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UA FI 301 - finance ch 13 study guide

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Chapter 13 Financial Futures Markets 373 Chapter 13 Financial Futures Markets 1 A n is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date A option contract B brokerage contract C financial futures contract D margin call ANSWER C 2 Interest rate futures are not available on A Treasury bonds B Treasury notes C Eurodollar CDs D the S P 500 index ANSWER D 3 take positions in futures to reduce their exposure to future movements in interest rates or stock prices A Hedgers B Day traders C Position traders D None of these ANSWER A 4 trade futures contracts for their own account A Commission brokers B Floor brokers C Commission traders D Floor traders ANSWER D 5 The initial margin of a futures contract is typically between and percent of a futures contract s full value A 0 2 B 5 18 C 25 40 D 45 60 ANSWER B 374 Chapter 13 Financial Futures Markets 6 If the prices of Treasury bonds the value of an existing Treasury bond futures contract should A increase be unaffected B decrease be unaffected C decrease decrease D decrease increase ANSWER C 7 Assume that a T bill futures contract with a face value of 1 million is purchased at a price of 95 per 100 face value At settlement the price of T bills is 95 50 What is the difference between the selling and purchase price of the futures contract A 50 B 50 C 500 D 5 000 E none of these ANSWER D 8 If speculators believe interest rates will they would consider a T bill futures contract today A increase selling B increase buying C decrease selling D decrease purchasing a call option on ANSWER A 9 Financial futures contracts on U S securities are by non U S financial institutions A not allowed to be traded B rarely desired C commonly traded D not allowed to be traded and rarely desired ANSWER C 10 Assume that speculators had purchased a futures contract at the beginning of the year If the price of a security represented by a futures contract over the year then these speculators would likely have purchased the futures contract for than they can sell it for A increases more B decreases less C remains the same more D increases less ANSWER D Chapter 13 Financial Futures Markets 375 11 Assume that a futures contract on Treasury bonds with a face value of 100 000 is purchased at 93 00 If the same contract is later sold at 94 18 what is the gain ignoring transactions costs A 1 180 000 B 118 C 11 800 D 15 625 E 1 562 50 ANSWER E 12 The use of financial leverage A magnifies the positive returns of futures contracts B magnifies losses of futures contracts C does both of these D does neither of these ANSWER C 13 According to the text when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates this is referred to as A a long hedge B a short hedge C a closed out position D basis trading ANSWER B 14 A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts If interest rates increase the market value of the bond holdings will and the position in futures contracts will result in a A increase gain B increase loss C decrease gain D decrease loss ANSWER C 15 The basis is the A difference between the price of a security and the price of a futures contract on the security B gain or loss from hedging with futures contracts C difference between a futures contract price and the initial deposit required D price paid for a futures contract after accounting for transactions costs E price paid for an option contract ANSWER A 376 Chapter 13 Financial Futures Markets 16 The profits of a financial institution with interest rate sensitive liabilities and interest rate insensitive assets are with hedging than without hedging if interest rates decrease A higher B the same C lower D higher or the same ANSWER C 17 Assume that a bank obtains most of its funds from large CDs with a one year maturity Its assets are in the form of loans with rates that adjust every six months The bank would be affected if interest rates increase To partially hedge its position it could futures contracts A adversely purchase B favorably sell C favorably purchase D adversely sell ANSWER C 18 According to the text a futures contract on one financial instrument to protect a position in a different financial instrument is known as A cross hedging B ratio hedging C basis hedging D liquid hedging ANSWER A 19 In cross hedging if the futures contract value is volatile than the portfolio value hedging will require a amount of principal represented by the futures contracts A less greater B more greater C more smaller D none of these ANSWER B 20 Municipal Bond Index MBI futures A involve a physical exchange of bonds B are based on a Treasury bond index C are based on actively traded corporate bonds D are settled in cash ANSWER D Chapter 13 Financial Futures Markets 377 21 Systemic risk reflects the risk that a particular event could A cause losses at a firm due to inadequate management control B spread adverse effects among several firms or among financial markets C cause a loss in value due to market conditions D have a larger effect on the futures position than on the position being hedged ANSWER B 22 A savings and loan association has long term fixed rate mortgages financed by short term funds It hedges by selling Treasury bond futures If interest rates decline and many mortgages are prepaid A the gain on the futures contracts offsets the loss on the mortgages B the gain on the mortgages offsets the loss on the futures contracts C the gain on the futures contracts more than offsets any unfavorable effects on mortgages D a loss on the futures contracts more than offsets the favorable effect on the mortgage portfolio ANSWER D 23 If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions it could hedge its position by futures contracts on A purchasing Treasury bonds B purchasing the S P 500 Index C purchasing a Municipal Bond Index D selling a Municipal Bond Index ANSWER D 24 The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between the futures price when the initial position was created and the futures price at A the settlement date B the date at which the futures price reaches its maximum C the date at which the futures price reaches its minimum D the date three months beyond the date when the initial position


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