Review of Lecture 27 Quiz and Test Questions
1. MB20 Two motives drive trading of commodity contracts in the futures and options
markets: hedging and speculating. Choose the statement that best describes
characteristics of speculators.
a. they expect or already have a position in the underlying commodity
b. movements in the commodity price almost totally determine the outcome
c. whether the futures contract turns a profit or a loss is largely irrelevant to the
overall outcome
d. Two choices, A and C, are correct
e. The three A-B-C choices are all correct
2. CR1a Suppose a company in the USA has a chance to sell its product internationally for
either (i) 36000 rupees or (ii) 44300 krone. Shipping and other costs are identical. The
company bases its decisions on today's currency exchange rates: 1 USD = 5.00 rupees
and 1 USD = 6.45 krone . Which statement is most accurate?
a. the company receives $289 more USD if they make the deal in rupees
b. the company receives $332 more USD if they make the deal in rupees
c. the company receives $332 more USD if they make the deal in krone
d. the company receives $289 more USD if they make the deal in krone
e. the company receives $251 more USD if they make the deal in krone
3. FT4c The Company hopes to win a job for delivering its product to an overseas client. The
Company must submit a bid to the client stating the cost of the job, and the client
decides whether or not to hire the Company. The Company estimates they can produce
the product over the next few months at a pretax cost of $120,000 ; their target pretax
profit margin (= Pretax profit / Sales revenue ) for this job is 20%. The Company is
willing to accept payment from the client in foreign currency (krone). The spot exchange
rate today is 1 USD = 0.8400 krone. The client agrees to pay the Company its requested
bid, but by the time the Company receives the payment, the price of the krone has
appreciated by 15 percent relative to the dollar. How much is the actual pretax profit
margin?
a. 33.5%
b. 25.2%
c. 36.8%
d. 27.7%
e. 30.4%
4. FT1b Awhile ago futures contracts for crawdads (1750 lbs. per contract) traded at a
futures price of $1.00 per lb. Today the futures price is $0.83 . The margin on the
contract is 0.50%. For an investor that was long one contract during this period, what is
the rate of return?
a. -3740%
b. -2810%
c. -3400%
d. -3091%
5.
e. -2554%
CR1c Suppose a company in the USA has a chance to buy its product internationally for
either (i) 36000 krone or (ii) 29000 bhat. Shipping and other costs are identical. The
company bases its decisions on today's currency exchange rates: 1 USD = 6.60 krone ,
and 1 USD = 5.12 bhat . Which statement is most accurate?
a. the company pays $241 less USD if they make the deal in krone
b. the company pays $182 less USD if they make the deal in krone
c. the company pays $210 less USD if they make the deal in krone
d. the company pays $210 less USD if they make the deal in bhat
e. the company pays $241 less USD if they make the deal in bhat
6. FT5c A futures contract provides the opportunity to lock-in the exchange rate at which
you can buy or sell 175,000 bhat . The futures price, quoted in U.S. cents per bhat,
currently is 81.40 . The margin requirement is 2.25%. You enter long on one contract.
Thereafter, the price of the bhat appreciates 7% relative to the USD. You then close your
futures position. Which statement is true?
a. your profit is $7,540 and rate of return is 358%
b. your profit is $8,671 and rate of return is 358%
c. your profit is $9,972 and rate of return is 358%
d. your profit is $8,671 and rate of return is 311%
e. your profit is $9,972 and rate of return is 311%
7. FT6b Today is Jan. 2, 2525, and the Company plans on sending its foreign subsidiary
40,000 rupee in June. Today's exchange rate, quoted in U.S. cents per rupee, currently is
80.70 in the local spot market, and 80.60 in the futures market for July delivery. The
Company today enters an appropriate position on 5 contracts (8,000 rupee each). The
Company intends to close the futures position in June, settle in cash, and use the cash
flows from the futures market to hedge movements in exchange rates at the local
market. By June the price of the rupee has depreciated 7% relative to the USD, and this
percentage change is reflected in both the spot and futures prices. So in June the
Company exchanges 40,000 rupee in the local spot market and, also, the Company
closes its futures position with a cash settlement. Which statement about this hedging
activity is correct?
a. the Company takes a short position and it eventually saves them $2,260
b. the Company takes a short position and it eventually saves them $2,989
c. the Company takes a long position and it eventually costs them $2,599
d. the Company takes a long position and it eventually costs them $2,260
e. the Company takes a long position and it eventually costs them $2,989
8. TQ17 The SP2 Index equals the sum of stock prices for companies Y and Z. Today's stock
prices equal $52 and $44 for stocks Y and Z, respectively. Today's futures price for the
SP2 with delivery in 1-year is $96.52 . The interest rate at which you may borrow and
invest is 11.6%. How much is the present value of stock index arbitrage profits, and how
do you capture it?
a. Capture the present value of arbitrage profits, $9.51 , by taking a short position in
the spot market, investing the proceeds at the interest rate, and also entering a long
position in the futures market.
b. Capture the present value of arbitrage profits, $12.58 , by taking a short position
in the spot market, investing the proceeds at the interest rate, and also entering a long
position in the futures market.
c. Capture the present value of arbitrage profits, $10.94 , by taking a short position
in the spot market, investing the proceeds at the interest rate, and also entering a long
position in the futures market.
d. Capture the present value of arbitrage profits, $9.51 , by taking a long position in
the spot market by borrowing money at the interest rate and entering a short position in
the futures market.
e. Capture the present value of arbitrage profits, $10.94 , by taking a long position in
the spot market by borrowing money at the interest rate and entering a short position in
the futures market.
9. FT3a Today is Jan. 2, 2525, and the Company plans on buying 36,000 bushels of
soybeans in October. Currently, soybeans cost $3.10 per bushel in the cash market, and
$3.40 in the futures market for November delivery. The Company today goes long on 3
contracts (12,000 bushels each). In October, the Company buys 36,000 bushels in the
local market for the cash price of $4.20 . Also in October, the Company closes its futures
position on the November contracts at a futures price of $4.40 . What is the Company's
net cost?
a. $126,720
b. $139,392
c. $153,331
d. $115,200
e. $104,727