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Multiple Choice Questions on Futures

1) The annualized dividend yield on the s&p 500 is 1.40%. The continuously compounded interest rate is 6.4%. if the 9-month forward price is $925.28 and the index is priced at 950.46$, what is the profit/loss from a cash and carry strategy?

a. 61.50 gain
b. 25.18 loss
c. 25.18 gain
d. 61.50 loss

2) The manager of a blue chip growth stock mutual fund is trying to fully hedge the $650 million portfolio position during the last two months of the calendar year. the current price of the S&P 500 Index futures contract is 1200. If the mutual fund has a beta of 1.24 how many contracts will be needed to hedge the fund?

a) 541,666
b)2,686
c)242,963
d)1,083

3) Consider an investment in five S&P 500 Index futures contracts at a price of $924.80. the initial margin requirement is 15% and the maintenance margin is 10.0%. If the continuously compounded interest rate is 5.0% what will the futures price need to be for a margin call to occur 10 days from now? Assume no settlement within the 10 days.

a.) $852.64
b.)$905.25
c.) $898.63
d.)$872.79

4) The price of an S&P 500 Index futures contract is $988.26 when you decide to enter a long position. When the position is closed the futures price is $930.32. If there are no settlement requirements, what is your percentage gain or loss under a 15.0% margin requirement? (Ignore opportunity costs)

a.) 39% gain
b.) 43% loss
c.) 43% gain
d.)39% loss

Solution Preview

1) The annualized dividend yield on the S&P 500 is 1.40%.  The continuously compounded interest rate is 6.4%. If the 9-month forward price is $925.28 and the index is priced at 950.46$, what is the profit/loss from a cash and carry strategy?

a. 61.50 gain
b. 25.18 loss
c. 25.18 gain
d. 61.50 loss

Answer: d. 61.50 loss

In a cash and carry strategy, the trader sells the futures contract and buys the undelying asset to deliver it

Investment required (value of boorowed amount ) for cash and carry = S e^ { (r-q) t }
S= $950.46
r= 6.40%
q= 1.40%
t= 9 months= 0.75 years

Investment=(amount paid)= $986.78 =950.46 x e ^ ((6.4% - 1.4% ) x 0.75 )
9-month forward price=(Amount received)= $925.28
Therefore, Loss= $61.50 =$986.78 - ...

Solution Summary

4 MCQs on futures have been answered.

$2.19