Question 1 2.

I need help with these sample test questions.

Question 1

2.5 pts

When a speculator goes short a futures contract, what does the speculator expect will happen to the underlying product price before the position is closed?

Price will rise.

Price will fall.

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Question 2

2.5 pts

A bank is expected to borrow $1 million for nine months three months from today and is concerned that the interest rate then will increase. The bank buys a "three against twelve" FRA for $1 million at a rate of 8% to hedge the interest rate risk. In three months the FRA settles at 7.5%. There are 273 days in the FRA period. What is the bank's net borrowing cost for the 273 days (at an annualized rate)?

7.50%

8.00%

7.75%

8.25%

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Question 3

2.5 pts

A company has an outstanding floating-rate debt and is concerned that the interest rate will increase when it is reset next time. The company is considering to convert this floating-rate debt into a fixed-rate debt through interest rate swap with a big bank. In the swap, the company should ____________from the bank?

pay floating rate and receive fixed rate

pay fixed rate and receive floating rate

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Question 4

2.5 pts

If a short straddle is your desired position, you expect the volatility of the underlying asset price to

increase

decrease

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Question 5

2.5 pts

Suppose the current spot rate for the SF is $0.5876. The premium on a call option with an exercise price of $0.5595 is $0.0373. What is the time value of this call options?

SF 0.0092/$

SF 0.0654/$

$0.0092 /SF

$0.0654 /SF

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Question 6

2.5 pts

From the table below, what is the BID cross-exchange for Swiss Francs priced in euro?

 USD EquivalentCountryBIDASKSwitzerland (Franc) CHF0.76480.7652Euro €1.41.42

€0.5386/CHF

€0.5389/CHF

€0.5463/CHF

€0.5466/CHF

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Question 7

2.5 pts

Suppose the current spot rate for the British pound is $1.78. A put option with an exercise price of $1.75 is said to be

in the money.

out of the money.

at the money.

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Question 8

2.5 pts

Suppose you bought a eurodollar futures contract at 95.50 a few days ago and you sold the contract today at 95.30. How much money did you gain or lose for your eurodollar futures contract?

You gained $2,000.

You lost $2,000.

You gained $500.

You lost $500.

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Question 9

2.5 pts

Suppose on September 30, 2005, you buy 10 futures contracts on the Euro at the price of $1.2405/Euro in the morning of that day. At the day's close, the price settles at $1.2415/Euro. Do you gain or lose in your account (marking to market)? How much? (Note: The contract size is Euro125,000).

You gain $1,250.

You gain Euro 1,250.

You lose $1,250.

You lose Euro 1,250.

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Question 10

2.5 pts

The exchange of debt-service obligations denominated in one currency for the service on an agreed-upon principal amount of debt denominated in another currency is known as

a currency swap

an interest rate swap

a floating-rate bond

a fixed-rate bond

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Question 11

2.5 pts

A company is expected to borrow $2,000,000 six months from now and is worried that the interest rate will increase then. In order to manage interest rate risk, the company is considering using Eurodollar futures contracts that are actively traded in CME, what position should the company take?

long 1 Eurodollar futures contract

short 1 Eurodollar futures contract

long 2 Eurodollar futures contract

short 2 Eurodollar futures contract

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Question 12

2.5 pts

A foreign currency ________ option gives the holder the right to _______ a foreign currency whereas a foreign currency _______ option gives the holder the right to _________ a currency.

call, buy, put, sell

call, sell, put, buy

put, hold, call, release

None of the above

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Question 13

2.5 pts

If the $/€ bid and ask prices are $1.50/€ and $1.51/€, respectively, the corresponding €/$ bid and ask prices are: 

€0.6667 and €0.6623

$1.51 and $1.50

€0.6623 and €0.6667

cannot be determined with the information given

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Question 14

2.5 pts

From the table below, what is the ASK cross-exchange rate for Swiss Francs priced in euro?

 USD EquivalentCountryBIDASKSwitzerland (Franc) CHF0.76480.7652Euro €1.41.42

€0.5386/CHF

€0.5389/CHF

€0.5463/CHF

€0.5466/CHF

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Question 15

2.5 pts

If you have an A/R (account receivable) in British pound due in 3 months, which of the following is a right hedging strategy (assume that the $ is your home currency)?

buy pound forward.

sell pound forward.

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Question 16

2.5 pts

From the buyer's perspective, what is the break-even price for a call option on the British pound with an exercise price of $1.45 and a premium of $.20 per pound (ignore time value of the option premium)?

£1.65/$

$1.45/£

$1.25/£

$1.65/£

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Question 17

2.5 pts

An __________ swap is an agreement between two parties to exchange interest payments for a specific maturity in an agreed upon notional amount.

interest rate

currency

bond

currency bond

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Question 18

2.5 pts

The writer of a currency option has

higher initial costs than the buyer of the option.

huge profit potential and limited loss potential.

huge loss potential and limited profit potential.

None of the above

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Question 19

2.5 pts

One of the major differences between futures and forward contracts is that

Forward contracts have more marking-to-market risk while futures have more credit risk.

Futures contracts have more marking-to-market risk while forwards have more credit risk.

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Question 20

2.5 pts

A(n) __________ is a contract that fixes an interest rate today on a future loan or deposit.

inverse floater

step-up

step-down

forward forward

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Question 21

50 pts

1. (8 points)

Suppose you observe the following exchange rates:

$/€: 1.35; $/£: 1.60; and €/£: 1.20.

Starting with $1,000,000, how can you make money (show the steps and the amount of   your profit in US$)? 

2. (10 points)

Assume today's settlement price on a CME EUR futures contract is $1.3140/EUR. You have a LONG position in one contract. Your performance bond (margin) account currently has a balance of $1,700. The next three days' settlement prices are $1.3126, $1.3133, and $1.3049. (Note: the contract size for euro futures contract traded at CME is €125,000)

2.1. Calculate the gain/loss from daily marking-to-market.

Day 1:

Day 2:

Day 3:

2.2. If you want to close your position at the end of day 3, what is your total gain or loss in the past three days?

2.3. What is the margin account balance at the end of day 3?

3.(10 points)

Assume the premium for an August call option on British pound with the strike price of $1.5/£ is $0.40/£. All else equal, the premium for a put option on British pound with the same strike price and maturity is $0.50/£. 

Calculate the maximum gain, maximum loss and break-even point for a call option buyer, put option buyer, and long position of a straddle.

Maximum gain

Maximum loss

Break-even point

Call

____________

____________

____________

Put

_____________

_____________

____________

Straddle

_____________

_____________

_____________

4. (12 points)

Alpha and Beta Companies can borrow for a five-year term at the following rates:

                                                           Alpha             Beta

           Moody's credit rating        Aa                  Baa

           Fixed-rate borrowing cost      10.5%             12.0%

           Floating-rate borrowing cost  LIBOR       LIBOR + 1%

Assuming that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.

4.1. How much in total can be saved by entering into a swap deal with a bank?

4.2. Develop an interest rate swap with the swap bank being involved. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. 

a. At what rate should Alpha finance?

b. at what rate should Beta finance?

c. at what rate should the Bank pay Alpha?

d. t what rate should Beta pay the Bank?

4.3. From arranging this swap, what is the net cost and cost savings for Alpha, Beta? what is the profit for the bank? Please answer the following questions.

Net cost for Alpha:

Cost savings for Alpha:

Net cost for Beta:

Cost savings for Beta:

Profit for the Bank from this swap:

5. (10 points)

A "three-against-nine" FRA has an agreement rate of 4.75 percent. You believe six-month LIBOR  in three months will be 5.125 percent. You decide to take a speculative position in a FRA with a $1,000,000 notional value. There are 183 days in the FRA period. 

5.1. Should you buy or sell the FRA?

5.2. What is your expected profit if your forecast is correct about the six-month LIBOR rate?