 |
1 | |
Insurance companies have some advantages in bearing risk; these include: |
| | A) | Superior ability to estimate the probability of loss |
| | B) | Extensive experience and knowledge about how to reduce the risk of a loss |
| | C) | The ability to pool risks and thereby gain from diversification |
| | D) | All of the above |
|
|
2 | |
A derivative is a financial instrument whose value is determined by: |
| | A) | A regulatory body such as the FTC |
| | B) | An underlying asset |
| | C) | Hedging a risk |
| | D) | Speculation |
|
|
3 | |
Derivatives 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) | Offset risk by hedging and increase risk by speculating |
|
|
4 | |
Futures contracts contrast with forward contracts by: |
| | A) | Trading on an organized exchanged |
| | B) | Marking to the market on a daily basis |
| | C) | Allowing the seller to deliver any day over the delivery month |
| | D) | All of the above |
|
|
5 | |
If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60, how much will you net per bushel? (Ignore transaction costs.) |
| | A) | $3.75 |
| | B) | $0.15 |
| | C) | $3.60 |
| | D) | None of the above |
|
|
6 | |
On November 13, Al buys a July futures contract on 100 tons of soybean meal at a price of $172.0 a ton. On the same day, Bob sells this futures contract at the same price. On November 14, the July contract is trading at $174.2 a ton. Given that the contract is marked to market, what payments need to be made on the 14th? (Ignore transaction costs.) |
| | A) | Al pays the clearing house $220 and the clearing house pays Bob $220 |
| | B) | Bob pays the clearing house $220 and the clearing house pays Al $220 |
| | C) | Al pays the clearing house $172 and the clearing house pays Bob $174.2 |
| | D) | None, no payments are made until July |
|
|
7 | |
The current level of Standard & Poor's index is 250. The prospective dividend yield is 3.2%, and the interest rate is 7%. What is the value of a one-year future on the index? (Assume all dividend payments occur at the end of the year.) |
| | A) | 230.7 |
| | B) | 250.0 |
| | C) | 259.5 |
| | D) | 267.5 |
|
|
8 | |
The spot price for delivery of home heating oil is $0.550 per gallon. The futures price for one year from now is $0.560. If the risk-free rate is 6% per year, what is the PV(net convenience yield)? |
| | A) | $0.041 |
| | B) | $0.010 |
| | C) | $0.022 |
| | D) | $0.044 |
|
|
9 | |
A forward contract carries an obligation to perform the terms of a contract. This is not like: |
| | A) | A cash transaction because a service is carried out but like an option because it is a deferred choice |
| | B) | An option because a service is performed but like a cash transaction because it is completed today |
| | C) | An option because the buyer has the choice to exercise but similar to a cash transaction in that a service is performed |
| | D) | A hedging transaction because a commitment has been undertaken with the forward |
|
|
10 | |
A forward contract is described by: |
| | A) | Agreeing today to buy a product at a later date at a price to be set in the future |
| | B) | Agreeing today to buy a product today at its current price |
| | C) | Agreeing today to buy a product at a later date at a price set today |
| | D) | Agreeing today to buy a product if and only if its price rises above the exercise price today at its current price |
|
|
11 | |
Suppose that the spot rate of exchange is $1 = 5 French francs. Suppose also that the 1-year interest rate is 7.5% for dollars and 9% for French francs. What is the 1-year forward rate of exchange between dollars and francs? |
| | A) | $1 = 6.00 francs |
| | B) | $1 = 5.86 francs |
| | C) | $1 = 4.93 francs |
| | D) | $1 = 5.07 francs |
|
|
12 | |
If the one-year spot interest rate is 10% and two-year spot interest rate is 12%, calculate the one-year forward interest rate one year from today (approximately): |
| | A) | 10% |
| | B) | 12% |
| | C) | 14% |
| | D) | None of the above |
|
|
13 | |
First National Bank has made a 5-year, $100 million fixed-rate loan at 10%. Annual interest payments are $10 million, and all principal will be repaid in year 5. The bank wants to swap the fixed interest payment into a floating-rate annuity. If the bank could borrow at a fixed rate of 8% for 5 years, what is the notional principal of the swap? |
| | A) | $80 million |
| | B) | $100 million |
| | C) | $125 million |
| | D) | $180 million |
|
|
14 | |
A chocolate company, which uses the futures market to lock in the price of cocoa to protect a profit, is an example of: |
| | A) | A long hedge |
| | B) | A short hedge |
| | C) | Purchasing futures to guard against a potential loss |
| | D) | Both A and C |
|
|
15 | |
Duration of a pure discount bond is: |
| | A) | Equal to its half-life |
| | B) | Less than a zero coupon bond |
| | C) | Equal to its liabilities hedged |
| | D) | Equal to its maturity |
|