Practice Quiz #1
Each question is worth 1 point
1. If the futures price increases, an investor with a short position accumulates profits on his margin account.
(a) True
(b) False
2. You own a long forward position with Ft,T = 200. At settlement, the price of the underlying asset is 150. What is your payoff at settlement? (For a question similar to this, you will have a box on Canvas you type the answer into)
3. The forward price for a stock which pays a dividend Dt(′) at t′ which occurs between t and T is
Ft,T > Ster(T-t) . Does an arbitrage opportunity exist?
(a) Yes, an arbitrage opportunity exists
(b) No, an arbitrage opportunity does not exist
(c) There is not enough information to answer this question
4. Futures are traded on an organized exchange.
(a) True
(b) False
5. You own a short forward position with Ft,T = 110. At settlement, the price of the underlying asset is 120. What is your payoff at settlement? (For a question similar to this, you will have a box on Canvas you type the answer into)
6. How can you create a synthetic long position in a stock so that you pay St today and get a payoff of ST at time T? Assume markets do not allow any arbitrage.
(a) Buy forward on stock and borrow Ft,T at continuously compounded interest rate r
(b) Buy forward on stock and lend Ft,T at continuously compounded interest rate r
(c) Buy forward on stock and borrow Ft,Te-r(T-t) at continuously compounded interest rate r
(d) Buy forward on stock and lend Ft,Te-r(T-t) at continuously compounded interest rate r
7. March 1st: A US company expects to receive 50 million Japanese Yen at the end of July. The company shorts 4 September Yen futures contracts on March 1st and plans to close out the position in July when the Yens are received. Each futures contract is for the delivery of 12.5 million yen. The futures price on March 1st in cents per Yen is FMarch,September = F1 = 0.78. Is the company perfectly hedged against exchange rate risk?
(a) Yes, the company is perfectly hedged
(b) No, the company has basis risk equal to SJuly - FJuly,September
(c) No, the company has basis risk equal to SJuly - FMarch,September
(d) No, the company has basis risk equal to SSeptember - FMarch,September
8. July 1st: A company expects to sell 200,000 barrels of oil on September 1st. The company decides to hedge the risk by using oil future contracts which settle on September 1st. Each futures contract is for the delivery of 100,000 barrels of oil. How can the company construct a perfect hedge?
The company should [choose long/short] [input a number] oil futures .