\begin{array}{l}\begin{array} { l l r } \text {Risk-free rate in Canada }&0.04 \text { year } \\\text {Risk-free rate in Switzerland }&0.03 / \text { year } \\\text {Spot exchange rate }&1.67 \mathrm{SF} / \$\end{array}\end{array}$$
Assume the current market futures price is 1.66 SF/$.You borrow 167,000 SF and convert the proceeds to Canadian dollars and invest them in Canada at the risk-free rate.You simultaneously enter a contract to purchase 170,340 SF at the current futures prices (maturity of 1 year).What would be your profit (loss)?

A) Profit of 630 SF
B) Loss of 2300 SF
C) Profit of 2300 SF
D) Loss of 630 SF
E) None of these

Question 51

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.
E) None of these.

Question 52

The "Triple Witching Hour" is a term used to refer to the simultaneous expiration of:

A) S&P 100 stock index options and the Major Market Index futures and option contracts.
B) S&P 500 futures,S&P index options,and options on individual stocks.
C) S&P 500 futures,options on futures and options on dividend stocks.
D) S&P 100 stock index options,options of futures and options on individual stocks.
E) S&P 500 futures,DJIA futures and individual stock options.

Question 53

Speculators may use futures markets rather than spot markets because

A) transactions costs are lower in futures markets.
B) futures markets provide leverage.
C) spot markets are less efficient.
D) futures markets are less efficient.
E) both a and b are true.

Question 54

You took a short position in two S&P 500 futures contracts at a price of 910 and closed the position when the index futures was 892,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.
E) None of these.

Question 55

Given a stock index with a value of $1100,an anticipated dividend of $27 and a risk-free rate of 3%,that should be the value of one futures contract on the index?

A) $943.40
B) $970.00
C) $913.40
D) $1106.00
E) $1000.00

Question 56

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 57

You purchased one 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.
E) None of these.

Question 58

You would like to take a position in the S&P500 stock index,but have decided to use market-index futures contracts and T-bills rather than actually purchasing the index.Your strategy will duplicate the payoff you would receive if you held the index and your goal is to time the market.If you want to minimize transactions costs and are bullish you should

A) buy and hold T-bills and shift in and out of futures contracts as you expect the market to turn up or down.
B) sell futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down.
C) buy futures contracts and T-bills and shift back and forth between them as you expect the market to turn up or down.
D) buy and hold futures contracts and shift in and out of T-bills as you expect the market to turn up or down.
E) sell futures contracts and buy T-bills and shift back and forth between them as you expect the market to turn up or down.

Question 59

Futures contracts are regulated by

A) the Commodity Futures Trading Corporation.
B) the Chicago Board of Trade.
C) the Chicago Mercantile Exchange.
D) the Federal Reserve.
E) the Securities and Exchange Commission.

Question 60

Taxation of futures trading gains and losses

A) is based on cumulative year-end profits or losses.
B) occurs based on the date contracts are sold or closed.
C) can be timed to offset stock portfolio gains and losses.
D) is based on the contract holding period.
E) none of these.

Question 61

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 these are true.
E) none of these are true.

Question 62

An interest rate floor

A) pays the holder in any period that the reference interest rate falls below some limit.
B) Is analogous to a sequence of options with the same strike and different maturities.
C) is part of a collar.
D) both a and b are true.
E) all of these.

Question 63

Who guarantees that a futures contract will be fulfilled?

A) the buyer
B) the seller
C) the broker
D) the clearinghouse
E) nobody

Question 64

Modest and Sundaresan (1983)investigated futures prices and found

A) deviations from theoretical prices did not occur.
B) deviations from theoretical prices were always less than transactions costs.
C) deviations from theoretical prices were large and potentially profitable.
D) deviations from theoretical prices were occasionally larger than transactions costs.
E) none of these.

Question 65

Which of the following is true about profits from futures contracts?

A) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
B) It is possible for both the holder of the long position and the holder of the short position to earn a profit.
C) The clearinghouse makes most of the profit.
D) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.
E) Holders of short positions can recognize profits by making delivery early.

Question 66

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 these.
E) none of these.

Question 67

A swap

A) obligates two counterparties to exchange cash flows at one or more future dates.
B) allow participants to restructure their balance sheets.
C) allows a firm to convert outstanding fixed rate debt to floating rate debt.
D) a and b.
E) a,b,and c.

Question 68

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 69

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) a and d

Question 70

A collar

A) combines interest rate caps and floors.
B) entails the purchase of a cap with one limit rate and the sale of a floor with a lower limit rate.
C) entails the sale of a cap with one limit rate and the purchase of a floor with a higher limit rate.
D) a and b.
E) a and c.

Question 71

You hold a $50 million portfolio of par value bonds with a coupon rate of 10 percent paid annually and 15 years to maturity.How many T-bond futures contracts do you need to hedge the portfolio against an unanticipated change in the interest rate of 0.18%? Assume the market interest rate is 10 percent and that T-bond futures contracts call for delivery of an 8 percent coupon,paid annually 20-year _______ maturity T-bond.

A) 398 contracts long
B) 524 contracts short
C) 1048 contracts short
D) 398 contracts short
E) none of these

Question 72

You sold 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.
E) None of these is correct.

Question 73

The spot rate for the British pound is $2.00 and the one-year forward rate is $2.039.The one-year Canadian interest rate is 4%.The one-year interest rate in the UK is _____.

A) 3%
B) 4.5%
C) 2.5%
D) 2%
E) 1.5%

Question 74

Stoll and Whaley (1987,1991)concluded that expiration-day volatility was a result of program trades because

A) volume in program trading has increased in recent years.
B) the implementation of the SuperDot system made program trading simpler.
C) large price swings tended to be reversed on the day following contract expiration.
D) all of these are true.
E) none of these are true.

Question 75

Which two indices had the lowest correlation between them during the 2001-2006 period?

A) S&P and DJIA;the correlation was 0.957
B) S&P and Nasdaq;the correlation was 0.630
C) NYSE and Nasdaq;the correlation was 0.944
D) Russell 2000 and DJIA;the correlation was 0.758
E) NYSE and DJIA;the correlation was 0.931

Question 76

Some of the newer futures contracts include
I)fashion futures.
II)weather futures.
III)electricity futures.
IV)entertainment futures.

A) I and II
B) II and III
C) III and IV
D) I,II,and III
E) I,III,and IV

Question 77

An interest rate cap is

A) an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate exceeds a specified limit.
B) an agreement in which the buyer makes a payment today in exchange for possible future payments if a reference interest rate falls below a specified limit.
C) an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate falls below a specified limit.
D) an agreement in which the CFTC commits to the buyer that it will make up any marginal payments due if a reference interest rate exceeds a specified limit.
E) The maximum allowable rate that can be earned on a swap agreement.

Question 78

With regard to futures contracts,what does the word "margin" mean?

A) It is the amount of the money borrowed from the broker when you buy the contract.
B) It is the maximum percentage that the price of the contract can change before it is marked to market.
C) It is the maximum percentage that the price of the underlying asset can change before it is marked to market.
D) It is a good-faith deposit made at the time of the contract's purchase or sale.
E) It is the amount by which the contract is marked to market.

Question 79

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 these.

Question 80

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) a and c.
E) none of these.