Question 1

The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is $1619 when the position is closed out, the gain is

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Question 2

Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar.

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Question 3

A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. It hedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaid

Accepted Answer

If interest rates decline, the value of the futures contracts will decrease, resulting in a loss. This loss will more than offset any favorable effects from the prepayment of mortgages, as the hedging strategy was designed to protect against rising rates, not falling rates.

Question 4

Companies with international trade can hedge ____ by ____ currency futures.

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Question 5

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

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Question 6

Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations.

Accepted Answer

Dynamic asset allocation is a strategy where institutional investors make changes to their investment allocations over time in response to changing market conditions and expectations, including shifting between risky and low-risk investments.

Question 7

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

Accepted Answer

Basis risk is the risk that the hedged position is not affected in the same manner as the underlying instrument, leading to an imperfect hedge. Market risk refers to the overall risk of changes in market prices, liquidity risk is the risk of not being able to sell an asset quickly enough without losing value, and credit risk is the risk of counterparty default. None of these fully capture the concept of basis risk.

Question 8

Systemic risk reflects the risk that a particular event could

Accepted Answer

Systemic risk is the risk that an event could have adverse effects on multiple firms, markets, or even the entire system. It is not limited to inadequate management control or market conditions and is not related to the effectiveness of hedging.

Question 9

The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between the futures price when the initial position was created and the futures price at

Accepted Answer

The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between the futures price when the initial position was created and the futures price at the settlement date. The settlement date is the date on which the futures contract is settled, and the final price is determined based on the prevailing market price at that time.

Question 10

If a futures contract is more volatile than the portfolio value, the amount of principal represented by the futures contracts to hedge the portfolio is ____ the market value of the securities to be hedged.

Accepted Answer

If the futures contract is more volatile than the portfolio, a smaller amount of principal in futures contracts is needed to hedge the same market value of securities, as the futures will have larger price movements.

Question 11

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be

Accepted Answer

When numerous institutional investors sell stock index futures to prepare for a market decline, it increases the supply of these futures, leading to a decrease in their price. Therefore, the index futures price would likely be below the prevailing stock prices due to this selling pressure.

Question 12

The prices of stock index futures

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...

Question 13

In cross-hedging, if the futures contract value is ____ volatile than the portfolio value, hedging will require a ____ amount of principal represented by the futures contracts.

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Question 14

Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the default risk. A short position in Treasury bill futures ____ an effective hedge against the default risk.

Accepted Answer

A short position in either Treasury bond futures or Treasury bill futures would not be an effective hedge against default risk because these positions primarily hedge against interest rate risk, not credit or default risk.

Question 15

Which of the following statements is incorrect with respect to cross-hedging?

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The answer of Which of the following statements is incorrect...

Question 16

The risk that the position being hedged by a futures position is not affected in the same manner as the instrument underlying the financial futures contract, is referred to as

Accepted Answer

Basis risk refers to the risk that the basis (difference between the futures price and the underlying asset price) widens or narrows, leading to a mismatch between the hedged position and the underlying instrument. This can occur due to factors specific to the underlying instrument, such as changes in supply and demand or local market conditions, leading to a decoupling of the futures price from the underlying asset price.

Question 17

Municipal Bond Index (MBI) futures

Accepted Answer

Municipal Bond Index (MBI) futures are settled in cash, meaning that there is no physical exchange of bonds. Instead, the futures contract is settled based on the difference between the contract price and the actual market price at the time of expiration. The MBI futures are also based on a specific municipal bond index, not a Treasury bond index or actively traded corporate bonds.

Question 18

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.

Accepted Answer

The financial institution expects the market value of its municipal bonds to decline due to economic conditions, so it could hedge its position by selling futures contracts on a Municipal Bond Index. This way, if the market value of municipal bonds declines, the institution would make a profit from the futures contracts.

Question 19

Trading restrictions imposed on specific stocks or stock indices are referred to as

Accepted Answer

Circuit breakers are mechanisms that temporarily halt trading on a specific stock or stock index when there is a significant decline in price or high volatility. This is done to prevent extreme price movements and to give investors time to reassess their positions. Other choices, such as index busters, index options, and protective covenants, do not accurately describe trading restrictions on specific stocks or stock indices.

Question 20

Financial leverage, when used in association with a futures contract, ____ the positive returns and ____ losses.

Accepted Answer

Financial leverage magnifies both positive returns and losses because it involves using borrowed funds to increase the potential return on investment, which also increases the risk.

Quiz 13: Financial Futures Markets