Treasury Management – BFI303
Tutorial 11
1. Discuss the differences between futures and forward contracts.
2. A US-based exporter anticipates €200 million of exports and hedges against fluctuations
in the exchange rate by selling €200 million forward at $1.30/€. Discuss the profit/loss at:
i. Exchange rate at maturity is $1.40/€.
ii. Exchange rate at maturity is $1.20/€.
3. Standardized futures contracts exist for all of the following underlying assets
except:
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a. gold.
b. common stocks.
c. stock indexes.
d. Treasury bonds.
4. Which of the following is false?
a. Futures contracts allow fewer delivery options than forward contracts.
b. Futures contracts are more liquid than forward contracts.
c. Futures contracts trade on a financial exchange.
d. Futures contracts are marked to market.
5. Which one of the following actions will offset a long position in a futures contract that
expires in June?
a. Sell any futures contract, regardless of its expiration date.
b. Sell a futures contract that expires in June.
c. Hold the futures contract until it expires.
d. Buy any futures contract, regardless of its expiration date.
e. Buy a futures contract that expires in June.
6. Which of the following does the most to reduce default risk for futures contracts?
a. Credit checks for both buyers and sellers.
b. High liquidity.
c. Flexible delivery arrangements.
d. Marking to market.
7. Which of the following is most similar to a stock broker?
a. Futures commission merchant.
b. Floor broker.
c. Local.
d. Pit trader.
8. Using futures contracts to transfer price risk is called:
a. diversifying.
b. speculating.
c. hedging.
d. arbitrage.
9. Which of the following is best described as selling a synthetic asset and simultaneously
buying the actual asset?
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a. Arbitrage.
b. Speculating.
c. Diversifying.
d. Hedging.
10. Which of the following causes the futures price of an asset to increase, everything else
held constant?
a. Higher expected spot price for the underlying asset.
b. Higher income received while carrying the underlying asset.
c. Lower expected spot price for the underlying asset.
d. Higher costs of carrying the underlying asset.
e. Lower risk-free rate of interest.
11. A put option has a strike price of $35. The price of the underlying stock is currently
$42. The put is:
a. out of the money.
b. at the money.
c. near the money.
d. in the money.
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12. A call option with a strike price of $55 can be bought for $4. What will be your net
profit if you sell the call and the stock price is $52 when the call expires?
a. $3.
b. $0.
c. –$7.
d. –$4.
e. $4.
13. Suppose you sell a call and buy one share of stock. What is your cash payoff when the
option expires? (Ignore the costs of the call and the share of stock).
a. Receive X if St ≤ X and receive St if St > X.
b. Receive St if St ≤ X and receive X if St > X.
c. Receive St if St ≤ X and receive –(St –X) if St > X.
d. Receive (St – X) if St ≤ X and receive X if St > X.
14. Which of the following has the right to sell an asset at a predetermined price?
a. A put buyer.
b. A put writer.
c. A call writer.
d. A call buyer.
15. Which of the following is potentially obligated to sell an asset at a predetermined price?
a. A put buyer.
b. A call buyer.
c. A put writer.
d. A call writer.
16. An OTC forward contract is:
a. an option to call
b. a forward contract for which the payback is outside the contract period
c. a customised agreement that is not traded on an exchange
d. a standardised agreement that is traded on an exchange
e. a forward contract in which the spot price of the asset at maturity is over the
contract forward price
17. An investment strategy that requires no outlay of an investor's own money to generate
positive riskless profits is:
(a) arbitrage
(b) risk seeking
(c) portfolio replicating
(d) beta adjusting
(e) minimum variance