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标题: Derivative Investments【Reading 55】Sample [打印本页]
作者: kmf229    时间: 2012-4-3 12:09     标题: [2012 L2] Derivative Investments【Session 16- Reading 55】Sample

What is the difference between spot and futures prices? Spot prices are always:
A)
lower than futures prices.
B)
equal to the futures price at futures expiration.
C)
delivered to meet the futures obligation at expiration.


The difference between the spot and the futures price must be zero at expiration to avoid arbitrage
作者: kmf229    时间: 2012-4-3 12:09

The difference between the spot and the futures price must converge to zero at futures expiration because:
A)
the futures contract becomes equivalent to the underlying asset at expiration.
B)
an arbitrage trade can be implemented using only other futures contracts.
C)
the futures contract has to be worth the same as all other delivery months.


If the futures and spot prices are not equal, arbitrage activity will occur.
作者: kmf229    时间: 2012-4-3 12:10

Regarding futures contracts, the spot price refers to the:
A)
price of the underlying asset in a particular location, or ‘spot’, in the future.
B)
present value of the expected future price.
C)
current market price of the asset underlying the futures contract.


The spot price refers to the current market price of the asset underlying the contract. It is the price for immediate delivery of the asset.
作者: kmf229    时间: 2012-4-3 12:10

At the expiration of a futures contract, the futures price is:
A)
equal to the market price for immediate delivery of the asset.
B)
the same as the price at the initiation of the contract.
C)
above or below the market price, depending on supply and demand.


At expiration, the futures price is equal to the price of the asset for immediate delivery because the contract calls for delivery of the asset on that date. Note that at expiration, the spot price and the futures price are equal.
作者: kmf229    时间: 2012-4-3 13:06

At the expiration of a futures contract, the difference between the spot and the futures price is:
A)
equal to zero.
B)
always positive.
C)
at its point of highest volatility.


The difference must be zero at expiration because both the spot price and the futures price are, at that point in time, the price of the underlying asset for immediate delivery.
作者: kmf229    时间: 2012-4-3 13:08

The primary difference in credit risk between forwards and futures contracts is most likely because:
A)
forwards markets have higher-quality participants.
B)
futures markets have higher-quality participants.
C)
futures are marked to market daily.


Futures are marked to market daily—this reduces credit risk to a single day’s losses.
作者: kmf229    时间: 2012-4-3 13:09

The value of a futures contract between the times when the account is marked-to-market is:
A)
never less than the value of a forward contract entered into on the same date.
B)
equal to the difference between the price of a newly issued contract and the settle price at the most recent mark-to-market period.
C)
the same as the contract price.


Between the mark-to-market account adjustments, the contract value is calculated just like that of a forward contract; it is the difference between the price at the last mark-to-market and the current futures price, (i.e. the futures price on a newly issued contract). The mark-to-market of a futures contract is the payment or receipt of funds necessary to adjust for the gains or losses on the position. This adjusts the contract price to the ‘no-arbitrage’ price currently prevailing in the market.
作者: kmf229    时间: 2012-4-3 13:11

The value of a futures contract:
A)
is based on the difference between the futures price at contract initiation and the current futures price.
B)
is equal to the margin balance in the futures account after the mark-to-market period.
C)
is zero after the mark-to-market period.


The value of a futures contract may be positive or negative during a trading day, however when the account is marked-to-market the futures price is effectively reset to the most recent settle price so that the contract has zero value unless the equilibrium price is outside daily price change limits.
作者: kmf229    时间: 2012-4-3 13:12

The value of a futures contract is:
A)
zero when the account is marked to market for an account that has sufficient margin.
B)
equal to the variation margin paid on any given day.
C)
calculated in the same manner as the value of a forward contract.


The value of a futures contract is zero when the account is marked-to-market and there is no margin call. The price of the contract is adjusted to the new ‘no-arbitrage’value, which is theoretically the same as the settle price at the end of trading, as long as price change limits have not been reached. Note that this is different from a forward contract. With a forward contract, the forward price is fixed for the life of the contract so the contract may accumulate either a positive or negative value as the forward price for new contracts changes over the life of the contract.
作者: kmf229    时间: 2012-4-3 13:13

The no-arbitrage price of a futures contract with a spot rate of 990, a time to maturity of 2 years, and a risk-free-rate of 5% is closest to:
A)
1091.
B)
1040.
C)
792.


The no-arbitrage price of a futures contract is based on the spot rate, the time to maturity, and the risk-free-rate.
FP= S0 × (1 + Rf)T

= 990(1.05)2

= 1091
作者: kmf229    时间: 2012-4-3 13:14

Compared to the price on an otherwise identical forward contract, the price of a futures contract is:
A)
always the same at contract initiation.
B)
lower when asset price changes are positively correlated with interest rate changes.
C)
higher when asset price changes are positively correlated with interest rate changes.


A positive correlation between asset price changes and interest rate changes makes the mark-to-market feature attractive to a futures buyer. This leads to a higher futures price compared to the forward price on an otherwise identical contract.
作者: kmf229    时间: 2012-4-3 13:14

When interest rate changes are negatively correlated with the price changes of the asset underlying a futures/forward contract:
A)
futures prices are higher.
B)
forward prices are higher.
C)
futures prices may be higher or lower depending on the risk-free rate and price volatility.


A negative correlation between asset price changes and interest rate changes makes the mark-to-market feature unattractive to a futures buyer. This leads to a lower futures price, compared to the forward price on an otherwise identical contract.
作者: kmf229    时间: 2012-4-3 13:15

Compared to futures prices on a six-month contract, forward prices on an identical contract are:
A)
always higher.
B)
higher, lower, or equal.
C)
equal.


Futures prices may be higher or lower than forward prices on a contract with identical terms, depending on the correlation between interest rate changes and the price changes of the underlying asset. When interest rates and asset values are positively correlated, the futures price tends to be higher, and when interest rates and asset values are negatively correlated, the futures price tends to be lower.
作者: kmf229    时间: 2012-4-3 13:16

To initiate an arbitrage trade if the futures contract is underpriced, the trader should:
A)
borrow at the risk-free rate, buy the asset, and sell the futures.
B)
borrow at the risk-free rate, short the asset, and sell the futures.
C)
short the asset, invest at the risk-free rate, and buy the futures.

Click for Answer and Explanation

If the futures price is too low relative to the no-arbitrage price, buy futures, short the asset, and invest the proceeds at the risk-free rate until contract expiration. Take delivery of the asset at the futures price, pay for it with the loan proceeds and keep the profit. For Treasury bill (T-bills), shorting the asset is equivalent to borrowing at the T-bill rate. To initiate an arbitrage trade if the futures contract is underpriced, the trader should:
A)
borrow at the risk-free rate, buy the asset, and sell the futures.
B)
borrow at the risk-free rate, short the asset, and sell the futures.
C)
short the asset, invest at the risk-free rate, and buy the futures.


Click for Answer and Explanation

If the futures price is too low relative to the no-arbitrage price, buy futures, short the asset, and invest the proceeds at the risk-free rate until contract expiration. Take delivery of the asset at the futures price, pay for it with the loan proceeds and keep the profit. For Treasury bill (T-bills), shorting the asset is equivalent to borrowing at the T-bill rate. To initiate an arbitrage trade if the futures contract is underpriced, the trader should:
A)
borrow at the risk-free rate, buy the asset, and sell the futures.
B)
borrow at the risk-free rate, short the asset, and sell the futures.
C)
short the asset, invest at the risk-free rate, and buy the futures.



If the futures price is too low relative to the no-arbitrage price, buy futures, short the asset, and invest the proceeds at the risk-free rate until contract expiration. Take delivery of the asset at the futures price, pay for it with the loan proceeds and keep the profit. For Treasury bill (T-bills), shorting the asset is equivalent to borrowing at the T-bill rate.
作者: kmf229    时间: 2012-4-3 13:18

All of the following are examples of the monetary benefits or costs of holding an asset underlying a futures contract EXCEPT:
A)
storage and insurance costs for storing gold.
B)
having a ready supply of the asset for business purposes.
C)
dividend payments from a portfolio of stocks.


Having a ready supply of an asset for business purposes is a non-monetary benefit of holding the asset. This convenience yield can result in backwardation.
作者: kmf229    时间: 2012-4-3 13:36

The return from the non-monetary benefits of holding the asset underlying a futures contract is (are) called:
A)
negative-storage costs.
B)
the non-monetary return.
C)
the convenience yield.


The return from the non-monetary benefits of holding the asset underlying a futures contract is called the convenience yield.
作者: kmf229    时间: 2012-4-3 13:36

Consider two assets with identical storage costs. For the asset with the greater convenience yield, the percentage difference between the no-arbitrage price and the spot price will be:
A)
greater at contract initiation but the same at expiration.
B)
greater throughout the term of the contract.
C)
lower any time prior to expiration.


The net costs of holding an asset are Net Costs = Storage Costs – Convenience Yield. When the convenience yield is higher, net costs of carrying (storing) the asset are lower, and the futures price will be lower. The difference between the spot price and the futures price is zero at expiration for any asset.
作者: kmf229    时间: 2012-4-3 13:37

Backwardation refers to a situation where:
A)
the futures price is below the spot price.
B)
the futures price is above the spot price.
C)
long hedgers outnumber short hedgers.


Backwardation refers to a situation where the futures price is below the spot price. For backwardation to occur, there must be a significant benefit to holding the asset, either monetary or non-monetary.
作者: kmf229    时间: 2012-4-3 14:03

Which of the following best defines backwardation? The market is said to be in backwardation if:
A)
the cash price exceeds the futures price.
B)
the futures price exceeds the cash price or the distant futures price exceeds the nearby futures price.
C)
the futures price exceeds the cash price.


Backwardation occurs when there is a convenience, or security, associated with holding the spot asset, usually when it is uncertain whether the asset will even be available in the future. Backwardation is rare with financial futures.
作者: kmf229    时间: 2012-4-3 14:04

A situation where the futures price is below the spot price of the asset is called:
A)
backwardation.
B)
contango.
C)
negative carry.


A situation where the futures price is below the spot price of the underlying asset is called backwardation.
作者: kmf229    时间: 2012-4-3 14:04

How is market backwardation related to an asset's convenience yield? If the convenience yield is:
A)
negative, causing the futures price to be below the spot price and the market is in backwardation.
B)
positive, causing the futures price to be below the spot price and the market is in backwardation.
C)
larger than the borrowing rate, causing the futures price to be below the spot price and the market is in backwardation.


When the convenience yield is more than the borrowing rate, the no-arbitrage cost-of-carry model will not apply. It means that the value of the convenience of holding the asset it is worth more than the cost of funds to purchase it. This usually applies to non-financial futures contracts.
作者: kmf229    时间: 2012-4-3 14:05

A situation where the futures price is above the spot price of the underlying asset is called:
A)
positive carry.
B)
contango.
C)
normal backwardation.


A situation where the futures price is above the spot price of the asset is called contango
作者: kmf229    时间: 2012-4-3 14:05

Which of the following best defines normal contango? Normal contango is when the futures price lies:
A)
above the expected future spot price and the futures price falls over the life of the contract.
B)
above the expected future spot price and the futures price rises over the life of the contract.
C)
below the expected future spot price and the futures price falls over the life of the contract.


A pattern of falling futures prices is known as normal contango. This situation occurs if hedgers are net long.
作者: kmf229    时间: 2012-4-3 14:05

Which of the following statements regarding normal backwardation is CORRECT? Futures prices tend to:
A)
rise over the life of the contract because speculators are net long and have to receive compensation for bearing risk.
B)
rise over the life of the contract because hedgers are net long and have to receive compensation for bearing risk.
C)
fall over the life of the contract because hedgers are net short and have to receive compensation for bearing risk.


Normal backwardation means that expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts, they must sell them at a discount to the expected future spot prices to get speculators to assume the risk of holding a net long position. The futures price rises over the life of the contract, which compensates speculators for the exposure of their long positions.
作者: kmf229    时间: 2012-4-3 14:06

Under the view that futures transfer risk from asset holders to futures buyers, the:
A)
expected asset price in the future will be less than the futures price.
B)
futures price will be less than the expected future spot price.
C)
convenience yield is positive.


Under the view that futures transfer risk from asset holders to futures buyers, the futures price will be less than the expected future spot price. The longs (speculators) must be compensated for bearing asset price risk by receiving a lower future purchase price for the asset.
作者: kmf229    时间: 2012-4-3 14:16

What is the situation called when a futures price continuously increases over its life because most hedging strategies are short hedges?
A)
Contango.
B)
Normal backwardation.
C)
A normal market.


Normal backwardation means that expected futures spot prices are greater than futures prices. It suggests that when hedgers are net short futures contracts, they must sell them at a discount to the expected future spot prices to get investors to buy them. The futures price rises as the contract matures to converge with spot prices.
作者: kmf229    时间: 2012-4-3 14:17

The theoretical question of whether futures prices are unbiased predictors of future spot rates focuses on:
A)
whether futures markets are efficient.
B)
the correlation between interest rate changes and asset price changes.
C)
whether futures buyers are taking on asset owners’ price risk.


The theoretical analysis of whether futures prices are unbiased predictors of spot rates at futures expiration dates depends on whether futures buyers are being compensated for taking on the asset price risk that futures sellers are avoiding. Under the assumption that futures transactions are driven by those with natural short price risk transacting with those who have natural long positions, expected future spot prices are equal to futures prices.
作者: kmf229    时间: 2012-4-3 14:17

Under the view that futures markets are primarily a mechanism for short hedgers and long hedgers to offset their respective asset price risks:
A)
forward prices will be greater than futures prices.
B)
futures prices will be unbiased predictors of future spot rates.
C)
expected future asset prices are less than the futures prices.


Under the view that futures markets are primarily a mechanism for short hedgers and long hedgers to offset their respective risks, futures prices will be unbiased predictors of future spot rates.
作者: kmf229    时间: 2012-4-3 14:18

Suppose the soybean market is in backwardation with a cash price of $6.50/bushel and a futures price of $6.00/bushel. Also assume that a trader owns 5,000 bushels of soybeans and does not need the soybeans until after futures expiration. Which of the following is the best strategy for the trader?
A)
Sell the soybeans in the spot market, buy an appropriate futures, and profit $2,500.
B)
Do nothing since the convenience yield is so high.
C)
Sell the soybeans in the spot market, buy an appropriate futures, and profit $1,250.

Since the trader does not need the soybeans now he should monetize the convenience yield by selling in the spot market and simultaneously buy soybean futures for his later needs. The total profit is computed as follows:
Total profit = (Cash Price − Futures Price) × Amount = ($6.50 − $6.00) × 5,000 = $2,500.
作者: kmf229    时间: 2012-4-3 14:18

The primary reason that Eurodollar futures contracts do not allow a pure arbitrage opportunity relative to LIBOR is that:
A)
Eurodollar futures do not have a delivery option that increases price efficiency.
B)
the value of the deposit does not change $25 for every basis point change in expected 90-day LIBOR.
C)
the Eurodollar future is denominated in U.S. dollars and LIBOR is based upon Eurodollar time deposits.



Eurodollar futures are priced at a discount yield. LIBOR is an add-on yield, which is the rate that is earned on the face amount of a deposit. The result is that the deposit value is not perfectly hedged by the Eurodollar contract.
作者: kmf229    时间: 2012-4-3 14:19

Which of the following statements regarding Eurodollar futures is most accurate?
A)
Eurodollar futures are priced as a discount yield and LIBOR is subtracted from 100 to get the quote.
B)
Every basis point (0.01%) move in annualized 60-day LIBOR represents a $25 gain or loss on the contract.
C)
Eurodollars futures are based on 60-day LIBOR, which is an add-on yield.


Eurodollar futures are priced as a discount yield and are quoted as 100 minus 90-day LIBOR.
作者: kmf229    时间: 2012-4-3 14:19

Unlike U.S. T-bills and their futures contracts, no riskless arbitrage relation exists between LIBOR and the Eurodollar futures contract:
A)
therefore investors must utilize synthetic instruments to hedge their exposure to LIBOR.
B)
resulting in most investors hedging their LIBOR exposure with 90-day T-bill contracts.
C)
but Eurodollar futures contracts are still a useful, widely used hedging vehicle for exposure to LIBOR.


Although an imperfect hedge, Eurodollar futures are still widely used to hedge exposure to LIBOR.
作者: kmf229    时间: 2012-4-3 14:20

Craig Champion, CFA, manages portfolios of U.S. securities for European investors. His clients have differing tastes with respect to hedging exchange rate risk and the types of securities they hold. Francois Levisque is a Belgian investor who holds a large diversified portfolio of U.S. equities. Levisque has a reputation for some success in timing the U.S. equity market. For example, he has often locked in gains on his portfolio with derivatives shortly before a market correction. Sometimes he also hedges his portfolio’s currency risk. Levisque has just instructed Champion to take a large short position in S&P 500 index, either with futures or with a forward contract. Champion notices that the futures price is less than the current spot price and consults with his colleague Danielle Silvers, CFA. Champion says he thinks that the futures price is less than the spot price because the dividend yield of the S&P 500 is greater than the Treasury Bill rate. Silvers says that it could just be backwardation. Silvers also notes that the use of a forward contract might be a good idea because the contract will not attract the attention of other market participants who might react to Levisque’s move. Champion tells Silvers that the reason Levisque wants to hedge his equity position is that he thinks all U.S. interest rates will increase soon. This, he believes, is bearish for equities, and he also thinks the negative relationship between equity prices and interest rates makes a short forward contract more attractive than a short futures contract.
Ragnar Hvammen is a Norwegian investor with a large investment in oil-related assets that he often hedges with futures contracts. Champion notices that the price of the oil futures contract is usually higher than the spot price. Hvammen uses short-term borrowings in dollars, from both European and U.S. banks, to meet the liquidity needs of his oil investments, and he has Champion hedge these short positions with Eurodollar futures. Silvers suggests that Champion should consider using T-bill futures to hedge the loans from U.S. banks, and use Eurodollar futures only for the Eurodollar loans. Champion says he will look into that, as well as forward rate agreements, as alternative hedging tools for Hvammen. Champion and Silvers each gave a reason for why the futures price of the S&P 500 index might be less than the spot price. With respect to their statements:
A)
they are both incorrect.
B)
they are both correct.
C)
Champion is incorrect and Silvers is correct.


The equation for the price of a futures contract on an equity index is FP = S0 × e(R − σ) × T, where σ is the dividend yield and R is the risk-free rate. If R < σ, then FP < S0 and Champion is correct. Silvers could be correct in that backwardation is defined as FP < S0, with the relationship being caused by the risk aversion of hedgers of long asset positions. Their risk aversion makes them willing to take short contracts at lower prices than otherwise might be the case.
If Champion thinks that the S&P 500 index is negatively correlated with interest rates, then choosing the short forward contract over the short futures contract is:
A)
counterproductive because a short futures contract would benefit more from a higher borrowing rate.
B)
counterproductive because a short futures contract would benefit more from a higher reinvestment rate.
C)
appropriate because the forward contract would benefit more from a higher reinvestment rate.


When hedging a position, futures contracts are better if the hedge produces a positive cash flow, via marking-to-market, when interest rates rise and is hurt when interest rates fall. In this case, when interest rates rise and cause equity values to fall, a short futures position will receive a positive cash flow that can be reinvested at the higher rate. If interest rates fall, and the short futures position must be marked to market with a negative cash flow, the opportunity cost of the negative cash flow is lower. Forward contracts that do not require marking-to-market do not “benefit” from changes in interest rates.
For a futures contract on an asset with no storage costs, convenience yield, or other expected cash flows over the term of the contract, there should be a:
A)
negative correlation between the futures price and interest rates and a positive correlation between the futures price and the spot price.
B)
positive correlation between the futures price and both interest rates and the spot price.
C)
positive correlation between the futures price and interest rates and a negative correlation between the futures price and the spot price.


The equation for the no-arbitrage price of a futures contract with no storage costs, convenience yield, or other expected cash flows over the term of the contract is FP = S0 × (1 + R)T, so the futures price is positively correlated with both the interest rate and the spot price.
Oil futures prices might be higher than the spot price because:
A)
there are more benefits than costs to holding the asset.
B)
of reverse contango.
C)
there are more costs than benefits to holding the asset.


In calculating the futures price, we would subtract the benefits of holding the asset, e.g., the present value of dividends and coupons, and add the costs of holding the asset. Oil does not pay a dividend, and there would be costs for holding oil. Contango describes the situation where the futures price exceeds the spot price, and there is not such thing as reverse contango.
With respect to using Eurodollar futures, instead of T-bill futures, to hedge short-term loans from U.S. banks, Champion is:
A)
justified because the Eurodollar futures market is very liquid, and LIBOR is more correlated with short-term loan rates than is the T-bill rate.
B)
justified because the Eurodollar futures market is very liquid, and LIBOR is less correlated with short-term loan rates than is the T-bill rate.
C)
not justified because the Eurodollar futures market is not very liquid, and LIBOR is more correlated with short-term loan rates that T-bills.


Eurodollar futures are futures on dollar LIBOR, and LIBOR is the prevailing rate on very large bank loans called Eurocurrency loans. The rates on T-bills can be driven by influences (e.g., a flight to quality) that are different than those that drive dollar LIBOR rates. As a result, Eurodollar futures are more highly correlated with (dollar) bank loan rates should provide a better hedge for the client’s bank loan exposure. Moreover, the Eurodollar futures market is large and very liquid.
The forward rate associated with a forward rate agreement (FRA) is:
A)
greater than that implied by the Eurodollar futures rate especially when the maturity of the contracts is longer.
B)
less than that implied by the Eurodollar futures rate especially when the maturity of the contracts is longer.
C)
greater than that implied by the Eurodollar futures rate especially when the maturity of the contracts is shorter.


The forward (FRA) rate = implied futures rate – convexity bias. The convexity bias is considered negligible for contracts of less than one or two years. It is generally viewed as a consideration for contracts with a maturity of longer than two years.
作者: kmf229    时间: 2012-4-3 14:20

An index is currently 876, the risk-free rate (Rf) is 7%, and the dividend yield on the index portfolio is 1.8%. Assuming that these are continuously compounded yields, the price of an 18-month index future is closest to:
A)
945.2.
B)
947.1.
C)
943.0.


FP =
876 e(0.07-0.018)1.5 = 947.1.
作者: kmf229    时间: 2012-4-3 14:21

Wanda Brock works as an investment strategist for Globos, an international investment bank. Brock has been tasked with designing a strategy for investing in derivatives in Mazakhastan, an Eastern European country with impressive economic growth. One of the first tasks Brock tackles involves hedging. Globos wants to hedge some of its investments in Mazakhastan against interest-rate and currency volatility. After a bit of research, Brock has gathered the following data:

Using the above data, Brock develops some hedging strategies, and then delivers them to Globos’ futures desk.Brock then turns her attention to Mazakhastanian commodities. Globos has acquired the rights to large deposits of copper, silver, and molybdenum in Mazakhastan and suspects the futures markets may be mispriced. Brock has assembled the following data to aid her in making recommendations to Globos’ futures desk:
Copper
Spot price: $3.15/pound.
1-year futures price: $3.54/pound. Silver
Spot price: $12.75/pound.
1-year futures price: $12.82/pound.
Molybdenum
Spot price: $34.45/pound.
1-year futures price: $35.23/pound.

After making some calculations, Brock assesses the arbitrage opportunities in Mazakhastan and passes the information on to the futures desk. Shortly afterward, she is informed that Globos’ Mazakhastan subsidiary uses its silver holdings as collateral for business loans, which allows the unit to obtain a favorable interest rate.
Jonah Mason, one of Globos’ traders, asks Brock for a few details about the Mazakhastan financial markets. Brock sends Mason a short e-mail containing the following observations:
Before Mason receives the e-mail, he turns his attention to a memo about a futures contract a subordinate is considering. Unfortunately, the memo arrives without the summary page to the notes. Mason must deduce the nature of the hedge based on its characteristics: The risk-free rate used in calculating the futures price, and that price adjusted to account for individual future dividends.The price of a 75-day gluck future should be closest to:
A)
0.1081$/G.
B)
9.4429G/$.
C)
9.3750G/$.

To calculate the price of a currency future, use the following equation:
Spot exchange rate × (1 + domestic risk-free rate)t / (1 + foreign risk-free rate)t.
In this case, since the exchange rate is expressed in glucks per dollar, the Mazakhastan interest rate is considered domestic. Since we are pricing a 75-day future, the time variable “t” is 75/365.
9.4073G/$ × (1.0375)(75/365) / (1.055)(75/365) = 9.3750G/$.
(Study Session 16, LOS 55.h)

Based on the information he received from Brock, Mason can best conclude that:
A)
inflation in Mazakhastan is likely to rise.
B)
futures prices are higher than forward prices in Mazakhastan.
C)
prices of corporate bonds in Mazakhastan are likely to rise.


Since Mazakhastanian investors prefer mark-to-market accounting and interest rates are positively correlated to asset values, Mason can conclude that futures prices are higher than forward prices. The upgrade of sovereign debt could spill over into the private sector, driving up bond prices. And an increase in consumer income could spark spending that drives up inflation. But neither the debt information nor the income information is sufficient to draw conclusions. (Study Session 16, LOS 55.c)
Based on the two characteristics of the futures contract in Mason’s memo, which of the following does the contract refer to?
Treasury bond futures?Stock index futures?
A)
YesNo
B)
YesYes
C)
NoYes


Both Treasury bond futures and stock index futures require the use of the risk-free rate to determine price. But while the pricing of bond futures requires the discounting of individual dividends, the pricing of stock-index futures does not, instead using a continuously compounded dividend yield. (Study Session 16, LOS 55.f)
Based on Brock’s information, how should traders best take advantage of arbitrage opportunities in Mazakhastan?
A)
Buy spot copper, sell spot silver, and do not trade molybdenum.
B)
Buy spot copper, do not trade silver, and sell spot molybdenum.
C)
Buy spot copper, sell spot silver, and sell spot molybdenum.


First we must determine whether the futures contracts are mispriced, by multiplying the commodity price by (1 + the risk-free rate), or 1.0375. The basic equation uses the risk-free rate, but we have the actual borrowing rate, and for real-world purposes the actual borrowing rate provides a more accurate price estimate. For practical purposes, we should probably use the borrowing rate, but both rates provide the same answer to the question above. For illustration purposes, we use the risk-free rate in the discussion below.
It turns out that all three contracts are mispriced. Copper futures are overpriced, and silver and molybdenum futures are underpriced. However, transaction costs muddy the water. Assuming a 3% commission on futures trades, the price differential on molybdenum is not sufficient to justify an arbitrage trade. Thus, the traders should buy copper, for which the futures contract is overpriced, and sell silver, for which the futures contract is underpriced, and make no trades in molybdenum despite the fact that the futures contract is underpriced.


Copper
(per pound)

Silver
(per ounce)

Molybdenum
(per pound)


Spot price

$3.15

$12.75

$34.45


Futures price

$3.54

$12.82

$35.23


No-arbitrage futures price

$3.27

$13.23

$35.74


Potential arbitrage profits

$0.27

$0.41

$0.51


Transaction costs

$0.11

$0.38

$1.06


Arbitrage opportunity

Yes

Yes

No


(Study Session 16, LOS 55.h)

Assume that Globos has taken a position in the Eurodollar futures contract, it is now 60 days later and the contract is expiring. Globos interest rate forecast for 90-day LIBOR was correct. The value of the futures contract at expiration is closest to:
A)
$980,250.
B)
$921,000.
C)
$981,000.


The Eurodollar futures contract is based on 90-day LIBOR.
The forecast for 90-day LIBOR was 7.9%. Thus, the contract price at expiration is:
$1,000,000 × (1 − (0.079 × 90/360)) = $980,250. (Study Session 16, LOS 55.g)

Which of the following would be most likely to cause a contango situation with silver futures in Mazakhastan?
A)
An increase in the availability of asset-backed loans.
B)
A huge silver discovery.
C)
A shortage of warehouse space that drives up rental rates.


In a contango situation, futures prices are higher than the spot price. This normally occurs when there are no benefits to holding an asset, or when the costs of storing an asset are high enough to offset the benefits of holding the asset. An increase in the availability of asset-backed loans would increase the convenience yield of silver, which would not cause a contango situation. A silver discovery could have some effect on the price of silver, but should not affect a contango situation one way or another. On the other hand, an increase in storage costs would offset some of the convenience yield. We don’t know whether such an increase in costs would be enough to make the net cost of holding silver positive, but any increase in costs could contribute to a contango situation. (Study Session 16, LOS 55.e)
作者: kmf229    时间: 2012-4-3 14:21

The price of a 9-month future on a newly issued Treasury bond is calculated as the bond price:
A)
minus one coupon payment, increased at the 9-month risk-free rate.
B)
increased at the 9-month risk-free rate, minus one coupon payment.
C)
increased at the 9-month risk-free rate, minus one coupon payment increased at the 3-month rate for money 6 months from now.


The no-arbitrage 9-month futures price for a newly issued coupon bond is calculated as:
Bond Price (1 + Rf)9/12 − Coupon (1 + Rf)3/12
An alternative (equivalent) method is:
[Bond Price − (Coupon / (1 + Rf)6/12)](1 + Rf)9/12



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