FIN2601 Assignment 1 (QUIZ ANSWERS) Semester 1 2024 - DUE 10 April

FIN2601 Assignment 1 (QUIZ ANSWERS) Semester 1 2024 - DUE 10 April The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well *The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market* All of the above Which of the following is approximately true when size is measured in terms of the underlying principal amounts or value of the underlying assets? - ANSThe over-the-counter market is twice as big as the exchange-traded market The exchange-traded market is twice as big as the over-the-counter market The exchange-traded market is ten times as big as the over-the-counter market *The over-the-counter market is ten times as big as the exchange-traded market Which of the following is true? - ANS-Neither futures contracts nor forward contracts are traded on exchanges Both forward and futures contracts are traded on exchanges *Futures contracts are traded on exchanges, but forward contracts are not* Forward contracts are traded on exchanges, but futures contracts are not Which of the following is true? - ANS-Gold producers should always hedge the price they will receive for their production of gold over the next one year Gold producers can hedge by buying gold in the forward market *The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold Gold producers should always hedge the price they will receive for their production of gold over the next three years 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? - ANS-It leads to a better exchange rate being paid It caps the exchange rate that will be paid *It leads to a more predictable exchange rate being paid* It provides a floor for the exchange rate that will be paid 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 What futures price will allow $2,000 to be withdrawn from the margin account? - ANS-58 66 64 *62* 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? - ANS-78cents *72cents* 76 cents 74 cents 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? - ANS-*Short 192 contracts* Long 192 contracts Long 96 contracts Short 96 contracts 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? - ANS-Long 192 contracts Short 96 contracts Short 192 contracts *Long 96 contracts* 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? - ANS-A forward contract will always give a better outcome than an option An option can be used to lock in the exchange rate An option will always give a better outcome than a forward contract *A forward contract can be used to lock in the exchange rate