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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 5: Determination of Forward and Futures Prices Multiple Choice Test Bank: Questions with Answers 1. Which of the following is a consumption asset? A. The S&P 500 index B. The Canadian dollar C. Copper D. IBM stock Answer: C A, B, and D are investment assets (held by at least some investors purely for investment purposes). C is a consumption asset. 2. An investor shorts 100 shares when the share price is $50 and closes out the p
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 5: Determination of Forward and Futures PricesMultiple Choice est !an : #uestions with $nswers 1.Which of the following is a consumption asset?A.The S&P 500 indexB.The anadian dolla!.oppe! .#B$ stoc%Answe! A' B' and a!e in(estment assets )held *+ at least some in(esto!s pu!el+ fo! in(estment pu!poses,.  is a consumption asset.-.An in(esto! sho!ts 100 sha!es when the sha!e p!ice is 50 and closes out the position six months late! when the sha!e p!ice is /. The sha!es pa+ a di(idend of  pe! sha!e du!ing the six months. ow much does the in(esto! gain? A. 1'000B. /00. 200 . 00Answe! B The in(esto! gains 2 pe! sha!e *ecause he o! she sells at 50 and *u+s at /. owe(e!' the in(esto! has to pa+ the  pe! sha!e di(idend. The net p!o3t is the!efo!e 24 o! / pe! sha!e. 100 sha!es a!e in(ol(ed. The total gain is the!efo!e /00..The spot p!ice of an in(estment asset that p!o(ides no income is 0 and the !is%f!ee !ate fo! all matu!ities )with continuous compounding, is 106. What is the th!ee+ea! fo!wa!d p!ice? A. /0.50B. --.--. .00 ..17Answe! A The +ea! fo!wa!d p!ice is the spot p!ice g!ossed up fo!  +ea!s at the !is%f!ee !ate. #t is 0 e 0.18  9/0.50./.The spot p!ice of an in(estment asset is 0 and the !is%f!ee !ate fo! all matu!ities is 106 with continuous compounding. The asset p!o(ides an income of - at the end of the 3!st +ea! and at the end of the second +ea!. What is the th!ee+ea! fo!wa!d p!ice? A. 1:.72B. 5.;/  . /5.15 . /0.50Answe! B The p!esent (alue of the income is - e 0.181 <-e 0.18- 9 .//2. The th!ee +ea! fo!wa!d p!ice is o*tained *+ su*t!acting the p!esent (alue of the income f!omthe cu!!ent stoc% p!ice and then g!ossing up the !esult fo! th!ee +ea!s at the !is%f!ee !ate. #t is )04.//2, e 0.1×3 = $35.84. 5.An exchange !ate is 0.2000 and the sixmonth domestic and fo!eign !is%f!ee inte!est !ates a!e 56 and 26 )*oth exp!essed with continuous compounding,.What is the sixmonth fo!wa!d !ate?A.0.2020B.0.2122.0.2-/: .0.7:0Answe!  The sixmonth fo!wa!d !ate is  0.7000e −(0.05−0.07)×0.5 =0.6930. 7.Which of the following is t!ue? A.The con(enience +ield is alwa+s positi(e o! =e!o. B.The con(enience +ield is alwa+s positi(e fo! an in(estment asset. .The con(enience +ield is alwa+s negati(e fo! a consumption asset. .The con(enience +ield measu!es the a(e!age !etu!n ea!ned *+ holdingfutu!es cont!acts. Answe! A The con(enience +ield measu!es the *ene3t of owning an asset !athe! than ha(ing a fo!wa!d>futu!es cont!act on an asset. o! an in(estment asset it is alwa+s =e!o. o! a consumption asset it is g!eate! than o! e@ual to =e!o.2.A sho!t fo!wa!d cont!act that was negotiated some time ago will expi!e in th!ee months and has a deli(e!+ p!ice of /0. The cu!!ent fo!wa!d p!ice fo! th!eemonth fo!wa!d cont!act is /-. The th!ee month !is%f!ee inte!est !ate )with continuous compounding, is ;6. What is the (alue of the sho!t fo!wa!d cont!act?A. <-.00B. 4-.00. <1.:7 . 41.:7Answe!    The cont!act gi(es one the o*ligation to sell fo! /0 when a fo!wa!d p!ice negotiated toda+ would gi(e one the o*ligation to sell fo! /-. The (alue of the cont!act is the p!esent (alue of   −$2 or   −2 e -0.08×0.25 = −$1.96. ;.The spot p!ice of an asset is positi(el+ co!!elated with the ma!%et. Which of the following would +ou expect to *e t!ue? A.The fo!wa!d p!ice e@uals the expected futu!e spot p!ice. B.The fo!wa!d p!ice is g!eate! than the expected futu!e spot p!ice. .The fo!wa!d p!ice is less than the expected futu!e spot p!ice. .The fo!wa!d p!ice is sometimes g!eate! and sometimes less than theexpected futu!e spot p!ice. Answe!  When the spot p!ice is positi(el+ co!!elated with the ma!%et the fo!wa!d p!ice is less than the expected futu!e spot p!ice. This is *ecause the spot p!ice is expected to p!o(ide a !etu!n g!eate! than the !is%f!ee !ate and the fo!wa!d p!ice is the spot p!ice g!ossed up at the !is%f!ee !ate.:.Which of the following desc!i*es the wa+ the futu!es p!ice of a fo!eign cu!!enc+ is @uoted *+ the $ g!oup?A.The num*e! of .S. dolla!s pe! unit of the fo!eign cu!!enc+B.The num*e! of the fo!eign cu!!enc+ pe! .S. dolla!.Some futu!es p!ices a!e alwa+s @uoted as the num*e! of .S. dolla!s pe! unit of the fo!eign cu!!enc+ and some a!e alwa+s @uoted the othe! wa+ !ound .The!e a!e no @uotation con(entions fo! futu!es p!icesAnswe! A The futu!es p!ice is @uoted as the num*e! of S dolla!s pe! unit of the fo!eign cu!!enc+. Spot exchange !ates and fo!wa!d exchange !ates a!e sometimes @uoted this wa+ and sometimes @uoted the othe! wa+ !ound. 10.Which of the following desc!i*es the wa+ the fo!wa!d p!ice of a fo!eign cu!!enc+ is @uoted?A.The num*e! of .S. dolla!s pe! unit of the fo!eign cu!!enc+B.The num*e! of the fo!eign cu!!enc+ pe! .S. dolla!.Some fo!wa!d p!ices a!e @uoted as the num*e! of .S. dolla!s pe! unit of the fo!eign cu!!enc+ and some a!e @uoted the othe! wa+ !ound .The!e a!e no @uotation con(entions fo! fo!wa!d p!icesAnswe!  The futu!es p!ice is @uoted as the num*e! of S dolla!s pe! unit of the fo!eign cu!!enc+. Spot exchange !ates and fo!wa!d exchange !ates a!e sometimes @uoted this wa+ and sometimes @uoted the othe! wa+ !ound.  11.Which of the following is CDT a !eason wh+ a sho!t position in a stoc% isclosed out?A.The in(esto! with the sho!t position chooses to close out the positionB.The lende! of the sha!es issues inst!uctions to close out the position.The *!o%e! is no longe! a*le to *o!!ow sha!es f!om othe! clients .The in(esto! does not maintain ma!gins !e@ui!ed on his>he! ma!ginaccount Answe! BA' ' and a!e all !easons wh+ the sho!t position might *e closed out. B isnot. The lende! of sha!es cannot issue inst!uctions to close out the sho!t position.1-.Which of the following is CDT t!ue?A.Eold and sil(e! a!e in(estment assetsB.#n(estment assets a!e held *+ signi3cant num*e!s of in(esto!s fo!in(estment pu!poses.#n(estment assets a!e ne(e! held fo! consumption .The fo!wa!d p!ice of an in(estment asset can *e o*tained f!om thespot p!ice' inte!est !ates' and the income paid on the assetAnswe! #n(estment assets a!e sometimes held fo! consumption. Sil(e! is anexample. To *e an in(estment asset' an asset has to *e held fo!in(estment *+ at least some t!ade!s1.What should a t!ade! do when the one+ea! fo!wa!d p!ice of an asset is toolow? Assume that the asset p!o(ides no income.A.The t!ade! should *o!!ow the p!ice of the asset' *u+ one unit of theasset and ente! into a sho!t fo!wa!d cont!act to sell the asset in one+ea!.B.The t!ade! should *o!!ow the p!ice of the asset' *u+ one unit of theasset and ente! into a long fo!wa!d cont!act to *u+ the asset in one+ea!..The t!ade! should sho!t the asset' in(est the p!oceeds of the sho!t saleat the !is%f!ee !ate' ente! into a sho!t fo!wa!d cont!act to sell theasset in one +ea! .The t!ade! should sho!t the asset' in(est the p!oceeds of the sho!t saleat the !is%f!ee !ate' ente! into a long fo!wa!d cont!act to *u+ the assetin one +ea! Answe! #f the fo!wa!d p!ice is too low !elati(e to the spot p!ice the t!ade! shouldsho!t the asset in the spot ma!%et and *u+ it in the fo!wa!d ma!%et.
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