FIN 420 EXAM QUESTIONS AND ANSWERS
B) It leads to a more predictable exchange rate being paid - Answers :A company due
to pay a certain amount of a foreign currency in the future decides to hedge with futures
contracts. Which of the following best describes the advantage of hedging?
A) It leads to a better exchange rate being paid
B) It leads to a more predictable exchange rate being paid
C) It caps the exchange rate that will be paid
D) It provides a floor for the exchange rate that will be paid
64 - Answers :A company enters into a long futures contract to buy 1,000 units of a
commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is
$4,000. What futures price will allow $2,000 to be withdrawn from the margin account?
$66
$62
$64
$58
72 cents - Answers :A company enters into a short futures contract to sell 50,000 units
of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance
margin is $3,000. What is the futures price per unit above which there will be a margin
call?
78 cents
74 cents
76 cents
72 cents
Short 192 contracts - Answers :A company has a $36 million portfolio with a beta of 1.2.
The futures price for a contract on an index is 900. Futures contracts on $250 times the
index can be traded. What trade is necessary to neutralize the portfolio to be risk free?
Short 96 contracts
Long 192 contracts
Long 96 contracts
Short 192 contracts
Long 96 contracts - Answers :A company has a $36 million portfolio with a beta of 1.2.
The futures price for a contract on an index is 900. Futures contracts on $250 times the
index can be traded. What trade is necessary to increase beta to 1.8?
Long 96 contracts
Short 96 contracts
Long 192 contracts
Short 192 contracts
A forward contract can be used to lock in the exchange rate - Answers :A company
knows it will have to pay a certain amount of a foreign currency to one of its suppliers in
the future. Which of the following is true?
, A) A forward contract will always give a better outcome than an option
B) An option will always give a better outcome than a forward contract
C) An option can be used to lock in the exchange rate
D) A forward contract can be used to lock in the exchange rate
0.60 - Answers :Suppose that the standard deviation of monthly changes in the price of
commodity A is $2. The standard deviation of monthly changes in a futures price for a
contract on commodity B (which is similar to commodity A) is $3. The correlation
between the futures price and the commodity price is 0.9. What hedge ratio should be
used when hedging a one month exposure to the price of commodity A?
0.90
0.67
0.60
1.45
The hedger's position improves - Answers :The basis is defined as spot minus futures.
A trader is hedging the sale of an asset with a short futures position. The basis
increases unexpectedly. Which of the following is true?
A) The hedger's position improves
B) The hedger's position stays the same
C) The hedger's position sometimes worsens and sometimes improves
D) The hedger's position worsens
C) Creates long-term hedges from short term futures contracts - Answers :Which of the
following best describes "stack and roll"?
A) Can avoid losses on futures contracts by entering into further futures contracts
B) Involves two different exposures simultaneously
C) Creates long-term hedges from short term futures contracts
D) Involves buying a futures contract with one maturity and selling a futures contract
with a different maturity
B) The price for immediate delivery - Answers :Which of the following best describes the
term "spot price"?
A) The price for delivery at a future time
B) The price for immediate delivery
C) The price of renting an asset
D) The price of an asset that has been damaged
A) Exercisable only at maturity - Answers :Which of the following describes European
options?
B) It leads to a more predictable exchange rate being paid - Answers :A company due
to pay a certain amount of a foreign currency in the future decides to hedge with futures
contracts. Which of the following best describes the advantage of hedging?
A) It leads to a better exchange rate being paid
B) It leads to a more predictable exchange rate being paid
C) It caps the exchange rate that will be paid
D) It provides a floor for the exchange rate that will be paid
64 - Answers :A company enters into a long futures contract to buy 1,000 units of a
commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is
$4,000. What futures price will allow $2,000 to be withdrawn from the margin account?
$66
$62
$64
$58
72 cents - Answers :A company enters into a short futures contract to sell 50,000 units
of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance
margin is $3,000. What is the futures price per unit above which there will be a margin
call?
78 cents
74 cents
76 cents
72 cents
Short 192 contracts - Answers :A company has a $36 million portfolio with a beta of 1.2.
The futures price for a contract on an index is 900. Futures contracts on $250 times the
index can be traded. What trade is necessary to neutralize the portfolio to be risk free?
Short 96 contracts
Long 192 contracts
Long 96 contracts
Short 192 contracts
Long 96 contracts - Answers :A company has a $36 million portfolio with a beta of 1.2.
The futures price for a contract on an index is 900. Futures contracts on $250 times the
index can be traded. What trade is necessary to increase beta to 1.8?
Long 96 contracts
Short 96 contracts
Long 192 contracts
Short 192 contracts
A forward contract can be used to lock in the exchange rate - Answers :A company
knows it will have to pay a certain amount of a foreign currency to one of its suppliers in
the future. Which of the following is true?
, A) A forward contract will always give a better outcome than an option
B) An option will always give a better outcome than a forward contract
C) An option can be used to lock in the exchange rate
D) A forward contract can be used to lock in the exchange rate
0.60 - Answers :Suppose that the standard deviation of monthly changes in the price of
commodity A is $2. The standard deviation of monthly changes in a futures price for a
contract on commodity B (which is similar to commodity A) is $3. The correlation
between the futures price and the commodity price is 0.9. What hedge ratio should be
used when hedging a one month exposure to the price of commodity A?
0.90
0.67
0.60
1.45
The hedger's position improves - Answers :The basis is defined as spot minus futures.
A trader is hedging the sale of an asset with a short futures position. The basis
increases unexpectedly. Which of the following is true?
A) The hedger's position improves
B) The hedger's position stays the same
C) The hedger's position sometimes worsens and sometimes improves
D) The hedger's position worsens
C) Creates long-term hedges from short term futures contracts - Answers :Which of the
following best describes "stack and roll"?
A) Can avoid losses on futures contracts by entering into further futures contracts
B) Involves two different exposures simultaneously
C) Creates long-term hedges from short term futures contracts
D) Involves buying a futures contract with one maturity and selling a futures contract
with a different maturity
B) The price for immediate delivery - Answers :Which of the following best describes the
term "spot price"?
A) The price for delivery at a future time
B) The price for immediate delivery
C) The price of renting an asset
D) The price of an asset that has been damaged
A) Exercisable only at maturity - Answers :Which of the following describes European
options?
