Answer the following MCQs by choosing the correct answer and fill it up in the answer table provided at the end of this section. Each correct answer will be awarded 2 marks.

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 What futures price will allow $2,000 to be withdrawn from the margin account?

A.$58

B.$62

C.$64

D. $66

2.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?

A.78 cents

B.76 cents

C.74 cents

D.72 cents

3.You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day?

A.$1,800

B.$3,300

C.$2,200

D.$3,700

4.A hedger takes a long position in a futures contract on Silver on November 1, 2020 to hedge an exposure on March 1, 2021. The initial futures price is $60 per gram. On December 31, 2020 the futures price is $61per gram. On March 1, 2021 it is $64 per gram. The contract is closed out on March 1, 2021. What gain is recognized in the accounting year January 1 to December 31, 2021? Each contract is on 1000 grams of the Silver.

A.$0

B.$1,000

C.$3,000

D.$4,000

5.Margin accounts have the effect of

A.Reducing the risk of one party regretting the deal and backing out

B.Ensuring funds are available to pay traders when they make a profit

C.Reducing systemic risk due to collapse of futures markets

D.All of the above

6.On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company?

A.$59.50

B.$60.50

C.$61.50

D.$63.50

7.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?

A.$1,016

B.$1,001

C.$981

D.$1,014

8.A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?

A.Long 192 contracts

B.Short 192 contracts

C.Long 96 contracts

D.Short 96 contracts

9.A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?

A.Long 192 contracts

B.Short 192 contracts

C.Long 48 contracts

D.Short 48 contracts

10.Which of the following increases basis risk?

A.A large difference between the futures prices when the hedge is put in place and when it is closed out

B.Dissimilarity between the underlying asset of the futures contract and the hedger's exposure

C.A reduction in the time between the date when the futures contract is closed and its delivery month

D.None of the above

11.Which of the following is true of LIBOR

A.The LIBOR rate is free of credit risk

B.A LIBOR rate is lower than the Treasury rate when the two have the same maturity

C.It is a rate used when borrowing and lending takes place between banks

D.It is subject to favorable tax treatment in the U.S.

12.A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three-month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract?

A.+$2.00

B.$2.00

C.+$1.96

D.$1.96

13.An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain?

A. $1,000

B.$400

C. $700

D.$300

14.What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income.

A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year.

B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year.

C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year

D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

15.Which of the following is NOT a reason why a short position in a stock is closed out?

A.The investor with the short position chooses to close out the position

B.The lender of the shares issues instructions to close out the position

C.The broker is no longer able to borrow shares from other clients

D.The investor does not maintain margins required on his/her margin account

16.Consider the current price of a bond is $100 and you are going for a 9-month forward contract on it. This bond is entitled to receive a coupon of $9 in 6 months and the risk free interest rate is 8% per annum continuously compounded for all maturities. What is the fair forward price of this bond?

A.$99.00

B.$97.00

C.$101.00

D.$100.00

17.Assuming that you are going for a 1 year forward contract on 100 Gold bullions that is currently priced at $2,500 each bullion. The storage cost will be $50 each bullion for 1 year and to be paid in advance half yearly. The risk free interest rate is 7% p.a. for all maturities and it is continuously compounded. If the 1-year forward price for this Gold bullion is quoted as $2800 each, what will be the arbitrage profit for each bullion?

A.$300.00

B.$0.00

C.$66.03

D.$250.00

18.You took a short position in 20 September CPO Futures contracts. Each contract is to deliver 25 metric tons of crude palm oil. As you entered the CPO Futures today the September CPO futures is trading at RM 2,200 per metric tone. You posted an initial margin of RM45,000 and the maintenance margin is RM33,000. On the 7^th trading day the CPO price had increased to RM 2,230 per metric tone which led to a margin call of RM15,000. On the 23^rd trading day the September CPO Futures were trading at RM 2,180 per metric ton and you decided to close out your position. The one round total brokerage fee is RM620. Calculate your profit or loss in this September CPO Futures trading?

A.RM 25,000 gain

B.RM 25,620 (loss)

C.RM 25,620 gain

D.RM 5, 620 (loss)

19.Andy's Frozen requires 5,000 tones of frozen cattle meat for its food catering in December 2021. As of today 1^st April 2021 the frozen cattle meat is selling at $20,000 per tone. The risk free interest rate for all maturities is 12% p.a. continuously compounded. The storage cost of frozen meat is $540 per month and to be paid at the end of each quarter calendar year. The frozen cattle meat supplier quoted the December forward price to be $25,000 per tone. Calculate the arbitrage profit (if any).

A.$8,126.02

B.$1,893.00

C.$2,344.86

D.$12,363.86

20.A trader enters into a short position in 5 Eurodollar futures contracts. How much does the trader gain or loss when the futures price quote increases by 6 basis points?

A.$150

B. $750

C.$750 (loss)

D.$150 (loss)

21.How much is a basis point?

A.1.0%

B.0.1%

C.0.01%

D.0.001%

22.Suppose that the risk-free interest rate is 6% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. Currently, the index is trading at 1100, calculate the fair-forward price for a contract on this index deliverable in 5 months.

A.1000

B.1100

C.1109

D.1110

23.The quoted 9-month forward price of 916 Gold is $280 per gram. The spot price of the 916 Gold is $222 per gram now. Considering the storage cost is 10% of its spot price per annum and the risk free interest rate is 8% p.a. continuously compounded, the 9-month fair-forward price of this 916 Gold should be

A.$280

B.$254

C.$250

D.$276

24.Based on the information given in question 23, if the storage cost is given as $25 per gram per annum payable at the end of the 9-month contract, identify what would be the arbitrage profit?

A.$69.27

B.$23.54

C.$19.28

D.$0.00

25.It is 1^st April today and assuming that your company need to borrow $300,000,000 on 1^st July for next 3 months. You are planning to use the Eurodollar Futures (EF) to hedge the possible change in the Libor rate between now and 1^st July. The July EF is trading at 95.33 now and it turned out that on 1^st July the EF is trading at 95.96. There are 92 days between 1^st July to 1^st October. What would be your total interest payment for this borrowing upon the settlement of it on 1^st October?

A.$1,677,128

B.$3,574,038

C.$2,624,160

D.$3,569,160

26.Which of the following statement is true?

A.Hedging can always be done more easily by a company's shareholders than by the company itself

B.If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge

C.If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging

D.If all companies in an industry do not hedge, a company is liable increase its risk by hedging

27.Which of the following statement is true?

A.Gold producers should always hedge the price they will receive for their production of gold over the next three years

B.Gold producers should always hedge the price they will receive for their production of gold over the next one year

C.The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold

D.Gold producers can hedge by buying gold in the forward market

28.A stock index currently stands at 350. The risk-free interest rate is 7% per annum (with continuous compounding) and the dividend yield on the index is 4% per annum (with continuous compounding). The forward price for a four-month contract should be 352.5.

A.True

B.False

29.You enter into a short Eurodollar futures contract at a price of 99.65 and close it out a week later at a price of 99.50. You have gained $150 on the position.

A.True

B.False

30.The physical market price of premium olive oil is $30 per liter. A futures contract on 100,000 liters with settlement in 1 year is currently priced at $33.20 per liter. The one-year interest rate is 7% p.a. (continuously compounded) and it costs $0.50 per liter per year (payable at the beginning of each year) to store olive oil. You can make riskless arbitrage profit of $48,885 (to the nearest dollar) by buying 100,000 liters of physical olive oil, storing it and selling one futures contract.

A.True

B.False

31.Firm XYZ plans to borrow $10 million for 3 months beginning in June. They can achieve a perfect hedge of their borrowing rate by buying FRA.

A.True

B.False

32.In the context of hedging using futures, "basis" risk may arise in a hedging situation if the futures contract used for hedging relates to a commodity that is different from that being hedged.

A.True

B.False

33.Which of the following best describes the term "spot price"?

A.The price for immediate delivery

B.The price for delivery at a future time

C.The price of an asset that has been damaged

D.The price of renting an asset

34.Which of the following statement is NOT true about forward and futures contracts?

A.Forward contracts are more liquid than futures contracts

B.The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market

C.In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates

D.Taxes and transaction costs can lead to forward and futures prices being different

35.A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts.Which of the following best describes the advantage of hedging?

A.It leads to a better exchange rate being paid

B.It leads to a more predictable exchange rate being paid

C.It caps the exchange rate that will be paid

D.It provides a floor for the exchange rate that will be paid

36.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?

A.$1,016

B.$1,001

C.$981

D.$1,014

37.Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use?

A.The June contract

B.The July contract

C.The May contract

D.The August contract

38.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?

A.The hedger's position improves.

B.The hedger's position worsens.

C.The hedger's position sometimes worsens and sometimes improves.

D.The hedger's position stays the same.

39.By shorting the corn futures contracts, the corn farmers can hedge against the risk of adverse weather wiping out their crop.

A.True

B.False

40.On the 15th of May a trader shorted a December gold futures contract at $1250 per ounce. One gold contract is on 100 ounces. On the 20th of July, the trader closed out the position at $1275. The loss of $2500 is paid on the 20th of July.

A.True

B.False