MULTIPLE CHOICE QUESTIONS

PART A – MULTIPLE CHOICE QUESTIONS – Total 50 Marks 

 

  1. A one-year forward contract is an agreement where – 2 marks
    1. One side has the right to buy an asset for a certain price in one year’s time.
    2. One side has the obligation to buy an asset for a certain price in one year’s time.
    3. One side has the obligation to buy an asset for a certain price at some time during the next year.
    4. One side has the obligation to buy an asset for the market price in one year’s time.

 

  1. Which of the following best describes the term “spot price” – 2 marks
    1. The price for immediate delivery
    2. The price for delivery at a future time
    3. The price of an asset that has been damaged
    4. The price of renting an asset

 

  1. Which of the following is NOT true – 2 marks
    1. A call option gives the holder the right to buy an asset by a certain date for a certain price
    2. A put option gives the holder the right to sell an asset by a certain date for a certain price
    3. The holder of a call or put option must exercise the right to sell or buy an asset
    4. The holder of a forward contract is obligated to buy or sell an asset

 

  1. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? – 2 marks
    1. 78 cents
    2. 76 cents
    3. 74 cents
    4. 72 cents

 

  1. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? – 2 marks
    $58
  2. $62
  3. $64
  4. $66

 

  1. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true – 2 marks
    1. This flexibility tends increase the futures price.
    2. This flexibility tends decrease the futures price.
    3. This flexibility may increase and may decrease the futures price.
    4. This flexibility has no effect on the futures price.

 

  1. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity? – 2 marks
  2. $1,016
  3. $1,001
  4. $981
  5. $1,014

 

  1. Which of the following is true? – 2 marks
  2. The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis).
  3. The optimal hedge ratio is the slope of the best fit line when the futures price (on the y-axis) is regressed against the spot price (on the x-axis).
  4. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis).
  5. The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).

 

  1. The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? – 2 marks
  2. The hedger’s position improves.
  3. The hedger’s position worsens.
  4. The hedger’s position sometimes worsens and sometimes improves.
  5. The hedger’s position stays the same.

 

  1. An interest rate is 6% per annum with annual compounding. What is the equivalent rate with continuous compounding? – 2 marks
  2. 5.79%
  3. 6.21%
  4. 5.83%
  5. 6.18%

 

  1. An interest rate is 5% per annum with continuous compounding. What is the equivalent rate with semi-annual compounding? – 2 marks
  2. 5.06%
  3. 5.03%
  4. 4.97%
  5. 4.94%

 

  1. Which of the following is true of LIBOR – 2 marks
  2. The LIBOR rate is free of credit risk
  3. A LIBOR rate is lower than the Treasury rate when the two have the same maturity
  4. It is a rate used when borrowing and lending takes place between banks
  5. It is subject to favorable tax treatment in the U.S.

 

  1. Which of the following is a consumption asset? – 2 marks
  2. The S&P 500 index
  3. The Canadian dollar
  4. Copper
  5. IBM stock

 

  1. As the convenience yield increases, which of the following is true? – 2 marks
  2. The one-year futures price as a percentage of the spot price increases
  3. The one-year futures price as a percentage of the spot price decreases
  4. The one-year futures price as a percentage of the spot price stays the same
  5. Any of the above can happen

 

  1. Which of the following is true for a consumption commodity? – 2 marks
  2. There is no limit to how high or low the futures price can be, except that the futures price cannot be negative
  3. There is a lower limit to the futures price but no upper limit
  4. There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative
  5. The futures price can be determined with reasonable accuracy from the spot price and interest rates.

 

  1. Which of following is applicable to corporate bonds in the United States? – 2 marks
  2. Actual/360
  3. Actual/Actual
  4. 30/360
  5. Actual/365

 

  1. It is May 1. The quoted price of a bond with a 30/360-day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price? – 2 marks
  2. 106.00
  3. 106.02
  4. 105.98
  5. 106.04

 

  1. Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract? – 2 marks
  2. The ability to deliver any of a number of different bonds
  3. The wild card play
  4. The fact that delivery can be made any time during the delivery month
  5. The interest rate used in the calculation of the conversion factor

 

  1. A company can invest funds for five years at LIBOR minus 30 basis points. The five-year swap rate is 3%. What fixed rate of interest can the company earn by using the swap? – 2 marks
  2. 2.4%
  3. 2.7%
  4. 3.0%
  5. 3.3%

 

  1. Which of the following describes the five-year swap rate? – 2 marks
  2. The fixed rate of interest which a swap market maker is prepared to pay in exchange for LIBOR on a 5-year swap
  3. The fixed rate of interest which a swap market maker is prepared to receive in exchange for LIBOR on a 5-year swap
  4. The average of A and B
  5. The higher of A and B

 

  1. Which of the following is true for an interest rate swap? – 2 marks
  2. A swap is usually worth close to zero when it is first negotiated
  3. Each forward rate agreement underlying a swap is worth close to zero when the swap is first entered into
  4. Comparative advantage is a valid reason for entering into the swap
  5. None of the above

 

  1. Which of the following tends to lead to an increase in house prices? – 2 marks
  2. An increase in interest rates
  3. Regulators specifying a maximum level for the loan-to-value ratio on mortgages
  4. Banks reducing the minimum FICO score that borrowers are required to have
  5. An increase in foreclosures

 

  1. Which of the following is true as the correlation between mortgage defaults increases? – 2 marks
  2. Equity tranches are almost certain to incur losses
  3. Senior tranches become more likely to incur losses
  4. The expected number of defaults increases
  5. Equity tranches are unaffected

 

  1. Which of the following describes regulatory arbitrage? – 2 marks
  2. Finding a way of reducing capital requirements without changing the risks being taken
  3. Buying products that are not subject to regulation
  4. Shorting products that are not subject to regulation
  5. Trading with the government

 

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