Fin730 Exam 2- LSUS Dr. Choi Exam with 100% Correct Answers

Fin730 Exam 2- LSUS Dr. Choi Exam with 100% Correct Answers A __________ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. *Ans* financial futures contract If speculators believe interest rates will ________, they would consider________ a t-bill futures contract today. *Ans* increase, selling A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ________, and the position in futures contracts will result in a __________. *Ans* decrease, gain The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at *Ans* the settlement date Which of the following statements is incorrect with respect to cross-hedging? *Ans* If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts. ________ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract. *Ans* Basis Currency futures may be purchased to hedge _______ or to capitalize on the expected ________ of that currency against the dollar. *Ans* payables, depreciation Speculators who normally close out their futures positions on the same day that the positions were initiated are referred to as *Ans* Day Traders Speculators in futures contracts that normally maintain their futures positions for extended periods of time (such as weeks or months) are referred to as *Ans* position traders An unexpected ________ in the consumer price index tends to create expectations of _________ interest rates and places ________ pressure on Treasury bond futures prices. *Ans* Increase; higher; downward A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use: *Ans* a long hedge Explain the use of circuit breakers. *Ans* Circuit breakers are trading restrictions imposed on specific stocks or stock indices when prices decline abruptly, which prohibit trading for short time periods. This allows investors to determ