Futures Swaps and Risk Management Ch.23 Exam Prep

Student name:__________

MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.
1) Which one of the following stock index futures has a multiplier of $50 times the index value?

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

2) 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

3) 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) Mini-Russell 2000 and NASDAQ 100

4) Which one of the following stock index futures has a multiplier of $50 times the index value?

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

5) 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

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

A) CAC 40
B) Hang Seng
C) Nikkei
D) DAX-30
E) CAC 40 and Hang Seng

7) Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index?

A) FTSE 100
B) Hang Seng
C) Nikkei
D) DAX-30
E) FTSE 100 and Hang Seng

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

A) FTSE 100
B) Hang Seng
C) Nikkei
D) DAX-30
E) FTSE 100 and Hang Seng

9) If you purchased one S&P 500 Index futures contract at a price of 3,550 and closed your position when the index futures was 3,547, 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 options are correct.

10) If you took a short position in two S&P 500 futures contracts at a price of 3,510 and closed the position when the index futures was 3,492, 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 options are correct.

11) 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 options are correct.

12) 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

13) 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

14) 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

15) 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

16) 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 R_US > R_UK, then E > F.
B) If R_US < R_UK, then E < F.
C) If R_US > R_UK, then E < F.
D) If R_US < R_UK, then F = E.
E) There is no consistent relationship that can be predicted.

17) 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.

18) Consider the following:

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$/$

19) Consider the following:

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, 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.

20) Consider the following:

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, 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.

21) Consider the following:

Assume the current market futures price is 1.66 A$/$. You borrow 167,000 A$, convert the proceeds to U.S. dollars, and invest them in the U.S. at the risk-free rate. You simultaneously enter a contract to purchase 170,340 A$ at the current futures price (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$

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

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

23) 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) obligates two counterparties to exchange cash flows at one or more future dates and allows participants to restructure their balance sheets.
E) All of the options are correct.

24) 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) is extensive and equal to the total value of the payments that the floating rate payer was obligated to make.
E) None of the options are correct.

25) 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 options are correct.

26) 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 options are correct.
E) None of the options.

27) 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 options are correct.
E) None of the options are correct.

28) 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.

29) Which two indices had the lowest correlation between them during the 2014-2018 period?

A) S&P and DJIA
B) S&P and NASDAQ 100
C) DJIA and Russell 2000
D) S&P and Russell 2000
E) NASDAQ 100 and DJIA

30) Which two indices had the highest correlation between them during the 2014-2018 period?

A) S&P and DJIA
B) S&P and Russell 2000
C) DJIA and Russell 2000
D) S&P and NASDAQ 100
E) NASDAQ 100 and DJIA

31) 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) CAPM and APT; will be

32) 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.

33) 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.

34) 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.

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%

35) 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.

What is the dollar value of your expected loss?

A) $142,900
B) $16,670
C) $85,714
D) $30,000
E) $64,200

36) 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.

For a 200-point drop in the S&P 500, 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

37) 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.

How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.

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

38) If you sold an S&P 500 Index futures contract at a price of 2950 and closed your position when the index futures was 2947, 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 options are correct.

39) If you took a short position in three S&P 500 futures contracts at a price of 2900 and closed the position when the index futures was 2885, 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 options are correct.

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

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

42) 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

43) 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.

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%

44) 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.

What is the dollar value of your expected loss?

A) $142,900
B) $65,152
C) $85,700
D) $30,000
E) $64,200

45) 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.

For a 75-point drop in the S&P 500, by how much does the futures position change?

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

46) 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.

How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer.

A) Sell 3.475
B) Buy 3.475
C) Sell 4.236
D) Buy 4.236
E) Sell 11.235

47) 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) ensures that currency futures prices and commodity futures prices are set correctly.
E) None of the options are correct.

48) 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.

49) 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 options are correct.

50) 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) covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.
E) covered interest arbitrage opportunities will not exist, and arbitragers will be able to make risk-free profits.

51) 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) covered interest arbitrage opportunities will exist, and arbitragers will be able to make risk-free profits.
E) covered interest arbitrage opportunities will not exist, and arbitragers will be able to make risk-free profits.

52) 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) interest rate parity does not hold, and arbitragers will be able to make risk-free profits.
E) interest rate parity holds, and arbitragers will be able to make risk-free profits.

53) 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) interest rate parity does not hold, and arbitragers will be able to make risk-free profits.
E) interest rate parity holds, and arbitragers will be able to make risk-free profits.

54) What is the dollar value of a S&P E-mini futures contract with a listed price of 3145?

A) $3,145
B) $157,250
C) $1,572,500
D) $31,450

55) What is the dollar value of a Mini-Dow futures contract with a listed price of 27,150?

A) $54,145
B) $135,750
C) $157,500
D) $51,450

56) What is the dollar value of a Mini-Dow futures contract with a listed price of 31,630?

A) $64,145
B) $145,750
C) $158,150
D) $61,450

57) What is the dollar value of a S&P E-mini futures contract with a listed price of 2970?

A) $32,145
B) $148,500
C) $572,500
D) $41,450

58) In which currency does the FTSE 100 futures trade?

A) US dollar
B) Euro
C) British pound
D) Hong Kong dollar