W AutoSave Off finance4408 final practice solved . Saved to this PC v Search Jairo Esteban Cuellar Cuellar Vargas X File Home Insert Draw Design Layout References Mailings Review View Help Acrobat Comments Share ~ 1. Which of the following statements about basis risk is incorrect? a) An airline company hedging exposure to a rise in jet fuel prices with heating oil futures contracts may face basis risk b) Choices left to the seller about the physical settlement of the futures contract in terms of grade of the commodity. location, chemical attributes may result in basis risk. ) Basis risk exists when futures and spot prices change by the same amount over time and converge at maturity of the futures contract. d) Basis risk is zero when variances of both the futures and spot process are identical and the 7. On March 1 2010, the price of crude oil is $95 and the July futures price is $97. On May 15 the correlation coefficient between spot and futures prices is equal to one. price of crude oil is $89 and the July futures price is $92. A company entered into a futures contract on March 1 to hedge the sale of crude oil on May 15. It closed out its position on May 15. What is the effective price received by the company for the crude oil sale? a) $97. 2 The current annual rate on a 2 yr T-Bill is 2.6% while a 3 yr T-Bill pays an annual rate of 2.9%. 6) $94 The implied forward rate from the 2"d year to the 3d year is therefore: a) 2.4%. C) $85 6) 3.0%. 1) $92. C) 3.2% 1) 3.5% 8 Which of the following is NOT a difference between forward contracts and futures contracts? a) Forward contracts are over-the-counter contracts while futures contracts trade on an 3. The duration of pension fund's portfolio is 3.5. This means that if interest rates go up by 1%, exchange then b) Forward contracts have credit risk while futures contracts have virtually no credit risk. a) The portfolio's value will decrease by 3.5%. c) Forward contracts are tailor made while futures contracts are standardized b) The portfolio's value will increase by 3.5% d) d) None of the above. c) The time to maturity of the portfolio's bonds will increase by 3.5 years. d) The time to maturity of the portfolio's bonds will decrease by 3.5 years. 9. A company enters into a short futures contract to sell 15,000 units of a commodity for $1.20 per unit. The initial margin is $5,000 and the maintenance margin is $3,500. At what futures price 4. It is currently January 2011 and the futures price for June WTI crude oil is $90.75/bbl. The 6- per unit will there will be a margin call? month LIBOR is 4.5% p.a. and storage costs for crude is about $2.50/bbl. If the spot price is a) $1.2 $92.50/bbl. what is the convenience yield implied by this? a) $1.31 b) $1.10 b) $1.75 C) $1.30 C) $3.41 d) $1.50 d) $3.81 10. The spot price for the British Pound Sterling is currently 2.2550 $/f. Also, currently the six- 5. Find the optimal stock index futures hedge ratio if the portfolio is worth $2,400,000, the beta is month US LIBOR and the six-month British LIBOR are 5.25% and 7.5% per annum 1.15 and the S&P 500 futures price is 450.70 with a multiplier of 500. a. 10.65 respectively. What is the six-month forward/futures price for the pound sterling (f)? a) 2.2078 b. 12.25 b) 2.2790 6123.80 2.3032 d. none of the above 1) 2.2313 6. In which of the following situations would you use a short hedge? 11. One reason a financial institution may use interest rate swaps is a) the planned purchase of a stock change the duration of its portfolio of assets. b) the planned purchase of stock options b) eliminate credit risk. c) the planned issuance of bonds C) convert a floating rate liability into a fixed rate asset. d) the planned repurchase of stock to cover a short position None of the above. Page 1 of 4 900 words X English (Canada) x Accessibility: Investigate Display Settings Focus + 80% - 13 . C Clear Search P ENG 3:39 US 2022-1 15W AutoSave Off finance4408 final practice solved v Search Jairo Esteban Cuellar Cuellar Vargas X File Home Insert Draw Design Layout References Mailings Review View Help Acrobat Comments Share 18. A hedge in which the asset underlying the futures is not the asset being hedged is | 12. A strengthening of the basis means a. a cross hedge a) the spot price rises more than the futures price b. an optimal hedge 6) the futures price falls more than the spot price C. a basis hedge c) a short hedger benefits d a minimum variance hedge d) all of the above 13. LIBOR is a) an interest rate charged on pounds sterling in London. an interest rate charged on Eurodollars. c) an interest rate charged by the European central bank. d) an interest rate charged on Treasury bills. 14. The risk that a party will not pay its counterparty to a financial contract is called a) payment risk b) credit risk settlement risk d) market risk 15. One good reason for practicing risk management is that arbitrage opportunities can be earned. True False 16. Which of the following best describes normal contango? a) the spot price is less than the expected futures price b) the futures price is less than the spot price c) the expected spot price is less than the futures price 1) the cost of carry is negative 17. Suppose you buy a one-year forward contract when the forward price is at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the payoff to the contract at expiration? a) $8.00 b) -$8.00 $0.00 d) $7.27 Page 4 of 4 900 words X English (Canada) Ex Accessibility: Investigate Display Settings Focus + 80% - 13 . C Clear Search P 34 ENG 3:39 US 2022-1 15