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2.
3.
4.
A hedge in which the asset underlying the futures is not the asset being hedged is
a.
a cross hedge
b.
an optimal hedge
c.
a basis hedge
d.
a minimum variance hedge
e.
none of the above
5.
When the futures expires before the hedge is terminated and the hedger moves into the next futures expiration,
it is called
a.
spreading the hedge
b.
rolling the hedge forward
c.
optimally weighting the hedge
d.
all of the above
e.
none of the above
6.
The duration of the futures contract used in the price sensitivity hedge ratio is
a.
the duration of the spot bond being hedged using the futures price instead of the spot price
b.
the duration of the deliverable bond using the spot price
c.
the duration of the deliverable bond using the futures price
d.
the duration of the overall bond portfolio
e.
none of the above
7.
Which technique can be used to compute the minimum variance hedge ratio?
a.
duration analysis
b.
present value
c.
regression
d.
all of the above
e.
none of the above
8.
Which of the following measures is used in the price sensitivity hedge ratio for bond futures?
a.
beta
b.
c.
d.
e.
duration
correlation
variance
none of the above
9.
Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the
asset price goes to $49? (Ignore carrying costs)
a.
-$1
b.
-$4
c.
$3
d.
$4
e.
none of the above
10.
Suppose you buy an asset at $70 and sell a futures contract at $72. What is your profit if, prior to expiration,
you sell the asset at $75 and the futures price is $78?
a.
-$1
b.
$2
c.
$1
d.
-$6
e.
none of the above
11.
12.
Find the profit if the investor buys a July futures at 75, sells an October futures at 78 and then reverses the
July futures at 72 and the October futures at 77.
a.
-3
b.
-2
c.
2
d.
1
e.
none of the above
13.
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if
the futures contract has a price of $90,000 and a modified duration of 8.5 years.
a.
16.27
b.
15.93
c.
7.42
d.
11.11
e.
none of the above
14.
What is the profit on a hedge if bonds are purchased at $150,000, two futures contracts are sold at $72,500
each, then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?
a.
-$2,500
b.
-$5,500
c.
-$500
d.
-$3,000
e.
none of the above
15.
Find the optimal stock index futures hedge ratio if the portfolio is worth $1,200,000, the beta is 1.15 and the
S&P 500 futures price is 450.70 with a multiplier of 250.
a.
10.65
b.
12.25
c.
d.
e.
6123.80
5325.05
none of the above
16.
17.
You hold a stock portfolio worth $15 million with a beta of 1.05. You would like to lower the beta to 0.90
using S&P 500 futures, which have a price of 460.20 and a multiplier of 250. What transaction should you
do? Round off to the nearest whole contract.
a.
sell 130 contracts
b.
sell 9,778 contracts
c.
sell 20 contracts
d.
buy 50,000 contracts
e.
sell 50,000 contracts
18.
You hold a bond portfolio worth $10 million and a modified duration of 8.5. What futures transaction would
you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25?
Round up to the nearest whole contract.
a.
buy 109 contracts
b.
buy 17 contracts
c.
buy 669 contracts
d.
sell 100 contracts
e.
sell 669 contracts
19.
Which of the following statements about the use of futures in tactical asset allocation is correct?
a.
Implementing tactical asset allocation using futures is a form of market timing.
b.
Futures can be used to synthetically buy or sell stocks but you cannot simultaneously adjust the beta
or duration
c.
A difference between the portfolio held and the index on which the futures is based will generate a
gain for the investor.
d.
The use of futures in tactical asset allocation will generate cash from the synthetic sale, which is then
used in the synthetic purchase.
e.
None of the above
20.
Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the
following occurs?
a.
futures prices are more volatile than spot prices
b.
the spot and futures contracts are correctly priced at the onset
c.
spot and futures prices are positively correlated
d.
futures prices are less volatile than spot prices
e.
none of the above
21.
22.
b.
c.
d.
e.
23.
Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5,
buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at
$9.5.
a.
-3
b.
-2
c.
2
d.
1
e.
none of the above
24.
Quantity risk is
a.
the difficulty in measuring the volatility
b.
the uncertainty about the size of the spot position
c.
the risk of mismatching the futures maturity to the spot maturity
d.
the possibility of regression error
e.
none of the above
25.
The relationship between the spot yield and the yield implied by the futures price is called
a.
the yield beta
b.
the price sensitivity
c.
the tail
d.
the hedge ratio
e.
none of the above
26.
All of the following are futures contract choice decisions related to hedging, except
a.
which future underlying asset
b.
which strike price
c.
which futures contract expiration
d.
whether to go long or short
e.
all of the above are futures contract choice decisions
27.
Hedging with futures contracts entails all of the following risks, except
a.
marking to market may require large cash outflows
b.
changes in margin requirements
c.
basis risk
d.
quantity risk
e.
all of the above are potential risks
28.
Based on the minimum variance hedge ratio approach, what is the optimal number of futures contracts to
deploy, given the following information. The correlation coefficient between changes in the underlying
instruments price and changes in the futures contract price is 0.95, the standard deviation of the changes in
the underlying positions value is 300%, and the standard deviation of the changes in the futures contracts
price is 11.4%.
a.
long 35 futures contracts
b.
long 25 futures contracts
c.
long 15 futures contracts
d.
short 25 futures contracts
e.
short 15 futures contracts
29.
Based on the minimum variance hedge ratio approach what is the hedging effectiveness, given the following
information. The correlation coefficient between changes in the underlying instruments price and changes in
the futures contract price is 0.70, the standard deviation of the changes in the underlying positions value is
40%, and the standard deviation of the changes in the futures contracts price is 50%. (Select the closest
answer.)
a.
50%
b.
45%
c.
40%
d.
35%
e.
30%
30.
Based on the price sensitivity hedge ratio approach, what is the optimal number of futures contracts to deploy,
given the following information. The yield beta is 0.65, the present value of a basis point change for the
underlying bond portfolio is $33,000, and the present value of a basis point change for the bond futures
contract is $325. (Select the closest answer.)
a.
long 100 futures contracts
b.
long 55 futures contracts
c.
short 66 futures contracts
d.
short 22 futures contracts
e.
short 11 futures contracts
The difference between the swap rate and the rate on a Treasury security of the same maturity is called the
a.
swap spread
b.
risk premium
c.
swap basis
d.
settlement spread
e.
LIBOR
2.
3.
4.
5.
The underlying amount of money on which the swap payments are made is called
a.
settlement value
b.
market value
c.
notional amount
d.
e.
base value
equity value
6.
7.
An interest rate swap with both sides paying a floating rate is called a
a.
plain vanilla swap
b.
two-way swap
c.
floating swap
d.
spread swap
e.
basis swap
8.
Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be
combined with this swap to produce a swap to produce a plain vanilla swap in currency B.
a.
pay currency B floating, receive currency A fixed
b.
pay currency B fixed, receive currency A floating
c.
pay currency B fixed, receive currency A fixed
d.
pay currency B floating, receive currency A floating
e.
none of the above
9.
For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange
rate is $1.55 is (approximately)
a.
11.55 million
b.
15.5 million
c.
10 million
d.
6.45 million
e.
none of the above
10.
A currency swap without the exchange of notional amount is most likely to be used in what situation?
a.
a company issuing a bond
b.
a company generating cash flows in a foreign currency
c.
a company arranging a loan
d.
a dealer trying to hedge a currency option
e.
none of the above
11.
12.
Find the upcoming net payment in a plain vanilla interest rate swap in which the fixed party pays 10 percent
and the floating rate for the upcoming payment is 9.5 percent. The notional amount is $20 million and
payments are based on the assumption of 180 days in the payment period and 360 days in a year.
a.
fixed payer pays $1,950,000
b.
fixed payer pays $950,000
c.
floating payer pays $1 million
d.
floating payer pays $50,000
e.
fixed payer pays $50,000
13.
Find the upcoming payment interest payments in a currency swap in which party A pays U. S. dollars at a
fixed rate of 5 percent on notional amount of $50 million and party B pays Swiss francs at a fixed rate of 4
percent on notional amount of SF35 million. Payments are annual under the assumption of 360 days in a year,
and there is no netting.
a.
party A pays $2,500,000, and party B pays SF1,400,000
b.
party A pays SF1,400,000, and party B pays $2,500,000
c.
party A pays SF1,750,000, and party B pays SF1,400,000
d.
party A pays $2,500,000, and party B pays $2,000,000
e.
party A pays $50 million, and party B pays SF35 million
14.
Find the net payment on an equity swap in which party A pays the return on a stock index and party B pays a
fixed rate of 6 percent. The notional amount is $10 million. The stock index starts off at 1,000 and is at
1,055.15 at the end of the period. The interest payment is calculated based on 180 days in the period and 360
days in the year.
a.
party B pays $851,500
b.
parry B pays $48,500
c.
party B pays $251,500
d.
party A pays $251,500
e.
party A pays $851,500
15.
Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock
index 1 and party B pays the return on stock index 2. The notional amount is $25 million. Stock index 1
starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500
and goes up to 3300 at the end of the period.
a.
The party paying index 1 pays about $238,000
b.
The party paying index 2 pays about $238,000
c.
The party paying index 2 pays about $3.095 million
d.
The party paying index 1 pays about $25 million
e.
The party paying index 1 pays about $3.095 million
16.
Find the fixed rate on a plain vanilla interest rate swap with payments every 180 days (assume a 360-day year)
for one year. The prices of Eurodollar zero coupon bonds are 0.9756 (180 days) and 0.9434 (360 days).
a.
5.9 percent
b.
5 percent
c.
6 percent
d.
5.5 percent
e.
2.95 percent
17.
Use the
2,000.
a.
b.
c.
d.
e.
18.
information in problem 16 to find the fixed rate on an equity swap in which the stock index is at
5.9 percent
5 percent
6 percent
2.95 percent
3.5 percent
Find the market value of a plain vanilla swap from the perspective of the fixed rate payer in which the
upcoming payment is in 30 days, and there is one more payment 180 days after that. The fixed rate is 7
percent and the upcoming floating payment is at 6.5 percent. The notional amount is $15 million. Assume
360 days in a year. The prices of Eurodollar zero coupon bonds are 0.9934 (30 days) and 0.9528 (210 days).
a.
the fixed payer pays $31,763.75
b.
the fixed payer pays $71,527.50
c.
the floating payer pays $49,500
d.
the floating payer pays $194,228
e.
none of the above
19.
Which of the following statements about constant maturity swaps is not true?
a.
the CMT rate is linked to a U. S. treasury security of equivalent maturity
b.
the typical maturity is 2 to 5 years
c.
the maturity is constant
d.
one rate is based on a security of a longer rate than the settlement period
e.
the swap is a type of interest rate swap
20.
a.
b.
c.
d.
e.
An equity swap with fixed interest payments has two payments remaining. The first occurs in 30
days and the second occurs in 210 days. The discount factors are 0.9934 (30 days) and 0.9528 (210
days). The upcoming fixed payment is at 4 percent and is based 180 days in a 360-day year. The
equity index was at 1150 at the beginning of the period and is now at 1152.75. The notional amount
is $60 million. Find the approximate value of the equity swap from the perspective of the party
making the equity payment and receiving the fixed payment.
$143,478
$642,000
-$143,478
-$642,000
-$496,560
22.
The present value of the series of dollar payments in a currency swap per $1 notional amount is $0.03. The
present value of the series of euro payments in the same currency swap per 1 is 0.0225. The current
exchange rate is $1.05 per euro. If the swap has a notional amount of $100 million and 105 million, find the
market value of the swap from the perspective of the party paying euros and receiving dollars.
a.
$519,375
b.
-$2,480,625
c.
$3,000,000
d.
-$3,000,000
e.
-$519,375
23.
24.
25.
Interest rate swaps can be used for all of the following purposes except:
a.
to borrow at the prime rate
b.
to convert a fixed-rate loan into a floating-rate loan
c.
to convert a floating-rate loan into a fixed-rate loan
d.
to speculate on interest rates
e.
to hedge interest rate risk
26.
The value of a pay-fixed, receive floating interest rate swap is found as the value of a
a.
floating-rate bond times the value of a fixed-rate bond.
b.
floating-rate bond plus the value of a fixed-rate bond.
c.
floating-rate bond minus the value of another floating-rate bond.
d.
fixed-rate bond minus the value of another fixed-rate bond.
e.
floating-rate bond minus the value of a fixed-rate bond.
27.
A basis swap is priced by adding a spread to the higher rate or subtracting a spread from the lower rate. This
spread is found as
a.
the difference between the floating rate on a plain vanilla swap based on one of the rates
and the fixed rate on a plain vanilla swap based on the other rate.
b.
the addition of the fixed rate on a plain vanilla swap based on one of the rates and the fixed
rate on a plain vanilla swap based on the other rate.
c.
the difference between the fixed rate on a plain vanilla swap based on one of the rates and
the fixed rate on a plain vanilla swap based on the other rate.
d.
the difference between the floating rate on a plain vanilla swap based on one of the rates
and the floating rate on a plain vanilla swap based on the other rate.
e.
none of the above correctly explain how this spread is found
28.
The value of a pay-fixed, receive-floating interest rate swap is found as the value of a
a.
floating-rate bond minus the value of a fixed-rate bond.
b.
fixed-rate bond minus the value of a floating-rate bond.
c.
floating-rate bond minus the value of another floating-rate bond.
d.
fixed-rate bond minus the value of another fixed-rate bond.
e.
none of the above correctly identify how this value is found.
29.
Swap payments typically involve adjusting for the fraction of the year in some fashion. This adjustment is
known as
a.
the compounding convention
b.
the accrual period
c.
the fraction convention
d.
the money market convention
e.
the payment period
30.
The combination of a pay euro fixed and receive dollar fixed swap with a pay dollar floating and receive euro
fixed results in
a.
a currency swap
b.
a currency swap, receive euro fixed and pay euro floating
c.
an interest rate swap, pay dollar fixed and receive dollar floating
d.
an interest rate swap, receive euro fixed and pay euro floating
e.
an interest rate swap, pay dollar floating and receive dollar fixed
2.
Which of the following best describes a company that practices enterprise risk management?
a.
interest rate risk and currency risk would be managed in unison
b.
a single department to manage risk
c.
it would manage insurance-related risks along with financial risk
d.
credit risk would be managed the same way as market risk
e.
operational risk would be managed
3.
4.
5.
6.
Which of the following organizations recommends best practices for the investment management industry?
a.
PRMIA
b.
Risk Standards Working Group
c.
GARP
d.
G-30
e.
Financial Accounting Standards Board
7.
8.
c.
d.
e.
9.
10.
11.
12.
13.
14.
15.
Prior to FAS 133, where on the financial statements were derivatives reported?
a.
as contingent liabilities
b.
as goodwill
c.
as intangible assets
d
nowhere because they were off-balance sheet items
e.
in Other Comprehensive Income
16.
Which of the following methods is not acceptable for disclosure under the SECs rules?
a.
the CEOs letter to the shareholders
b.
tabular information
c.
d
e.
sensitivity analysis
VAR
none of the above
17.
18.
Derivatives dealers primarily conduct derivatives transactions for which of the following reasons?
a.
to enhance the returns on their other investment transactions
b.
to profit off of their ability to execute trades at the right time
c.
to profit off of their market making services
d.
to provide services to enhance the overall attractiveness of their product line
a.
none of the above
19.
Which of the following methods is not permitted to satisfy the SECs requirements for disclosure of derivatives activity?
a.
b.
c.
d.
e.
20.
21.
Which of the following statements is not true about fair value hedges?
a.
it requires a method of determining the fair value of the derivative
b.
it defers recognition of all profits and losses until the hedge is terminated
c.
it will cause earnings to fluctuate if hedges are not effective
d.
it requires proper documentation
e.
none of the above
22.
Which of the following statements is not true about fair value hedges?
a.
it requires identification of the effective and ineffective parts
b.
derivatives profits and losses are temporarily carried in an equity account
c.
it requires proper documentation
d.
only dealer firms are eligible to use it
e.
none of the above
23.
24.
Which of the following would not be included among typical derivatives end users in the U. S.?
a.
pension funds
b.
corporations
c.
d.
e.
25.
26.
All of the following make up the financial derivatives risk management industry, except
a.
end users
b.
dealers
c.
consultants
d.
specialized software companies
e.
GRAP professionals
27.
28.
Hedge accounting, based on FAS 133, addresses all of the following except
a.
fair value hedges
b.
unfair value hedges
c.
cash flow hedges
d.
foreign investment hedges
e.
speculation
29.
30.