Solution to Risk management

1. A deep in-the-money call option on futures is exercised early because
a. the intrinsic value is maximized
b. it behaves like a futures but ties up funds
c. the futures price is not likely to rise any further
d. all of the above
e. none of the above

2. The transaction designed to exploit mis-pricing in the relationship between futures and spot prices is called

a. a repurchase agreement

b. a hedge

c. speculation

d. carry arbitrage

e. none of the above

3. The implied repo rate is similar to the

a. internal rate of return

b. cost of hedging

c. yield on the futures contract

d. all of the above

e. none of the above

4. On the basis of liquidity, the best futures contract for hedging short-term interest rates is
Answer

a. Treasury bills

b. the prime rate

c. commercial paper

d. Eurodollars

e. none of the above

5. Which one of the following options is not associated with the Treasury bond futures contract?
Answer

a. end-of-the-month

b. spread option

c. wild card option

d. quality option

e. none of the above

6 .The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a
Answer

a. Bond-bill spread

b. MOB spread

c. designated order turnaround

d. turtle trade

e. none of the above

7. The transaction in which money is borrowed by selling a security and promising to buy it back in several weeks is called a
Answer

a. term repo

b. overnight repo

c. term arbitrage

d. MOB spread

e. none of the above

8. The end-of-the-month option is
Answer

a. the right to exercise an option on the last day of the month

b. an option expiring on the last day of the month

c. the right to deliver during the last seven business days of the month

d. an option that trades only at the end of the month

e. none of the above

9. In which of the following situations would you use a short hedge?
Answer

a. the planned purchase of a stock

b. the planned purchase of commercial paper

c. the planned issuance of bonds

d. the planned repurchase of stock to cover a short position

e. none of the above

10. Derivatives activities in end users are primarily conducted by
Answer

a. the human resources group

b. the sales staff

c. the chief financial officer

d. the board of directors

e. the treasury group

11. The cost of carry consists of all the following except
Answer

a. the risk-free rate

b. the cost of storage

c. insurance on the asset

d. the risk premium

e. none of the above