1. Which of the following statements is false?
a. A spot price is a price today for immediate delivery.
b. If a Canadian firm has to pay U.S. dollars in the future, it worries about the potential depreciation of the U.S. dollar.
c. The forward price is a price today for future delivery.
d. We say long Canadian dollar and short U.S. dollar when you buy Canadian dollars and sell U.S. dollars.
2. What is the one-year forward rate if the spot rate is C$1.25/US$ and interest rates in Canada and the United States are 5 percent and 4 percent, respectively?
3. Which of the following statements is false?
a. Removing a naked position is called hedging.
b. To hedge, you take a long position in a U.S. dollar forward contract if you have a long position in U.S. dollars.
c. There is no initial cash outlay for a forward contract.
d. Forward contracts could be used to hedge against exchange rate changes.
4. Using the interest rates in Question 2, what is the cost of carry of synthetically creating a forward rate by borrowing in Canadian dollars and investing in U.S. dollars?
5. Which of the following statements is false?
a. Cost of carry could be either positive or negative.
b. The forward rate will change if the spot rate changes.
c. An income loss is offset by a capital gain on the exchange rate if IRP holds.
d. The spot rate is the forward rate multiplied by (1 + cost of carry percentage).
6. Which of the following statements about forward contracts is false?
a. In a naked position, the investor is exposed to changes in the value of the underlying asset.
b. When an investor has agreed to buy U.S. dollars and sell Canadian dollars forwards, she is long U.S. dollars and short Canadian dollars.
c. Long means investors own something.
d. Short means investors own something.
7. Which of the following statements about the profit (loss) from a forward contract is false?
a. Profit from a long position is negatively affected by the spot price.
b. Profit from a long position is the difference between the spot price and strike price, multiplied by the number of contracts.
c. Profit from a short position is negatively affected by the spot price.
d. Profit from a short position is the difference between the strike price and spot price, multiplied by the number of contracts.
8. Which of the following is false concerning forward contracts and futures contracts?
a. Futures contracts involve more credit risk than forward contracts do.
b. The Canadian Derivatives Clearing Corporation (CDCC) takes responsibility for reducing credit risk.
c. The higher the credit risk, the higher the margin.
d. Futures contracts are marked to market every day.
9. Suppose a futures contract is for 1,000 units of a certain asset and the starting price is $30.
The initial margin is 5 percent and the price closed on the first day at $45. Which of the following statements is true?
a. Only the buyer puts down a $1,500 deposit when entering into the contract; the seller does not put down an initial deposit.
b. The futures contract is worth $15,000 to the seller at the end of the first day.
c. The buyer’s commitment is to buy 1,000 units of the asset at $30 on a certain date.
d. At the end of the first day, the seller’s equity increased by $45,000.
10. Which of the following statements concerning futures contracts is false?
a. The initial value of the futures contract is zero.
b. The values of the buyer and the seller of the futures contract offset each other.
c. If the seller gains, the clearinghouse will transfer the gained value from the seller’s ac-count to the buyer’s account.
d. If an investor’s account falls below the maintenance margin, she receives a margin call.
11. In practice, most futures contracts are closed out
a. With an offsetting transaction before the final day of trading.
b. By actual deliveries of the underlying assets.
c. By leaving the contracts to expire.
d. By cash settlement.
12. Which of the following statements concerning Government of Canada bond futures is false?
a. The contract price is quoted per $100.
b. A maximum position limit is set to prevent a single dominant holding.
c. Basis risk exists when the underlying asset to be hedged is not identical to the asset used as the hedge.
d. To hedge, an investor should short a Government of Canada bond futures contract when he needs to buy the same bonds in the future.