Question 1

The minimum dollar amount required by an investor when taking a position in a futures contract is called the

Accepted Answer

The minimum dollar amount required by an investor when taking a position in a futures contract is called the initial margin. This is the amount of money that must be deposited into a margin account to open and maintain the position. The maintenance margin, option C, is the minimum amount of margin that must be maintained in the account to avoid a margin call. Option D is incorrect as there is an answer that is correct.

Question 2

Snooty Wine Importers has an order of exclusive Chateau de Snoot wines arriving from France in October,and the order will be paid in euros.Which of the following will hedge the importer's currency exposure?

Accepted Answer

Buying euros forward allows Snooty Wine Importers to lock in the exchange rate for euros today, protecting against the risk of the euro becoming more expensive in the future.

Question 3

NARRBEGIN: Exhibit 17-1
Exhibit 23-1
S&P 500 Index; $250 ´ index May 2004
 
-Refer to Exhibit 23-1.What was the lowest value of the December contract on the day quoted?

Accepted Answer

1051(250)= 262,750

Question 4

If the current spot exchange rate on the Euro is $1.2812/€ and the one year risk free rate for borrowing in dollars is 3% and 4% for borrowing in Euros,what should be the one year $/€ forward exchange rate?

Accepted Answer

1.2812(1.03/1.04)= 1.2689

Question 5

The process of identifying firm-specific risk exposures and managing those exposures is called

Accepted Answer

Firm-specific risk exposures are unique to a particular company and can have a significant impact on its financial performance. Risk management involves identifying and assessing these risks and implementing strategies to mitigate or manage them. This can include measures such as diversifying the company's portfolio, hedging against adverse events, or setting aside reserves to cover potential losses. Capital management and financial management are related concepts, but they do not specifically address the issue of risk exposure management.

Question 6

Suppose Snooty Wine Importers has an order of Chateau de Snoot wines arriving from France in October,and the order will be paid in euros.If Snooty enters a contract today with a forward rate of 0.9 euros per U.S.dollar for October delivery,and the spot rate in October turns out to be euro 0.85 per U.S.dollar,what is the effect of the forward contract on Snooty?

Accepted Answer

Since the forward rate is higher than the spot rate, Snooty is obligated to purchase euros at a higher price than the market rate in October. This means that Snooty will have to pay more U.S. dollars than they would have if they had waited to purchase euros at the spot rate in October. Snooty will lose money on this forward contract, which is equal to the difference between the forward rate and the actual spot rate multiplied by the value of the contract. In this case:
(0.9 - 0.85) x 100,000 euros = $5,000 x 7.5 (using the exchange rate of $1.00 = euro 0.85) = $37,500. Therefore, the correct answer is B, Snooty Importers lost $37,500.

Question 7

The overall impact of foreign exchange rate fluctuations on a firm's value is called

Accepted Answer

Economic exposure refers to the overall impact of foreign exchange rate fluctuations on a firm's value, including changes in its cash flow, market share, and competitiveness. Interest rate risk relates to potential losses or gains due to changes in interest rates, and transaction exposure refers to the risk of financial losses due to exchange rate fluctuations between the time a transaction is initiated and completed. Therefore, neither A nor B are the best choices.

Question 8

Suppose the spot exchange rate is 0.5491 pounds per U.S.dollar,while the risk-free borrowing rates are 4% in Britain and 3% in the United States.If the current forward exchange rate is also 0.5491 pounds per dollar,what opportunity exists?

Accepted Answer

The interest rate differential suggests borrowing in the U.S. at 3% and investing in Britain at 4% while locking in the exchange rate with a forward contract to sell pounds forward.

Question 9

Today,the price of an October oil futures contract closed at $49.50 per barrel.Yesterday,the contract closed at $50.25.When margin accounts are marked to market,

Accepted Answer

When margin accounts are marked to market, long positions will have the difference between the current price and the previous price deducted from their account. Therefore, in this case, long positions will have $0.75 per barrel deducted from their account. Short positions, on the other hand, would have $0.75 per barrel added to their account. No changes are made until the October expiration unless the position is closed out or adjusted before then.

Question 10

NARRBEGIN: Exhibit 17-1
Exhibit 23-1
S&P 500 Index; $250 ´ index May 2004
 
-Refer to Exhibit 23-1.If you are interested in purchasing a September S&P 500 index futures contract,what is the value of that contract?

Accepted Answer

1049.9(250)= 262,475

Question 11

The average price at which a futures contract sell at the end of the trading day is called the

Accepted Answer

The settlement price is the price at which a futures contract is settled at the end of the trading day. This is determined by the exchange and is used to calculate gains or losses for traders holding futures contracts. The opening price is the price at which a futures contract starts trading for the day, while the closing price is simply the last price at which a futures contract trades. There is no such thing as a lifetime price in the context of futures trading. Therefore, the best choice is C.

Question 12

If the current spot exchange rate on the Euro is €0.7805/$ and the one year risk free rate for borrowing in dollars is 3% and 4% for borrowing in Euros,what should be the one year $/€ forward exchange rate?

Accepted Answer

(1/.7805)(1.03/1.04)= 1.2689

Question 13

NARRBEGIN: Exhibit 17-1
Exhibit 23-1
S&P 500 Index; $250 ´ index May 2004
 
-Refer to Exhibit 23-1.How many June contracts were outstanding at the end of the trading day?

Accepted Answer

The table in Exhibit 23-1 shows that there were 183,158 June contracts outstanding at the end of the trading day, as indicated in the row labeled "Open Interest" under the column labeled "June."

Question 14

NARRBEGIN: Exhibit 17-1
Exhibit 23-1
S&P 500 Index; $250 ´ index May 2004
 
-Refer to Exhibit 23-1.What is the highest value at which the June contract has ever been quoted?

Accepted Answer

1044.2(250)= 261,050

Question 15

A call option on interest rates is called an

Accepted Answer

A call option on interest rates is called an interest rate cap. An interest rate cap is a contract that gives the holder the right, but not the obligation, to receive payments at the end of each period when the interest rate exceeds a predetermined level, known as the cap rate. This is used to limit exposure to interest rate moves above a certain level.

Question 16

If the current spot exchange rate on the Euro is $1.2812/€ and the two year risk free rate for borrowing in dollars is 3% and 4% for borrowing in Euros,what should be the two year $/€ forward exchange rate?

Accepted Answer

1.2812[(1.03)^2/(1.04)^2] = 1.2567

Question 17

You plan to buy a 2 year zero coupon bond one year from today.If the risk free rate is 5.6% and the forward price for the bond is $843.25,what should be the current price of a three year zero-coupon bond?

Accepted Answer

843.25 = $(1.056)
$ = 798.53

Question 18

NARRBEGIN: Exhibit 17-1
Exhibit 23-1
S&P 500 Index; $250 ´ index May 2004
 
-Refer to Exhibit 23-1.For the purpose of marking to market what is the current value of the December contract?

Accepted Answer

1059.35(250)= 264,837.50

Question 19

You plan to buy a 2 year zero coupon bond one year from today.If the risk free rate is 5.6% and a three year zero-coupon bond currently sells for $843.25,what should be the forward price?

Accepted Answer

843.25(1.056)= 890.47

Question 20

Suppose the spot price of oil is $49.50 per barrel,while the October futures price is $51.00 per barrel.For this contract,the basis is

Accepted Answer

The basis is calculated by subtracting the spot price from the futures price, so in this case the basis is $51.00 - $49.50 = $1.50. Choice A is incorrect because it is the futures price, not the basis. Choice B is incorrect because it is the spot price, not the basis. Choice D is incorrect because it is an unrelated price.

Quiz 23: Risk Management