Deck 23: Financial Statement Analysis

Question 1

Consider the following: $$\begin{array} { | l | l | } \hline \text { Risk-free rate in the United States } & 0.04 \text { year } \\\hline \text { Risk-free rate in Australia } & 0.03 / \text { year } \\\hline \text { Spot exchange rate } & 1.67 \mathrm { A } \$ /\$ \\\hline\end{array}$$

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

A)Borrow Australian Dollars in Australia, convert them to dollars, lend the proceeds in the United States and enter futures positions to purchase Australian Dollars at the current futures price.
B)Borrow U.S dollars in the United States, convert them to Australian Dollars, lend the proceeds in Australia and enter futures positions to sell Australian Dollars at the current futures price.
C)Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian Dollars at the current futures price.
D)Borrow Australian Dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price.
E)There is no arbitrage opportunity.

Answer 1

Borrow U.S dollars in the United States, convert them to Australian Dollars, lend the proceeds in Australia and enter futures positions to sell Australian Dollars at the current futures price.

Question 2

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

A)CAC 40
B)DJ Euro Stoxx - 50
C)Nikkei
D)DAX-30
E)A and B

Answer 2

E

Question 3

Let R_US be the annual risk free rate in the United States,R_UK be the risk free rate in the United Kingdom,F be the futures price of $/BP for a 1-year contract,and E the spot exchange rate of $/BP.Which one of the following is true?

A)if RUS > RUK, then E > F
B)if RUS < RUK, then E < F
C)if RUS > RUK, then E < F
D)if RUS < RUK, then F = E
E)There is no consistent relationship that can be predicted.

Answer 3

C

Question 4

Consider the following: $$\begin{array} { | l | l | } \hline \text { Risk-free rate in the United States } & 0.04 \text { year } \\\hline \text { Risk-free rate in Australia } & 0.03 / \text { year } \\\hline \text { Spot exchange rate } & 1.67 \mathrm { A } \$ /\$ \\\hline\end{array}$$

-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$/$
E)1.686 A$/$

Question 5

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 the above.

Question 6

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 the above.

Question 7

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 8

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

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

Question 9

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 the above.

Question 10

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

A)FTSE 100
B)DJ Euro Stoxx - 50
C)Nikkei
D)DAX-30
E)A and B

Question 11

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

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

Question 12

Let R_US be the annual risk free rate in the United States,R_J be the risk free rate in Japan,F be the futures price of $/yen for a 1-year contract,and E the spot exchange rate of $/yen.Which one of the following is true?

A)if R_US > R_J, then E < F
B)if R_US < R_J, then E < F
C)if R_US > R_J, then E > F
D)if R_US < R_J, then F = E
E)There is no consistent relationship that can be predicted.

Question 13

Consider the following: $$\begin{array} { | l | l | } \hline \text { Risk-free rate in the United States } & 0.04 \text { year } \\\hline \text { Risk-free rate in Australia } & 0.03 / \text { year } \\\hline \text { Spot exchange rate } & 1.67 \mathrm { A } \$ /\$ \\\hline\end{array}$$

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

A)Borrow Australian Dollars in Australia, convert them to dollars, lend the proceeds in the United States and enter futures positions to purchase Australian Dollars at the current futures price.
B)Borrow U.S.dollars in the United States, convert them to Australian Dollars, lend the proceeds in Australia and enter futures positions to sell Australian Dollars at the current futures price.
C)Borrow U.S.dollars in the United States and invest them in the U.S.and enter futures positions to purchase Australian Dollars at the current futures price.
D)Borrow Australian Dollars in Australia and invest them there, then convert back to U.S.dollars at the spot price.
E)There is no arbitrage opportunity.

Question 14

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 15

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 16

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

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

Question 17

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
E)NASDAQ 100

Question 18

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
E)none of the above

Question 19

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

A)FTSE 100
B)DJ Euro Stoxx - 50
C)Nikkei
D)DAX-30
E)A and B

Question 20

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
E)none of the above

Question 21

Assume the current market futures price is 1.66 A$/$.You borrow 167,000 A$ and 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 A$ at the current futures prices (maturity of 1 year).What would be your profit (loss)?

A)Profit of 630 A$
B)Loss of 2300 A$
C)Profit of 2300 A$
D)Loss of 630 A$
E)None of the above

Question 22

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 the above.

Question 23

How many contracts should you buy or sell to hedge your position?

A)sell 1.714
B)buy 1.714
C)sell 4.236
D)buy 4.236
E)sell 11.235

Question 24

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 25

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

A)S&P and DJIA; the correlation was 0.957
B)S&P and Russell 2000 the correlation was 0.899
C)DJIA and Russell 2000 the correlation was 0.758
D)S&P and NYSE; the correlation was 0.973
E)NYSE and DJIA; the correlation was 0.931

Question 26

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.
E)none of the above.

Question 27

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)A and B.
E)A,B,and C.

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. $$\begin{array} { | l | l | } \hline \text { Portfolio Value } & \$ 1 \text { million } \\\hline \text { Portfolio's Beta } & 0.60 \\\hline \text { Current S\&P500 Value } & 1400 \\\hline \text { Anticipated S\&P500 Value } & 1200 \\\hline\end{array}$$

-For a 200-point drop in the S&P500,by how much does the value of the futures position change?

A)$200,000
B)$50,000
C)$250,000
D)$500,000
E)$100,000

Question 29

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 0.899
C)DJIA and Russell 2000 the correlation was 0.758
D)S&P and NYSE; the correlation was 0.973
E)NYSE and DJIA; the correlation was 0.931

Question 30

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. $$\begin{array} { | l | l | } \hline \text { Portfolio Value } & \$ 1 \text { million } \\\hline \text { Portfolio's Beta } & 0.60 \\\hline \text { Current S\&P500 Value } & 1400 \\\hline \text { Anticipated S\&P500 Value } & 1200 \\\hline\end{array}$$

-What is the dollar value of your expected loss?

A)$142,900
B)$16,670
C)$85,700
D)$30,000
E)$64,200

Question 31

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. $$\begin{array} { | l | l | } \hline \text { Portfolio Value } & \$ 1 \text { million } \\\hline \text { Portfolio's Beta } & 0.60 \\\hline \text { Current S\&P500 Value } & 1400 \\\hline \text { Anticipated S\&P500 Value } & 1200 \\\hline\end{array}$$

-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%
E)6.42%

Question 32

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 above.
E)none of the above.

Question 33

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

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

Question 34

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.
E)the frequency with which the exchange rate changes.

Question 35

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 above.

Question 36

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 37

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 the above

Question 38

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.
E)proxy hedging.

Question 39

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 the above.

Question 40

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 above are true.
E)none of the above are true.

Question 41

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)A and B
E)none of the above

Question 42

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)A and C
E)B and C

Question 43

For a 75-point drop in the S&P500,by how much does the futures position change?

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

Question 44

Suppose that the risk-free rates in the United States and in the 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)$0.78/ C$
E)$1.22/ C$

Question 45

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
E)$1.57/BP

Question 46

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
E)none of the above

Question 47

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)A and C
E)B and C

Question 48

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)A and C
E)B and C

Question 49

What is the dollar value of your expected loss?

A)$142,900
B)$65,200
C)$85,700
D)$30,000
E)$64,200

Question 50

Why are commodity futures prices different from other futures prices? Explain the difference and give an example of a commodity and the factors involved.

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. $$\begin{array} { | l | l | } \hline \text { Portfolio Value } & \$ 1 \text { million } \\\hline \text { Portfolio's Beta } & 0.86 \\\hline \text { Current S\&P500 Value } & 990 \\\hline \text { Anticipated S\&P500 Value } & 915 \\\hline\end{array}$$

-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%
E)6.42%

Question 52

Suppose that the risk-free rates in the United States and in the 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)$0.78/ C$
E)$1.22/ C$

Question 53

Suppose that the risk-free rate is 4% and the market risk premium is 6%.You are interested in a cocoa futures contract.The beta of cocoa is -0.291.
- What is the required annual rate of return on the cocoa contract?
- You plan to hold the contract for three months,then take delivery of the cocoa.At that time you expect the spot price of cocoa to be $900 per ton.What is the present value of this three-month deferred claim?What would the proper price be for this contract?

Question 54

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)A and C
E)B and C

Question 55

How many contracts should you buy or sell to hedge your position?

A)sell 3.477
B)buy 3.477
C)sell 4.236
D)buy 4.236
E)sell 11.235

Question 56

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
E)none of the above

Question 57

E-Minis typically have a value of ____________ percent of the standard contract and exist for ____________.

A)50; individual stocks and commodities
B)50; stock indexes and foreign currencies
C)40; stock indexes and commodities
D)20; individual stocks and commodities
E)20; stock indexes and foreign currencies

Question 58

Explain how a firm that has issued $1 million of long-term bonds with a fixed 6% interest rate can convert its fixed-rate debt into floating-rate debt.Give two numerical examples that show the possible outcomes,one favorable and one unfavorable.