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1 | |
A producer wishes to be protected from future price decreases but wants to benefit from any future price increases. What form of hedging would you recommend? |
| | A) | Buy a put option on the asset |
| | B) | Sell a put option on the asset |
| | C) | Buy a call option on the asset |
| | D) | Sell a call option on the asset |
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2 | |
A coffee bean contract calls for delivery of 50,000 pounds. What happens to the seller of a coffee futures contract at $1.45 per pound if the futures price closes the next day at $1.47 per pound? |
| | A) | The contract is marked to market with a $1,000 gain |
| | B) | The contract is marked to market with a $1,000 loss |
| | C) | If prices increase before expiration, futures contracts are voided |
| | D) | The contract has not expired, so nothing happens |
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3 | |
Genie Corp. entered into a currency swap with its bank, providing Genie borrows $10 million at 8% and swaps for a 10% yen loan. The spot exchange rate is 105 yen to $1. If interest only is to be repaid on an annual basis, how much does Genie pay annually to the bank? |
| | A) | $80,000 |
| | B) | $800,000 |
| | C) | 105 million yen |
| | D) | 1050 million yen |
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4 | |
When hedging through the purchase of put options one must remember that they may be: |
| | A) | required to post additional margin when losses are marked-to-market |
| | B) | maximizing profit, but are also maximizing risk |
| | C) | obligated to sell their product at a lower than market price |
| | D) | reducing their profits compared to not hedging |
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5 | |
A clothing manufacturer buys a cotton futures contract that requires acceptance of 20,000 pounds of cotton at $0.72 per pound. How is the account marked-to-market if cotton futures close the next day at $0.75? |
| | A) | A loss of $600 is posted to the account |
| | B) | A gain of $600 is posted to the account |
| | C) | A loss of $6000 is posted to the account |
| | D) | A gain of $6000 is posted to the account |
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6 | |
The seller of a gasoline futures contract at $0.50 cents per gallon noted that the closing price of gasoline was $0.48 today. What will happen to this contract, which require delivery of 40,000 gallons of gasoline at expiration? |
| | A) | A gain of $400 is posted to the account |
| | B) | A loss of $400 is posted to the account |
| | C) | A gain of $800 is posted to the account |
| | D) | A loss of $800 is posted to the account |
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7 | |
Speculator's activities are necessary in the futures markets in order to: |
| | A) | serve sufficient participants wanting to reduce their risk |
| | B) | prevent hedgers from trading options |
| | C) | provide a continual stream of profit to hedgers |
| | D) | maintain futures prices at appropriate levels |
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8 | |
Uncle Ben's bought May call options for rice with an exercise price of $3.50 at a price of $0.15 per bushel. If the price of rice at the expiration of the contract is $3.75, what is the cost of one bushel of rice for Uncle Ben's? |
| | A) | $3.50 |
| | B) | $3.65 |
| | C) | $3.75 |
| | D) | $3.90 |
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9 | |
A farmer hedged his risk by buying put options on soybeans with an exercise price of $3.25 at a price of $0.10 per bushel. If the price of soybeans at the expiration of the contract is $3.25, what is the net revenue from each bushel of soybeans? |
| | A) | $3.15 |
| | B) | $3.25 |
| | C) | $3.35 |
| | D) | None of the above |
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10 | |
Which of the following is a source of profit for a swap dealer? |
| | A) | Management fee |
| | B) | Underwriting fee |
| | C) | Bid-ask spread |
| | D) | Commission charged on the sale of bonds |
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11 | |
How might a firm such as Kellogg use options to control raw material prices for breakfast cereals? |
| | A) | Buy call options on commodities. |
| | B) | Sell call options on commodities. |
| | C) | Buy put options on commodities. |
| | D) | Sell put options on commodities. |
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12 | |
The spot price of silver closes at $7 per ounce at the expiration of an option contract. Which one of the following option positions will have value? |
| | A) | The buyer of a call with $5 strike price. |
| | B) | The seller of a call with $5 strike price. |
| | C) | The buyer of a put with $5 strike price. |
| | D) | The seller of a put with $5 strike price. |
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13 | |
What happens to the price of a futures contract as expiration draws closer? |
| | A) | It exceeds the spot price of the asset. |
| | B) | It is exceeded by the spot price of the asset. |
| | C) | It approaches the spot price of the asset. |
| | D) | There is no relationship between futures price and spot price as the contract approaches expiration. |
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14 | |
The process of marking a futures contract to market means that: |
| | A) | the profitability of the contract is locked in from the onset of the contract. |
| | B) | the amount of commodity to be delivered changes as prices change. |
| | C) | contracts are closed out as soon as they become unprofitable. |
| | D) | profits or losses are posted to the contract daily. |
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15 | |
The basic difference between speculators and hedgers in futures contracts is that speculators: |
| | A) | will profit regardless of the direction of price change. |
| | B) | are not protecting their commodity holdings. |
| | C) | are concerned only with long-term price movements. |
| | D) | take a position in more than one commodity at a time. |
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