jawz

Which of the following is an advantage of using financial futures for asset allocation purposes instead of the cash market securities? Futures:

A) can be tailored to an investor's particular requirements.

B) offer time savings.

C) are traded over-the-counter which eliminates the market impact of large transactions.

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It will take less time to execute the asset allocation shift using futures than with buying and selling individual stocks and bonds.

jawz

Which of the following statements about bond portfolio management is least accurate?

A) To increase the duration of a bond portfolio through futures, the portfolio manager should sell futures contracts.

B) A portfolio managers sold a floor to finance the purchase of a cap in anticipation of higher interest rates on a floating-rate liability.

C) A portfolio manager with a $50 million face value in bonds and a futures contract with $100,000 face value should use 500 futures contracts according to the Face Value Naive model.

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To increase the duration of a bond portfolio through futures, the portfolio manager should buy futures contracts.

jawz

Which of the following is NOT an advantage of using financial futures for asset allocation?

A) Less portfolio disruption.

B) More precise hedging.

C) Time savings.

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Using financial futures contracts will save time and cause less portfolio disruption. However, futures contracts expose the manager to basis risk, wherein the futures contract and the portfolio are not perfectly correlated, leading to return differences between the futures position and the underlying exposure that is being replicated.

jawz

Which of the following is NOT an advantage of using futures instead of cash market instruments to alter portfolio risk?

A) Lower transaction costs.

B) Higher margin requirements.

C) Greater leverage opportunities.

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Lower margin requirements are one of the advantages of using futures instead of cash market instruments. The margin requirements are lower for futures, which allows for greater leverage.

jawz

John Hanes serves as a portfolio manager for Stackhouse Investments. One of his clients, the Red Wing Corporation, holds a $50 million face value position in a T-bill that matures in 182 days on March 21 (today is September 21). Red Wing also owns a $100 million position in a floating rate note (FRN) that matures in one year, pays LIBOR plus 25bp and has interest rate reset dates on December 21, March 21, and June 21. Red Wing has indicated that they need to sell the T-bill investment sooner than anticipated to fund an unexpected series of cash outflows.
Which of the following positions would effectively shorten the maturity of your client's Treasury bill investment and hedge your client against adverse movements in interest rates until the sale date given that one T-bill contract controls $1,000,000 in T-bills?

A) Buy 50 T-bill futures contracts.

B) Sell 500 T-bill futures contracts.

C) Sell 50 T-bill futures contracts.

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Since the client owns $50 million of face value of the T-bill, we should sell 50 December T-bill futures contracts. We sell 50 contracts because each contract controls a $1 million T-bill with a 90-92 day maturity upon expiration of the futures.

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Assuming interest rates rise, which of the following CORRECTLY describes the outcome regarding the ultimate disposal of the T-bill?

A) The T-bill will lose value, but the short T-bill futures contracts will gain in value to offset the loss.

B) The T-bill futures contract will lose value, but the Treasury bill will gain in value to offset the loss.

C) The holdings of T-bill futures contracts will have to be reduced (rebalanced) in order to maintain the current hedged relationship.

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This position will also hedge your client against adverse movements in interest rates should he decide to sell before the expiry of the T-bill futures. If interest rates rise, the T-bill will lose value, but the short T-bill futures position will gain value to offset this loss.

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Which of the following is a methodology that could be employed to convert your client's FRN to a one-year fixed rate structure?

A) Enter into an interest rate collar.

B) Purchase an interest rate cap.

C) Enter into a one-year, quarterly, receive-fixed interest rate swap.

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The swap will have a single fixed rate that will be received on a quarterly basis. The LIBOR payments from the swap will cancel with the LIBOR receipts from the client’s FRN. The net cash flow will be the swap fixed rate plus 25bp.

jawz

Which of the following is NOT an advantage of using financial futures for asset allocation purposes instead of the cash market securities?

A) Large orders have a very small market impact in the futures market.

B) Futures are priced exactly the same as the underlying asset but are more liquid.

C) Futures have lower brokerage fees.

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Futures are not priced exactly the same as the underlying cash asset. The difference between the two prices is the basis which is normally not equal to zero.

jawz

Which of the following is an advantage of using futures instead of cash market instruments to alter portfolio risk?

A) Transaction costs for trading futures are lower than trading in the cash market.

B) Futures provide higher returns than cash market instruments.

C) Futures can be customized to match any specific customer needs.

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There are three main advantages to using futures over cash market instruments. All three advantages are derived from the fact that there are low transactions costs and a great deal of depth in the futures market.Compared to cash market instruments, futures:

1. Are more liquid.
2. Are less expensive.
3. Make short positions more readily obtainable, because the contracts can be more easily shorted than an actual bond.

jawz

A portfolio manager is considering increasing the dollar duration of a portfolio by either buying more bonds or buying futures contracts. Having used a reliable model to determine a bond position and a futures position that have equal dollar durations, choosing to add the futures position to the existing portfolio will increase the final portfolio’s dollar duration:

A) by an amount equal to the proposed bond position.

B) more than the proposed bond position.

C) significantly, but less than the proposed bond position.

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Theoretically, using bonds or futures can accomplish the same goal.

jawz

A manager buys a position in futures contracts that have a dollar duration (for a forecasted interest rate change) equal to $22,500. Before buying the futures contracts, the manager’s fixed income portfolio had a dollar duration (for the forecasted interest rate change) equal to $40,500. The dollar duration of the combined position is:

A) -$18,000.

B) $63,000.

C) $18,000.

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This is an application of the formula DDP = DDP w/o futures + DDFutures position

jawz

A manager of a fixed-income portfolio sells futures contracts identical to contracts it already owns. With respect to the portfolio under management, the effect of this will be to:

A) increase modified duration.

B) increase the value.

C) decrease dollar duration.

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The only one of the choices we know for sure is that dollar duration will decline. The act of closing a futures contract does not necessarily change a portfolio’s value one way or another. The modified duration is a weighted average of the durations of the positions and not the dollar durations, it may go up or down.