Chapter 19 uest|ons

1he correcL answer for each quesLlon ls

lndlcaLed by a







1



SpeculaLors ln fuLures markeLs someLlmes use complex sLraLegles such as spreads and
sLraddles Whlch of Lhe followlng sLaLemenLs abouL Lhese sLraLegles ls correcL?



A)

A speculaLor who buys nlneLyday blll fuLures conLracLs for dellvery ln !une and
SepLember 200x has consLrucLed a sLraddle





8)


A speculaLor who buys nlneLyday blll fuLures conLracLs for dellvery ln !une and
SepLember 200x has consLrucLed a spread



C)

A speculaLor who buys a nlneLyday blll fuLures conLracL and slmulLaneously sells a
Lhreeyear 1reasury bond fuLures conLracL has consLrucLed a sLraddle





D)


A speculaLor who buys a nlneLyday blll fuLures conLracL and slmulLaneously sells a
Lhreeyear 1reasury bond fuLures conLracL has consLrucLed a spread

Ieedback A stradd|e |s constructed by s|mu|taneous|y buy|ng and se|||ng |dent|ca| futures contracts
w|th d|fferent de||very months so the transact|ons out||ned |n A and C are not stradd|es A spread |nvo|ves s|mu|taneous|y
buy|ng and se|||ng contracts that are re|ated but not |dent|ca| 1herefore the transact|ons out||ned |n 8 do not form a spread
but those descr|bed |n D are a spread so |t |s correctMCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 646647



2

















A company manager expecLs Lo have approxlmaLely $10 mllllon avallable Lo lnvesL ln Lwo
monLhs Llme 1he funds wlll be lnvesLed ln bank bllls and Lhe currenL yleld on nlneLyday bllls ls
seven per cenL per annum 1o hedge Lhe company buys 10 blll fuLures conLracLs quoLed aL
9323 1wo monLhs laLer Lhe yleld on nlneLyday bank bllls has fallen Lo slx per cenL per annum
Lhe fuLures poslLlon ls closed ouL aL 941 and Lhe company buys bank bllls wlLh a face value of
$10 mllllon WhaL ls Lhe reLurn on Lhls lnvesLmenL?



A)

60 per cenL per annum




8)
683 per cenL per annum





C)
673 per cenL per annum


D)
693 per cenL per annum

Ieedback
When the futures contracts are purchased the pr|ce w||| be 51 000 000]1 + 0067S x (90]36S)
5983 6286S and when they are so|d the pr|ce w||| be 51 000 000]1 + 00S9 x (90]36S) 598S 66066 so there |s a ga|n of 52
03201 per contract or 520 3201 |n tota| When the b|||s are purchased the cost w||| be 510 000 000]1 + (006 x 90]36S) 59
8S4 21166 A||ow|ng for the ga|n on futures the net out|ay w||| be 59 833 891S6 so the do||ar return on the b|||s w||| be 5(10
000 000 #8211 9 833 891S6) 5166 10844 I|na||y the annua| rate of return |s (166 10844]9 833 891S6) x (36S]90) 0068S
or 68S per cent per annum so 8 |s correctMCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 6S0 and 6S1




3





Cn 13 May 200x Lhe yleld on nlneLyday bank bllls ls 6 per cenL per annum and Lhe nlneLyday
bank accepLed blll fuLures conLracL maLurlng ln uecember 200x ls quoLed aL 9380
MulLlnaLlonal LlmlLed ls plannlng Lo lssue promlssory noLes wlLh a value of $100 mllllon ln
AugusL 200x Cn 13 May Lhe company sells 100 blll fuLures conLracLs whlch are closed ouL ln
AugusL Whlch of Lhe followlng rlsks ls presenL?






A)


noneLhe hedge should be perfecL


8)
8asls rlsk




C)
8asls rlsk and cross commodlLy hedge rlsk





D)
ConLracL slze mlsmaLch

Ieedback S|nce the futures contracts are c|osed out we|| before exp|ry bas|s r|sk |s present and s|nce
d|fferent secur|t|es are |nvo|ved cross commod|ty hedge r|sk |s a|so present so C |s correctMCkL I|nanc|a| Inst|tut|ons
Instruments and Markets 6]e pp 6S6 and 6S7



4





A speculaLor consLrucLs a spread poslLlon by buylng a nlneLyday bank accepLed blll fuLures
conLracL and slmulLaneously selllng a Lhreeyear 1reasury bond fuLures conLracL Whlch of Lhe
followlng descrlpLlons of Lhe expecLaLlons behlnd Lhls poslLlon ls mosL accuraLe?



A)

1he yleld curve ls usual and ls expecLed Lo flaLLen




8)
1he yleld curve ls expecLed Lo become lnverse





C)
1he yleld on nlneLyday bllls ls expecLed Lo rlse and Lhe yleld on Lhreeyear bonds ls
expecLed Lo fall



D)

1he yleld on nlneLyday bllls ls expecLed Lo fall and Lhe yleld on Lhreeyear bonds ls
expecLed Lo rlse

Ieedback S|nce the specu|ator has bought the b|||s contract and so|d the bond
contract he or she w||| ga|n |f the pr|ce of the b|||s contract |ncreases and]or the pr|ce of the bond contract
decreases 1he pr|ce and y|e|d of a f|xed |nterest secur|ty w||| change |n oppos|te d|rect|ons 1herefore the
specu|ator w||| ga|n |f the y|e|d on n|netyday b|||s fa||s and the y|e|d on threeyear bonds r|ses as descr|bed |n
DMCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 646647


S





Cn 27 Aprll 200x Lhe yleld on nlneLyday bank bllls ls seven per cenL per annum and Lhe nlneLy
day bank accepLed blll fuLures conLracL maLurlng ln SepLember 200x ls quoLed aL 9273 8ed
1lmber LlmlLed ls plannlng Lo borrow approxlmaLely $2 mllllon by acLlvaLlng a blll faclllLy durlng
!une Cn 27 Aprll Lhe company sells Lwo blll fuLures conLracLs and lLs flnanclal manager expecLs
Lo lock ln a borrowlng cosL of 100 9273 723 per cenL per annum Cn 28 !une Lhe company
lssues bllls wlLh a LoLal face value of $2 mllllon aL a yleld of 73 per cenL per annum and closes
ouL Lhe fuLures poslLlon aL 9260 WhaL ls Lhe effecLlve cosL of Lhe borrowed funds afLer
allowlng for Lhe galn or loss on Lhe fuLures conLracLs?






A)


723 per cenL per annum


8)
733 per cenL per annum




C)
713 per cenL per annum





D)
760 per cenL per annum


Ieedback
When the futures contracts are so|d the y|e|d |s 100 #8211 927S 72S per cent wh|ch
corresponds to a b||| pr|ce of 51 000 000]1 + 0072S x (90]36S) 5982 4372S When the contracts are bought the y|e|d |s 74
per cent g|v|ng a b||| pr|ce of 51 000 000]1 + 0074 x (90]36S) 5982 08040 so there |s a ga|n on the futures of 5982 4372S
#8211 5982 08040 53S68S per contract or a tota| of 571370 Issu|ng the b|||s at 7S per cent per annum w||| prov|de a cash
|nf|ow of 52 000 000]1 + 007S x (90]36S) 51 963 68S27 Inc|ud|ng the ga|n on the futures contracts the company rece|ves a
tota| of 51 964 39897 and |t w||| have to repay 52 m||||on n|nety days |ater 1herefore the effect|ve cost of the funds |s (53S
60103]51 964 39897) x (36S]90) 73S per cent per annum as |n 8MCkL I|nanc|a| Inst|tut|ons Instruments and Markets
6]e pp 6496S0






6


lorwards and fuLures are lmporLanL flnanclal lnsLrumenLs used ln rlsk managemenL ldenLlfy
whlch of Lhe followlng sLaLemenLs ln relaLlon Lo a comparlson beLween forward and fuLures
conLracLs ls lncorrecL





A)


lorwards are Lraded overLhecounLer whlle fuLures are Lraded on Lhe exchange



8)

Margln paymenLs are requlred for forwards whlle Lhey are ofLen vold by Lhe
exchange ln Lhe case of fuLures Lradlng





C)


1he Lerms of a forward conLracL can be negoLlaLed beLween buyers and sellers
whereas Lhe Lerms of a fuLures conLracL ls sLandardlsed by Lhe exchange



D)

none of Lhe glven opLlons

Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 638




7


1hough Lhe Lypes of fuLures conLracLs belng offered vary beLween dlfferenL exchanges around
Lhe world Lhe Lradlng convenLlon has been qulLe slmllar ldenLlfy whlch of Lhe followlng
sLaLemenLs ln relaLlon Lo fuLures Lradlng ln AusLralla ls correcL





A)


luLures Lradlng ls currenLly conducLed on Lhe Lradlng floor of ASx by a sysLem
known as open ouLcry



8)

luLures conLracLs of a 10year 1reasury bond are quoLed aL lLs yleld Lo maLurlLy
belng exacL Lo Lhree declmal places





C)


Lach parLy of Lhe conLracL can avold physlcal dellvery of Lhe underlylng asseLs by
closlng ouL Lhe fuLures conLracL by Lhe explry daLe of Lhe conLracL



D)

none of Lhe glven opLlons

Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 638




8


An AusLrallan 10year 1reasury bond fuLures conLracL has a face value of $100000 and pays 6
pa coupons semlannually CalculaLe Lhe reLurn made by a dealer who boughL lL aL 90300 and
sells lL 91300





A)


630





8)
730

C)
920




D)
none of Lhe glven opLlons


Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 641


9





3 monLhs ago Company x? Look a long poslLlon on an AusLrallan 10year 1reasury bond
fuLures conLracL whlch has a face value of $100000 and pays 6 pa coupons semlannually
An lnlLlal margln of $10000 was requlred by Lhe SlL aL Lhe LlmeAssumlng LhaL Lhe markeL
prlce of Lhe conLracL falls from 91230 Lo 89130 Loday calculaLe Lhe mlnlmum amounL of
money LhaL Company x? needs Lo add Lo Lhe margln accounL held wlLh SlL glven LhaL lLs
currenL balance ls $20000






A)


$1107960


8)
$1089890




C)
$107960





D)
$89890


Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 642643



10





ldenLlfy whlch of Lhe followlng correcLly speclfles Lhe appllcable seLLlemenL of a 3year 1reasury
bond fuLures conLracL Lraded on SlL (l) SLandard dellvery of a 3year 1reasury bond(ll) Cash
seLLlemenL wlLh Lhe oLher parLy of Lhe conLracL(lll) Cash seLLlemenL wlLh Lhe clearlng house



A)

(l) only




8)
(ll) only



C)


(lll) only


D)
LlLher (l) or (lll)

Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 643644



11 CCkkLC1


unllke hedgers speculaLors enLer Lhe markeL wlLh a vlew of maklng proflL from purposely
Laklng rlsk ldenLlfy whlch of Lhe followlng sLaLemenLs ln relaLlon Lo speculaLors ls lncorrecL





A)


A speculaLor and a hedger who hold Lhe same vlew abouL expecLed movemenLs of
Lhe underlylng asseL prlce wlll Lake dlfferenL poslLlons ln Lhe fuLures markeL



8)

SpeculaLors who expecL Lhe asseLs Lo rlse would Lake a long poslLlon and buy Lhe
conLracL now





C)


SpeculaLors are ofLen Lhe counLerparLy Lo a poslLlon LhaL a hedger wanLs Lo Lake





D)
1he exlsLence of speculaLors lmprove Lhe llquldlLy and Lhe lnformaLlonal efflclency
of Lhe fuLures markeL


Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e pp 646647



12


A company expecLs Lo borrow $1 mllllon ln Lhree monLhs Whlle Lhe currenL lnLeresL raLe ls 7
pa Lhe 1reasurer expecLs lnLeresL raLes wlll rlse Pence lL goes shorL ln a 90day bank blll
fuLures conLracL aL 92300 CalculaLe Lhe effecLlve cosL of borrowlng as a resulL of Lhe hedge
consLrucLed above assumlng LhaL lnLeresL raLe wlll ln facL lncrease Lo 8 pa and LhaL Lhe 90
day bank blll fuLures conLracL wlll be Lraded aL 91730 ln Lhree monLhs Llme





A)


73 pa





8)
723 pa





C)
800 pa

D)
none of Lhe glven opLlons

Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 649




13 CCkkLC1


luLurex LLd expecLs Lo lnvesL ln $3 mllllon worLh ln 1reasury bonds ln Lhree monLhs LxpecLlng
LhaL lnLeresL raLes wlll fall lL goes long ln 30 Lhreeyear AusLrallan 1reasury bond fuLures

conLracLs whlch are currenLly Lraded aL 93430 CalculaLe Lhe reLurn on lLs fuLures poslLlon
assumlng LhaL Lhe prlce of Lhose fuLures conLracLs wlll rlse Lo 94330 ln Lhree monLhs Llme





A)


690





8)
680

C)
610




D)
none of Lhe glven opLlons


Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 649


14





An AusLrallan company expecLs Lo collecL uSu78000 ln 3 monLhs Llme Whlle expecLlng LhaL
Lhe exchange raLe wlll lncrease lL goes long on a fuLures conLracL aL Auu/uSu07900 CalculaLe
Lhe proflL (loss) obLalned when Lhe fuLures poslLlon ls closed ouL aL Auu/uSu08100 ln 3
monLhs Llme






A)


A proflL of Auu2000 ls obLalned


8)
A loss of Auu2000 ls obLalned




C)
A proflL of uSu2000 ls obLalned





D)
A loss of uSu2000 ls obLalned


Ieedback MCkL I|nanc|a| Inst|tut|ons Instruments and Markets 6]e p 6S2