Multiple Choice Questions

1. The maintenance margin for a futures contract refers to:

a. The level to which a margin deposit must be returned after a margin call has been made

b. The level to which a margin deposit is set when an investor enters a long futures position

c. The difference between the futures market price and the contract price

d. The level of the margin deposit that would trigger a margin call

2.Which of the following statements is the most accurate?

a. Stock markets facilitate the flow of funds from saving-deficit units to savings-surplus units

b. Stock markets facilitate the trading of shares of all companies

c. An equally weighted portfolio consisting of all shares traded on the Australian Stock Exchange would represent the market portfolio

d. Stock markets provide liquidity for share trading.

3. An investor with a long futures position to buy one hundred ounces of gold for $1553 in September 2015 decides to reverse this position in June 2015 when the stop price is $1533 and the September futures price is $1543, they will:

a. Make a loss of $1000

b. Make a profit of $1000

c. Make a loss of $2000

d. Make a profit of $2000

4. An over-the-counter forward contract:

a. Is marked-to-market daily

b. Will be closed-out by the clearing house if a margin call is ignored

c. Is not subject to daily settlement

d. Rarely involves physical delivery

5. If a firm makes a 1 for 5 rights issue when its shares are trading for $9.90 that will allow investors to purchase new shares for $8.00, by how much should the share price fall when they trade ex-rights if there are no other influences on the share price?

a. 32c

b. 38c

c. $1.58

d. $1.90

6. If an individual who takes a short position in a futures contract wishes to realise a profit from their position, they should:

a. find a buyer and sell their position

b. offset their original contract by entering into another as a seller

c. offset their original contract by entering into another as a buyer

d. take delivery of the commodity

7. Relative to the maturity of a bond, the duration is:

a. longer when interest rates exceed the coupon rate

b. longer when interest rates are less than the coupon rate

c. shorter when the bond does not pay coupon interest

d. shorter when the bond does pay coupon interest

8. Australian stock brokers differ from dealers in that:

a. dealers buy and sell from their own portfolio whereas brokers only act on behalf of clients

b. brokers buy and sell from their own portfolio whereas dealers only act on behalf of clients

c. dealers only execute market orders while brokers only execute limit orders

d. brokers only execute market orders while only execute limit orders

Part A 1. Illiquid assets: a) Exhibit larger price decreases when they are sold b) Exhibit larger price increases when they are sold c) Are more fungible than liquid assets d) Are more fungible than debt securities 2. Equity markets involve: A permanent transfer of funds A temporary transfer of funds A predetermined return to investors Both B and D 3. The maintenance margin for a futures contract refers to: a) The level to which a margin deposit must be returned after a margin call has been made b) The level to which a margin deposit is set when an investor enters a long futures position c) The difference between the futures market price and the contract price d) The level of the margin deposit that would trigger a margin call 4. Market orders: Are executed immediately at current market prices 5. Which of the following statements is the most accurate? a) Stock markets facilitate the flow of funds from saving-deficit units to savings-surplus units b) Stock markets facilitate the trading of shares of all companies c) An equally weighted portfolio consisting of all shares traded on the Australian Stock Exchange would represent the market portfolio d) Stock markets provide liquidity for share trading. 6. Which of the following statements is incorrect? a) Arbitrageurs are motivated to earn a profit b) Arbitrageurs are motivated to reduce the risk of an existing exposure c) Arbitrageurs aim for a risk-free position d) Arbitrageurs profit from inconsistent pricing 7. The low of one price is least likely to hold when: a) Speculators are pessimistic about an interest rate increase b) Speculators are optimistic about an interest rate decrease c) Arbitrageurs are actively trading in a market d) Arbitragers are prevented from trading in a market 8. An investor with a long futures position to buy one hundred ounces of gold for $1553 in September 2015 decides to reverse this position in June 2015 when the stop price is $1533 and the September futures price is $1543, they will: a) Make a loss of $1000 b) Make a profit of $1000 c) Make a loss of $2000 d) Make a profit of $2000 9. If a 90-day bank bill ($1000 face value) was purchased for $985.56 on the date of issue and sold 30 days later for $991.14, what was the holding period return? a) 5.44% p.a. b) 5.66% p.a. c) 5.94% p.a. d) 6.89% p.a. 10. An over-the-counter forward contract: a) Is marked-to-market daily b) Will be closed-out by the clearing house if a margin call is ignored c) Is not subject to daily settlement d) Rarely involves physical delivery 11. If a firm makes a 1 for 5 rights issue when its shares are trading for $9.90 that will allow investors to purchase new shares for $8.00, by how much should the share price fall when they trade ex-rights if there are no other influences on the share price? a) 32c b) 38c c) $1.58 d) $1.90 12. The price effect and the reinvestment effect are both sources of: a) default risk b) term structure c) interest rate risk d) default risk structure 13. Improving business conditions will lead to: a) a decrease in inflation and therefore lower nominal interest rates b) a rightward shift in the supply curve for loanable funds, and therefore lowers interest rates c) a rightward shift in the demand curve for loanable funds, and therefore higher interest rates d) a rightward shift in the supply curve for loanable funds, and therefore higher interest rates 14. If an individual who takes a short position in a futures contract wishes to realise a profit from their position, they should: a) find a buyer and sell their position b) offset their original contract by entering into another as a seller c) offset their original contract by entering into another as a buyer d) take delivery of the commodity 15. Immunisation of a bond portfolio involves: a) holding a range of bond maturities to ensure that liquidity needs are met b) matching the duration of the bond portfolio with the duration of a liability c) selling the bonds with the greatest interest rate risk d) investing only in risk-free government bonds 16. Relative to the maturity of a bond, the duration is: a) longer when interest rates exceed the coupon rate b) longer when interest rates are less than the coupon rate c) shorter when the bond does not pay coupon interest d) shorter when the bond does pay coupon interest 17. If a short futures position is held by a hedger, a corresponding long futures position must be held by: a) a speculator b) a hedger c) an arbitrageur d) any of the above 18. Floating rate notes have a duration that: a) is infinite b) is equal to one plus the yield divided by the yield c) is at least equal to the time between coupon payments d) is at most equal to the time between coupon payments 19. Liquidity premium theory suggests that: a) there is a downward bias in the yield curve b) the market for some securities may be thinly traded; hence, investors require a reward for this risk c) there is an upward bias in the yield curve because interest rate risk increases with term to maturity d) there is a premium due to uncertainty about the future level of interest rates 20. Australian stock brokers differ from dealers in that: a) dealers buy and sell from their own portfolio whereas brokers only act on behalf of clients b) brokers buy and sell from their own portfolio whereas dealers only act on behalf of clients c) dealers only execute market orders while brokers only execute limit orders d) brokers only execute market orders while only execute limit orders Part B 21. Calculate the duration of a 18-month, 6% p.a. semi-annual coupon bond with a face value of $1000 if interest rate are 4% p.a. 22. Freda speculates by trading in one contract (10,000kg) of live cattle. It is now April 2015, and she believes that in May 2015 an outbreak of lamb flu will increase demand for beef, and cause live cattle futures prices to increase by 25%. The following live cattle futures contracts are available at the indicated price: Delivery date Contract price April 2015 350 c/kg July 2015 October 2015 355 c/kg 360 c/kg Clearly state what futures position she should take, how she can close this position in June 2015, and what profit she would realize if she expectation was exactly correct. 23. One or more of the financial instruments in the table below are misprices. Complete columns 5, 6, and 7 of the table, indicating which instruments would be bought and which would be sold to exploit the arbitrage opportunity. Assuming a 360-day year, with no transaction costs associated with buying or issuing bills and bonds, calculate the single round-trip profit based on 1 bond. Column 1 2 Instrumen Maturit t y (day) 3 4 5 Coupon Coupon Yield Price ($) Face (% (% frequency p.a.) 6 value p.a.) Bill 180 - - 360 - - 7.00 Bond 360 8.0 Semi- 7.78 annual Buy or sell? 6.50 Bill 7 1,002.0 8 1000 24. Calculate the duration of a portfolio consisting of 20 of band A, and 1000 of bond B, which have the attributes, listed in the table below. Bond Coupon rate Face value Price Maturity Duration A Nil $100,000 $92,592.60 1 year 1 year B 6%(Annual) $1000 $907.54 6 years 5.17 years 25. Current spot rates are given in the table below. Based on pure expectation theory, what price should a 12-month bank bill with face value of $10,000 be sold for in 2 years' time? Term (year) Interest rate (% p.a.) 1 5.0 2 6.0 3 6.8 4 7.4