chapter 5 questions I mess up Flashcards
Consider a mutual fund that invests primarily in fixed-income securities that have been determined to be appropriate given the fund’s investment goal. Which of the following is least likely to be a part of this fund?
a) Warrants.
b) Commercial paper.
c) Repurchase agreements.
a) Warrants.
Warrants are least likely to be part of the fund. Warrant holders have the right to buy the issuer’s common stock. Thus, warrants are typically classified as equity and are least likely to be a part of a fixed-income mutual fund.
Commercial paper and repurchase agreements are short-term fixed-income securities.
A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation?
a) Closed-end funds are unavailable to new investors.
b) When investors sell the shares of an open-end fund, they can receive a discount or a premium to the fund’s net asset value.
c) When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.
c) When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market.
When investors want to sell their shares, investors of an open-end fund sell the shares back to the fund whereas investors of a closed-end fund sell the shares to others in the secondary market
The Standard & Poor’s Depositary Receipts (SPDRs) is an investment that tracks the S&P 500 stock market index. Purchases and sales of SPDRs during an average trading day are best described as:
a) primary market transactions in a pooled investment.
b) secondary market transactions in a pooled investment.
c) secondary market transactions in an actively managed investment.
b) secondary market transactions in a pooled investment.
The usefulness of a forward contract is limited by some problems. Which of the following is most likely one of those problems?
a) Once you have entered into a forward contract, it is difficult to exit from the contract.
b) Entering into a forward contract requires the long party to deposit an initial amount with the short party.
c) If the price of the underlying asset moves adversely from the perspective of the long party, periodic payments must be made to the short party.
a) Once you have entered into a forward contract, it is difficult to exit from the contract.
Once you have entered into a forward contract, it is difficult to exit from the contract. As opposed to a futures contract, trading out of a forward contract is quite difficult.
Tony Harris is planning to start trading in commodities. He has heard about the use of futures contracts on commodities and is learning more about them. Which of the following is Harris least likely to find associated with a futures contract?
a) Existence of counterparty risk.
b) Standardized contractual terms.
c) Payment of an initial margin to enter into a contract.
Solution
a) Existence of counterparty risk.
Harris is least likely to find counterparty risk associated with a futures contract.
A German company that exports machinery is expecting to receive $10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction is most likely to achieve this objective?
a) Selling dollars forward.
b) Buying put options on the dollar.
c) Selling futures contracts on dollars.
b) Buying put options on the dollar.
Buying a put option on the dollar will ensure a minimum exchange rate but does not have to be exercised if the exchange rate moves in a favorable direction
Forward and futures contracts would lock in a fixed rate but would not allow for the possibility to profit in case the value of the dollar three months later in the spot market turns out to be greater than the value in the forward or futures contract.
A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreement for the publisher to buy and the producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a:
a) futures contract.
b) forward contract.
c) commodity swap.
b) forward contract.
The agreement between the publisher and the paper supplier to respectively buy and supply paper in the future at a price agreed upon today is a forward contract.
The Standard & Poor’s Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The latest price of a share of SPDRs is $290. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options expire in six months and have an exercise price of $305 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading:
a) below $305 per share.
b) above $305 per share.
c) above $308 per share.
b) above $305 per share.
Pierre-Louis Robert just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have the same exercise price, expiration date, and number of shares underlying. Considering both positions, Robert’s exposure to the risk of the stock of the Michelin Group is:
a) long.
b) short.
c) neutral.
a) long.
Robert’s exposure to the risk of the stock of the Michelin Group is long. The exposure as a result of the long call position is long. The exposure as a result of the short put position is also long. Therefore, the combined exposure is long.
You have placed a sell market-on-open order—a market order that would automatically be submitted at the market’s open tomorrow and would fill at the market price. Your instruction, to sell the shares at the market open, is a(n):
a) execution instruction.
b) validity instruction.
c) clearing instruction.
c) clearing instruction.
The type of efficiency that exists in an economy that distributes capital in the most productive way is best described as:
a) allocational.
b) informational.
c) operational.
c) operational.
The values of a price return index and a total return index consisting of identical equal-weighted dividend-paying equities will be equal:
A) only at inception.
B) at inception and on rebalancing dates.
C) at inception and on reconstitution dates.
A) only at inception.
Security market indexes are:
a) constructed and managed like a portfolio of securities.
b) simple interchangeable tools for measuring the returns of different asset classes.
c) valued on a regular basis using the actual market prices of the constituent securities.
a) constructed and managed like a portfolio of securities.
When creating a security market index, an index provider must first determine the:
a) target market.
b) appropriate weighting method.
c) number of constituent securities.
a) target market.
When creating a security market index, the target market:
a) determines the investment universe.
b) is usually a broadly defined asset class.
c) determines the number of securities to be included in the index.
a) determines the investment universe.
