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    FRM-Quiz 5

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    buithibinhyen2007

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    FRM-Quiz 5

    Uploaded by

    buithibinhyen2007
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    FRM-Quiz 5

    Uploaded by

    buithibinhyen2007

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    Financial Risk Management

    Quiz #5

    1. Which of the following statements regarding futures contracts is most likely correct? A business with a long
    exposure to an asset would hedge this exposure by either entering into a
    A. long futures contract or by buying a call option.
    B. long futures contract or by buying a put option.
    C. short futures contract or by buying a call option.
    D. short futures contract or by buying a put option.

    2. Which of the following statements is an advantage that is specific only to exchange trading compared to over-the-
    counter (OTC) trading? On an exchange system
    A. terms are not specified.
    B. trades are made in such a way as to reduce credit risk.
    C. participants have flexibility to negotiate.
    D. there is greater anonymity.

    3. An individual that maintains bid and offer prices in a given security and stands ready to buy or sell lots of said
    security is
    A. a hedger.
    B. an arbitrageur.
    C. a speculator.
    D. a dealer.

    4. Which of the following statements regarding the margining process on an exchange is correct?
    A. The initial margin is calculated as a function of the futures price.
    B. CCPs pay interest on both the initial margin and the variation margin.
    C. The initial margin or a futures contract is negotiated between the two parties directly.
    D. When providing noncash margin, the haircut is positively correlated with the price volatility of the underlying
    asset.

    5. A trader sells short 1,000 shares of Stock A, which is currently trading at $40 per share. A margin requirement of
    140% applies as well as a maintenance margin of 125%. If the share price rises to $55, the amount of the margin call
    is closest to
    A. $0.
    B. $1,000.
    C. $14,000.
    D. $15,000.

    6. An investor enters into a short position in a gold futures contract with the following characteristics:
     The initial margin is $3,000.
     The maintenance margin is $2,250.
     The contract price is $1,300.
     Each contract controls 100 troy ounces.
    If the price drops to $1,295 at the end of the first day and $1,290 at the end of the second day, which of the
    following is closest to the variation margin required at the end of the second day?
    A. $0
    B. $250
    C. $500
    D. $1,000

    7. An equity portfolio is worth $100 million with the benchmark of the Dow Jones Industrial Average (Dow). The
    Dow is currently at 10,000, and the corresponding portfolio beta is 1.2. The futures multiplier for the Dow is 10.
    Which of the following is the closest to the number of contracts needed to double the portfolio beta?
    A. 1,100
    B. 1,168
    C. 1,188
    D. 1,200

    8. An investor has an asset that is currently worth $500, and the annually compounded risk-free rate at all maturities
    is 3%.
    Which of the following amounts is the closest to the no-arbitrage price of a three-month forward contract?
    A. $496
    B. $500
    C. $502
    D. $504

    9. A bond pays a semiannual coupon of $40 and has a current value of $1,109. The next payment on the bond is in
    four months, and the annual interest rate is 6.50%. Using an annual compounding assumption, the price of a six-
    month forward contract on this bond is closest to
    A. $1,103.
    B. $1,104.
    C. $1,145.
    D. $1,185.

    10. A company has a $20 million portfolio with a beta of 1.2. It would like to use futures contracts on the S&P 500
    to hedge its risk. The index futures price is currently standing at 1080, and each contract is for delivery of $250
    times the index. What is the hedge that minimizes risk? What should the company do if it wants to reduce the beta of
    the portfolio to 0.6?

    11. Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an
    imperfect hedge? Explain your answer.

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