Deck 11: Forwards, Futures, and Swaps

Question 1

What is the "cost of carry" equivalent for exchange rates?

A)The forward rate
B)The interest rate in the host country
C)The interest rate in the foreign country
D)The interest rate difference between the host and foreign countries

Answer 1

The interest rate difference between the host and foreign countries

Question 2

Profit from a short position in a forward is:

A)(X - S_T)
B)[S_T - F] × n
C)(S_T - X)
D)[F - S_T] × n

Answer 2

[F - S_T] × n

Question 3

Assume the spot exchange rate today is C$1.02 per $US, while the three-month forward rate is C$1.06 per $US.What will be the profit (loss)for an investor who takes a US $100,000 short position in the forward contract if the spot rate in three months equals 1.05?

A)C$1,000
B)(C$1,000)
C)C$4,000
D)(C$4,000)

Answer 3

C$1,000

Question 4

Forward contracts:

A)trade in an open market.
B)establish a price paid tomorrow for something today.
C)offer delivery of a commodity by sellers in the future.
D)are traded on OTC markets.

Question 5

Which of the following describes a forward contango?

A)When the forward price is less than the spot price
B)When the forward price is more than the spot price
C)When the investor owns something
D)When the investor owes something

Question 6

Magdalena assumes a US$ 2,000 short position in a 1-year US forward contract
(F = C$1.0312 per US).If the spot rate in one year is C$1.04 per US what will her profit (loss)?

A)(C$8.80)
B)(C$20.00)
C)C$17.64
D)(C$17.64)

Question 7

What condition is necessary to create a synthetic forward contract?

A)A hedging position.
B)Exposure to changes in exchange rates
C)Interest rate parity
D)Speculating in the market

Question 8

Profit from a long position in a forward is:

A)(X - S_T)
B)[S_T - F] × n
C)(S_T - X)
D)[F - S_T] × n

Question 9

Which of the following carries storage costs?

A)Futures on stocks
B)Futures on exchange rates
C)Futures on commodities
D)Futures on interest rates

Question 10

A tailor-made contract with a price that is established today for future delivery is called a ___________.

A)futures contract
B)forward contract
C)spot contract
D)call option

Question 11

The six-month forward rate is C$ 1.00 per US$.Ahmed assumes a 1,000 long position in the forward contract and his profit in six months is C$30.00.What is the spot rate in six months?

A)C$ 1.030 per US$
B)C$ 1.031 per US$
C)C$ 1.029 per US$
D)C$ 0.970 per US$

Question 12

Magdalena assumes a US$ 2,000 short position in a 1-year US forward contract
(F = C$1.0312 per US).If the spot rate in one year is C$1.03 per US, what will her profit (loss)be in each case?

A)C$1.20
B)(C$1.20)
C)(C$2.40)
D)C$2.40

Question 13

Assume perfect foresight.The current spot rate is C$2.037 per British pound.The 3-month forward rate is C$2.0383 per British pound.The spot rate in three months will be C$2.04 per British pound.What position must an investor assume in order to make a profit of $17.00?

A)Pound 13,077 short position
B)Pound 10,000 long position
C)Pound 10,000 short position
D)Pound 13,077 long position

Question 14

When does counterparty risk arise?

A)When the spot price increases.
B)When the investor takes a naked position.
C)When the speculator loses to the counter party.
D)When the counterparty defaults.

Question 15

Marie has done some research and found that the spot rate is C$1.4039 per euro.Her neighbour told her that the three-month forward rate is C$1.44 per euro.If Marie assumes a 1,000 euro long position in the forward contract, what will her profit (loss)be if the spot rate in 3 months is C$1.45 per euro?

A)C$46.10 profit
B)C$10.00 loss
C)C$10.00 profit
D)C$36.10 profit

Question 16

Given the following information:
$\bullet$ he future spot rate C$0.00965 per yen
$\bullet$ the current spot rate C$0.0088 per yen
$\bullet$ the forward rate C$0.009721 per yen.
What is the cost (or proceeds)in Canadian dollars to eliminate foreign exchange exposure for 100,000 yen to be paid to a foreign supplier.

A)Cost C$965.00
B)Cost C$880.00
C)Cost C$972.10
D)Proceeds C$880.00

Question 17

Which of the following is a graph of a short position in a forward contract?

A)I
B)II
C)III
D)IV

Question 18

Xin is selling his transformer over the internet for C$500.An interested buyer says he is willing to pay 360 euro in six months.What position should Xin take to eliminate his foreign exchange exposure?

A)500 long Canadian forward contract
B)500 short Canadian forward contract
C)360 long euro forward contract
D)360 short euro forward contract

Question 19

Forward contracts can be used either to hedge or to speculate.These actions:

A)increase risk in both cases.
B)decrease risk in both cases.
C)spread or minimize risk in both cases.
D)none of the above.

Question 20

Suppose Montreal Import Company has to pay a foreign supplier 400,000 euros in one year and decides to hedge their position by entering into a forward contract.What is the appropriate forward position?

A)400,000 short euro forward contract
B)200,000 euro forward contract
C)400,000 long euro forward contract
D)not enough information provided to identify an answer

Question 21

By definition LIBOR is:

A)the long-term inter-bank option rate
B)the London inter-bank optimal rate
C)the limited inter-bank offer rate
D)the London inter-bank offered rate

Question 22

The following table represents the net set of trades made by a number of investors on a given day.

Given this information, what is the open interest in the market above?

A)6
B)12
C)0
D)more information required

Question 23

Which of the following are classified as 'investment' for the purpose of futures contracts?
I.Silver
II.Wheat
III.Bond

A)I, II
B)II, III
C)I, III
D)III

Question 24

If the bank could borrow at a fixed rate of 10% for 5 years, what is the notional principal of the swap if the interest is a fixed payment of $5 million per year?

A)$90 million
B)$50 million
C)$75 million
D)$80 million

Question 25

Johnson Ltd.enters into a 3-year, $2.0 million plain vanilla interest rate swap and agrees to pay a fixed rate of 4.0% and receive LIBOR.Payments are completed every six-month based on the LIBOR at the beginning of each six month period.LIBOR had the following values for each six-month period:
$\bullet$ Period 1 = 4.50%
$\bullet$ Period 2 = 5.0%
$\bullet$ Period 3 = 4.25%
$\bullet$ Period 4 = 4.0%
$\bullet$ Period 5 = 4.25%
$\bullet$ Period 6 = 4.55%
Based on this information what is the amount of the third payment?

A)Zero
B)$2,500
C)$5,000
D)$10,000.

Question 26

Use the following information to answer this question:
$\bullet$ underlying asset spot $200
$\bullet$ storage cost $20
$\bullet$ financing costs 5% per year.
Calculate the per unit cost of carry.

A)$20
B)0.15
C)0.105
D)0.10

Question 27

A "fixed for floating" interest rate swap is also referred to as:

A)plain vanilla
B)fixed swap
C)currency swap
D)plain swap

Question 28

An investor enters into a long position in 10,000 futures contracts of oil with a $50,000 initial margin and has a maintenance margin that is 75% of this amount.The futures price associated with this contract is $100.Assuming the price of the underlying asset decreases to $98, what is the margin call?

A)$50,000
B)$37,500
C)$7,500
D)No margin required

Question 29

Which of the following are classified as commodities for the purpose of futures contracts?
I.Silver
II.Wheat
III.Weather derivatives

A)I, II
B)II, III
C)I, III
D)I, II, III

Question 30

Characteristics of futures contracts include
I.traded on an exchange
II.settled on maturity date
III.initial margin and maintenance margin required
IV.standardized contracts

A)I, II, III, IV
B)II, III, IV
C)I, III, IV

Question 31

David estimated a six-month forward rate of C$1.01 per US$.The six-month US$ interest rate is currently 4%.If David's estimate is based on Interest Rate Parity, what was the observed current six-month Canadian interest rate, if the spot rate is C$1.02 per US$?

A)5.03%
B)2.03%
C)2.98%
D)2.05%

Question 32

Use the following information to answer this question:
$\bullet$ Current Spot Rate C$1.10 per $US
$\bullet$ Future Spot Rate C$1.1063 per $US
$\bullet$ Forward Rate C$1.1044 per $US
$\bullet$ Exposure $100,000 US.
What is the profit in Canadian dollars of covering the long position?

A)C$110
B)C$116
C)C$114
D)C$190

Question 33

Montreal First Bank is selling forward contracts on the USD/CAD exchange market.What exchange rate would they require for a three-month forward rate, if the spot rate is C$ 1.0200/USD and the interest rates are 3% and 2.5% in Canada and the US respectively?

A)C$1.0249
B)C$1.0213
C)C$1.0187
D)C$1.0200

Question 34

Use the following statements to answer this question:
I.Forward contacts are more affected by credit risk than future contracts.
II.Clearinghouses improve the level of risk associated with futures transactions.

A)I and II are correct
B)I and II are incorrect
C)I is correct and II is incorrect
D)I is incorrect and II is correct

Question 35

Montreal First Bank is selling forward contracts on the CAD/USD market.What exchange rate will they require for a three-month forward rate, if the spot rate is C$0.9800/USD, and the interest rates are 3% and 2.5% in Canada and the US respectively?

A)C$0.9752
B)C$0.9788
C)C$0.9812
D)C$0.9800

Question 36

Interest rate swaps allow one party to exchange:

A)a floating interest rate for a fixed interest rate over the contract term.
B)a fixed interest rate for a lower fixed interest rate over the contract term.
C)a floating interest rate for a lower floating value over the contract term.
D)all of the above.

Question 37

The dollar amount upon which a contract is valued is referred to as the:

A)settlement price
B)initial margin
C)strike price
D)notional amount

Question 38

Wheat is selling at a spot rate $25 per tonne.Storage costs are $2 for the year, and financing costs are 5% per year.What is the forward price for a one-year forward contract for wheat?

A)$25.00
B)$26.25
C)$25.13
D)$28.25

Question 39

Use the following information to answer this question:
$\bullet$ Current 1-year Japanese interest rate 3.0%
$\bullet$ Current 1-year Canadian interest rate 5.0%
$\bullet$ Current spot rate C$0.01 per yen.
Estimate the 1-year forward exchange rate using interest rate parity.

A)C$0.0102 per yen
B)C$0.0098 per yen
C)C$1.0194 per yen
D)C$0.9810 per yen

Question 40

Which of the following refers to a relatively small (in terms of the contract value)deposit made with a clearinghouse?

A)Maintenance margin
B)Margin call
C)Initial margin
D)Daily resettlement

Question 41

Company JH enters a swap to pay a fixed rate of 12% and the counterparty MI will pay a floating rate of LIBOR + 0.3%.What are the net payments (in %)from JH's point of view given that LIBOR for the next five periods equals: 8.0%, 9.0%, 11.0%, 12.0%, 12.3%

Question 42

Use the following statements to answer this question:
I.Credit default swaps (CDS)are a default premium on debt issue.
II.Credit default swaps (CDS)are insurance on the default of issuers of the debt.

A)I is correct, II is incorrect
B)I and II are correct
C)I and II are incorrect
D)I is incorrect, and II is correct

Question 43

Matthew enters into a forward rate agreement (FRA)with the local bank.The current one-year forward rate is 4%.If the yield on a one-year T-Bill in one year is 3.5%, what payment will be made to settle the agreement?

A)Matthew would pay the bank 0.5%.
B)Matthew will use the market rate rather than the FRA rate.
C)The bank would pay Matthew 0.5%.
D)Matthew would not exercise his option.

Question 44

Estimate the year 2 forward rate given:
2 year zero-coupon will earn 3.0%
1 year zero-coupon will earn 2.5%

A)2.0%
B)0.5%
C)3.5%
D)- 3.4%

Question 45

In order to estimate the forward rate for year 1.5 one needs which of the following?
I.1-year zero
II.1.5-year zero
III.2-year zero

A)I, III
B)I, II, III
C)I, II
D)II, III

Question 46

Ronald's company enters a 3-year, $10,000 plain vanilla interest rate swap and agrees to pay LIBOR and receive a fixed rate of 5%.Payments are to be exchanged every six months.Determine the semi-annual payments that Ronald must receive, assuming LIBOR has the following values for each six-month period beginning now: 5%, 5.5%, 6%, 4.75%, 4.25%, 4%.

Question 47

Find the forward price for one forward contract for gold that is selling for $1,449 spot, if the storage cost is $10 for the year and financing cost is 10% per year.

Question 48

What are the differences between forwards and futures contracts?

Question 49

Use the following statements to answer this question:
I.Credit default swaps (CDS)are insurance on the default of issuers of the debt.
II.The CDS market is heavily regulated to limit excessive exposure to risk.

A)I is correct, II is incorrect
B)I and II are correct
C)I and II are incorrect
D)I is incorrect, and II is correct

Question 50

An exchange of an interest rate return for the total return on an equity index, plus or minus a spread is called:

A)a total return swap.
B)an interest rate swap.
C)a credit default swap.
D)a return forward.

Question 51

In order to estimate the forward rate for year 6 one needs which of the following?
I.5-year zero
II.6-year zero
III.4-year zero

A)I, III
B)I, II, III
C)I, II
D)II, III

Question 52

A Credit default swap is classified as:

A)an exchange-traded transaction.
B)an over-the-counter transaction.
C)money market transaction.
D)options exchange market.

Question 53

An investor enters a short position worth $10,000 in futures contracts that require a maintenance margin that is 50% of this amount.The spot price of the underlying asset closes at the following prices for the next five days: $20.50, $20.75, $21.00, $20.75 and $20.00, and the current spot is $21.00.On what days will the investor receive a margin call and why? (Assume no deposits or withdrawals.)

Question 54

Explain how derivatives led to the worst recession in the post second world war era.

Question 55

Nanci enters into a long position in 6,000 futures contracts that require a $6,000 initial margin and has a maintenance margin that is 75% of this amount.The futures price associated with this contract is $10.Assume that the spot price of the underlying asset closes at the following prices for the next five days: $10.50, $10.75, $11.00, $9.75 and $9.25.Estimate the daily profit (loss)for Nanci as well as her equity position.(Assume no cash deposits or withdrawals are made from the account.)

Question 56

Assume company L wants to pay a floating rate and company N wants to pay a fixed rate.Company L is quoted 11% fixed-rate financing or a floating rate of LIBOR + 0.3%.In contrast, company N is quoted a fixed-rate financing at 14% and a floating rate financing at LIBOR + 0.75%.Calculate the net savings (%)to both parties if a swap is entered into between L and N if N pays L 12.0% and L pays N LIBOR.