Unformatted text preview: Chapter 19 Questions
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Speculators in futures markets sometimes use complex strategies such as spreads and straddles.
Which of the following statements about these strategies is correct?
A) A speculator who buys ninety-day bill futures contracts for delivery in June and September
200X has constructed a straddle.
B) A speculator who buys ninety-day bill futures contracts for delivery in June and September
200X has constructed a spread.
C) A speculator who buys a ninety-day bill futures contract and simultaneously sells a threeyear Treasury bond futures contract has constructed a straddle.
Feedback: A straddle is constructed by simultaneously buying and selling identical futures contracts with
D) A speculator who buys a ninety-day
different delivery months, so the transactions outlined bill A and C are notand simultaneously sells a threein futures contract straddles. A spread involves
year Treasury contracts that are related but not identical. Therefore, the transactions
simultaneously buying and sellingbond futures contract has constructed a spread.
outlined in B do not form a spread but those described in D are a spread, so it is correct.MORE: Financial
Institutions, Instruments and Markets 6/e, pp. 646-647. 2 4 2
A company manager expects to have approximately $10 million available to invest in two months' time.
The funds will be invested in bank bills and the current yield on ninety-day bills is seven per cent per
A) 6.0 per cent per annum
annum. B) hedge, the company buys 10 bill will be $1 000 000/[1 + at 93.25. Two months later,
When the futures contracts are purchased, the pricefutures contracts quoted 0.0675 x (90/365)] = $983 the
6.85 per cent per annum
yield on ninety-day
bills has fallen $1 000 000/[1 + 0.059 x (90/365)] = $985 660.66, so there is
628.65, and when they areper bank per annum be to six per cent per annum, the futures position is closed out at
C) 6.75 sold, the price will
9 032.01 the company buys bank bills total. face value of $10 million. What the cost will be $10
a gain of $2 4.1 and per contract or $20 320.1 in with a When the bills are purchased is the return on this 000
cent per annum
investment? = per854 211.66. Allowing for the gain on futures, the net outlay will be $9 833
000/[1 + (0.06 x 90/365)] $9
891.56 so the dollar return on the bills will be $(10 000 000 – 9 833 891.56) = $166 108.44. Finally, the
Feedback: of return is (166 108.44/9 833 891.56) x (365/90) = 0.0685 or 6.85 per cent per annum, so B is
correct.MORE: Financial Institutions, Instruments and Markets 6/e, pp. 650 and 651. 3 4 3
On 15 May 200X the yield on ninety-day bank bills is 6 per cent per annum and the ninety-day bank
accepted bill futures contract,should bein December 200X, is quoted at 93.80. MultiNational Limited is
A) None—the hedge maturing perfect
planning to issue promissory notes with a value of $100 million in August 200X. On 15 May the
B) Basis risk
company sells 100 bill futures contracts which are closed out in August. Which of the following risks is
present? Basis risk and cross commodity hedge risk
D) futures size mismatch
Feedback: Since the Contractcontracts are closed out well before expiry, basis risk is present and since
different securities are involved cross commodity hedge risk is also present so C is correct.MORE:
Financial Institutions, Instruments and Markets 6/e, pp. 656 and 657. 4 4 4
A speculator constructs a spread position by buying a ninety-day bank accepted bill futures contract
and simultaneously selling a three-year Treasury bond flatten. contract. Which of the following
A) The yield curve is usual and is expected to futures
descriptions of the expectations behind this position is most accurate?
B) The yield curve is expected to become inverse.
C) The yield on ninety-day bills is expected to rise and the yield on three-year bonds is
expected to fall.
Feedback: Since the speculator has bought the bills contract and sold the bond contract, he or she will
D) The yield on ninety-day bills is expected to fall and
gain if the price of the bills contract increases and/or the price of thethe yield on three-year bonds is price
bond contract decreases. The
expected to rise.
and yield of a fixed interest security will change in opposite directions. Therefore, the speculator will gain
if the yield on ninety-day bills falls and the yield on three-year bonds rises, as described in D.MORE:
Financial Institutions, Instruments and Markets 6/e, pp. 646-647. 5 4 5
On 27 contracts are sold, the yield is bank bills is 92.75 = 7.25 per cent, which the ninety-day
When the futuresApril 200X the yield on ninety-day100 –seven per cent per annum and corresponds to a
bank accepted + 0.0725 per annum = $982 in September the is quoted at 92.75. Red Timber
bill price of $1 000A) 7.25bill futures contract maturing 437.25. When200Xcontracts are bought, the yield is 7.4
000/[1 per cent x (90/365)]
Limited is price of $1 000 000/[1 +
per cent giving a billplanning to borrowannum 0.074 x $2 million = $982 080.40 so there is a gain on the 27
B) 7.35 per cent per approximately (90/365)] by activating a bill facility during June. On
April the company sells two bill futures contracts and its financial manager expects to lock the
futures of $982 437.25 – $982 080.40 = $356.85 per contract, or a total of $713.70. Issuingin a bills at
C) 7.15 per cent per annum
borrowing cost of 100 – 92.75 = 7.25 per cent per annum. On0.075 x (90/365)] = $1 963 685.27.with a
7.5 per cent per annum will provide a cash inflow of $2 000 000/[1 + 28 June the company issues bills
D) 7.60 of $2 million at a yield
total face value per cent per annum of 7.5 per cent per annum and $1 964 398.97 and it will have
Including the gain on the futures contracts, the company receives a total of closes out the futures position at
2.60. What is days later. Therefore, the effective cost of the funds the gain or loss on the futures
to repay $29million ninetythe effective cost of the borrowed funds after allowing for is ($35 601.03/$1 964 398.97)
Feedback: c7.35 per
x (365/90) = ontracts?cent per annum, as in B.MORE: Financial Institutions, Instruments and Markets 6/e,
pp. 649-650. 6 4 6
Forwards and futures are important financial instruments used in risk management. Identify which of
the following statements in relation to a comparison between forward and futures contracts is incorrect.
Forwards are traded over-the-counter, while futures are traded on the exchange.
B) Margin payments are required for forwards while they are often void by the exchange in the
case of futures trading.
C) The terms of a forward contract can be negotiated between buyers and sellers, whereas the
terms of a futures contract is standardised by the exchange.
D) None of the given options.
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 638. 7 4 7
Though the types of futures contracts being offered vary between different exchanges around the
world, the trading convention has been quite similar. Identify which of the following statements in
A) Futures trading is currently conducted on the trading floor of ASX, by a system known as
relation to futures trading in Australia is correct.
B) Futures contracts of a 10-year Treasury bond are quoted at its yield to maturity being exact
to three decimal places.
C) Each party of the contract can avoid physical delivery of the underlying assets by closing
out the futures contract by the expiry date of the contract.
D) None of the given options
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 638.
8 8 4
An Australian 10-year Treasury bond futures contract has a face value of $100,000 and pays 6% p.a.
coupons semi-annually. Calculate the return made by a dealer who bought it at 90.500 and sells it
D) None of the given options
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 641. 9 9 4
3 months ago, Company X&Y took a long position on an Australian 10-year Treasury bond futures
which has a face value of $100,000 and pays 6% p.a. coupons semi-annually. An initial
margin of $10,000 was required by the SFE at the time.Assuming that the market price of the contract
falls from 91.250 to 89.150 today, calculate the minimum amount of money that Company X&Y needs
to add to the margin account held with SFE, given that its current balance is $20,000.
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 642-643. 10
Identify which of the following correctly specifies the applicable settlement of a 3-year Treasury bond
futures contract traded on SFE. (I) Standard delivery of a 3-year Treasury bond(II) Cash settlement
A) (I) only
with the B)
other party of the contract(III) Cash settlement with the clearing house
C) (III) only
D) Either (I) or (III)
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 643-644. 11
Unlike hedgers, speculators enter the market with a view of making profit from purposely taking risk.
Identify which of the following statements in relation to speculators is incorrect.
A) A speculator and a hedger who hold the same view about expected movements of the
underlying asset price will take different positions in the futures market.
B) Speculators who expect the assets to rise would take a long position and buy the contract
C) Speculators are often the counterparty to a position that a hedger wants to take.
D) The existence of speculators improve the liquidity and the informational efficiency of the
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, pp. 646-647. 12
A company expects to borrow $1 million in three months. While the current interest rate is 7% p.a., the
Treasurer expects interest rates will rise. Hence, it goes short in a 90-day bank bill futures contract at
A) 7.5% pa
Calculate the effective cost of borrowing as a result of the hedge constructed above, assuming
that interest rate will, in fact, increase to 8% p.a. and that the 90-day bank bill futures contract will be
C) 8.00% pa
traded at 91.750 in three months' time.
D) None of the given options
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 649. 13
Futurex Ltd expects to invest in $5 million worth in Treasury bonds in three months. Expecting that
interest A) will fall, it goes long in 50 three-year Australian Treasury bond futures contracts which
are currently traded at 93.450. Calculate the return on its futures position, assuming that the price of
those futures contracts will rise to 94.350 in three months' time.
D) None of the given options
Feedback: MORE: Financial Institutions, Instruments and Markets 6/e, p. 649. 14
An Australian company expects to collect USD78,000 in 3 months' time. While expecting that the
exchange rate will of AUD2,000 is obtained a futures contract at AUD/USD0.7900. Calculate the profit
A) A profit increase, it goes long on
(loss) obtained when the futures position is closed out at AUD/USD0.8100 in 3 months' time.
B) A loss of AUD2,000 is obtained
C) A profit of USD2,000 is obtained
D) A loss of USD2,000 is obtained
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- futures contracts, SFE