# Derivatives 200079 Midsemester Exam

Topics: Futures contract, Short, Forward contract Pages: 11 (1821 words) Published: May 28, 2013
UNIVERSITY OF WESTERN SYDNEY

School of Economics and Finance

200079 Derivatives

INTERIM TEST (KEY)
PARRAMATTA

Spring Session 2012

TIME ALLOWED: 1 hour

FORMAT: 20 multiple-choice questions

WEIGHTING OF EXAMINATION: 30%
SUBJECT CO-ORDINATOR: Dr. I. Nalson

SCIENTIFIC (NON-PROGRAMMABLE) CALCULATORS AND FOREIGN LANGUAGE

DICTIONARIES ARE PERMITTED

NAME: ____________________________________

STUDENT NUMBER:__________________________

TUTORIAL TIME ____________________________

Instructions to candidates:

THIS IS A CLOSED BOOK EXAMINATION

MULTIPLE-CHOICE QUESTIONS

NB: Indicate the answer you think is correct on the computerised sheet

1. The price of a currency forward contract is less than the current spot price (the foreign currency is at a discount). If the contract price is theoretically correct

A: rf ( rd
B : rf = rd
C: rf ( rd*
D: We cannot tell on the available information

NB: rf = foreign interest rate; rd = domestic interest rate

The foreign currency is selling at a discount; therefore the foreign interest rate must be higher

2. The spot price of gold is \$ 890 per ounce. The interest rate (with annual compounding) is 12% per annum. The gold lending rate (gold fee) is 2% per annum payable in arrears at maturity of the forward contract. What is the theoretical one-year forward price of gold to two decimal places?

A: \$ 960.68
B: \$ 991.68
C: \$ 977.25*
D: None of the above

\$890(1 + 0.12)/1.02 = \$977.25

3. If the forward price of gold in the previous question is \$ 970.68 (other values unchanged), calculate the arbitrage profit per ounce of gold that can be achieved.

A: \$6.57*
B: \$8.56
C: \$7
D: None of the above

Borrow and sell gold at \$890
Invest proceeds (paying the gold fee) earning: \$890(1 + 0.12)/1.02 = \$977.25, having bought gold forward at \$970.68. Profit = \$977.25 - \$970.68 = \$6.57 per ounce.

4. An investor receives \$1450 in three years from an investment of \$1000 now. What interest rate per annum with monthly compounding (rounded to two decimal places) is required to achieve this return?

A: 11.58%
B: 13.72%
C: 12.45%*
D: None of the above

\$1450 =\$ 1000(1 + r/12)12*3

1.45 = (1 +r/12)36

[pic]

1.451/36 = 1 + r/12

1.450.027777777 = 1 + r/12

1.010374657 = 1 + r/12
0.010374657 = r/12
r = 0.010374657 ( 12
r = 0.12449588 = 12.45%

5. A company enters into a short futures contract to sell 80,000 pounds of cotton for 75 cents per pound. The initial margin is \$6,000 and the maintenance margin is \$4,000. What price of cotton futures will trigger a margin call?

A: 80 cents
B: 70 cents
C: 68 cents
D: None of the above*

Total value of the contract is 80,000(\$0.75) = \$60,000
We have a short position. We lose if the futures price rises. The position value would have to rise to \$62,000 for a \$2000 loss to be made. 80,000p = 62,000
p = \$0.775, therefore D is correct.

6. On the floor of a futures exchange one futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest?

A: Decrease of one*
B: Increase of one
C: No change
D: Decrease of two

See the lecture 2 on ‘HOW REVERSING TRADES AFFECT OPEN INTEREST’.

7. An investor receives \$1450 after investing \$1000 for five years. What is the percentage return per annum with continuous compounding (rounded to two decimal places)?

A: 8.13 %
B: 7.43 %*
C: 10.14. %
D: None of the above

\$1450 = 1000er*5
1450/1000 = er*5
1.45 = er*5
Take logs
0.3715635564/5 = r
r = 0.0743127 = 7.43% continuously compounded

8. A futures contract basis weakens unexpectedly. Which of the following is true?

A: A long hedger’s position improves*
B: A short hedger’s position improves
C: A long hedger’s position worsens
D: None of the above

See Lecture 5, p.9.

9. A zero coupon bond with four years to...

Please join StudyMode to read the full document