If the anticipated market value materializes what

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44. If the anticipated market value materializes, what will be your expected loss on the portfolio? A. 7.58% B. 6.52% C. 15.43% D. 8.57% E. 6.42% The change would represent a drop of (915 - 990)/990 = 7.58% in the index. Given the portfolio's beta, your portfolio would be expected to lose 0.86 * 7.58% = 6.52% Difficulty: Moderate 23-21
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Chapter 23 - Futures, Swaps, and Risk Management 45. What is the dollar value of your expected loss? The dollar value equals the loss of 6.52% times the $1 million portfolio value = $65,200. Difficulty: Easy 46. For a 75-point drop in the S&P500, by how much does the index change? The change is 75 points times the $250 multiplier, which equals $18,750. Difficulty: Easy 23-22
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Chapter 23 - Futures, Swaps, and Risk Management 47. How many contracts should you buy or sell to hedge your position? Allow fractions of contracts in your answer. The number of contracts equals the hedge ratio = Change in portfolio value / Profit on one futures contract = $65,200/$18,750 = 3.477. You should sell the contract because as the market falls the value of the futures contract will rise and will offset the decline in the portfolio's value. Difficulty: Moderate 23-23
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Chapter 23 - Futures, Swaps, and Risk Management 48. Covered interest arbitrage ____________. A. ensures that currency futures prices are set correctly B. ensures that commodity futures prices are set correctly C. ensures that interest rate futures prices are set correctly D. A and B E. none of the above Covered interest arbitrage ensures that currency futures prices are set correctly. Difficulty: Easy 49. A hedge ratio can be computed as ____________. A hedge ratio can be computed as the change in value of the unprotected position for a given change in the exchange rate divided by the profit derived from one futures position for the same exchange rate. Difficulty: Moderate 23-24
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Chapter 23 - Futures, Swaps, and Risk Management
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