Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz.com CFA Level III Item-set - Question Study Session 15 June 2018 Copyright © 2010-2018 FinQuiz.com All rights reserved Copying, reproduction or redistribution of this material is strictly prohibited info@finquiz.com FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8812 Questions 1(8813) through 6(8818) relate to Reading 28 Clarinet Underwood Case Scenario Clarinet Underwood is responsible for the management of a portfolio invested in foreign assets Underwood foresees a downturn in the foreign stock market and wants to hedge this risk However, she is not sure about how to go about it, and what to expect of the portfolio’s performance once she hedges When she asked her boss, Jeremiah Clint, he made the following comment: Statement 1: “For hedging the foreign stock market risk you will have to go short an appropriate number of foreign stock index futures contracts Once hedged, the portfolio will yield a return close to the foreign risk-free rate after converting to the domestic currency.” Clint told Underwood that one important consideration in the use of currency hedging strategies is the decision about whether to use futures or forwards for implementing the hedge He made the following comment: Statement 2: “Since the forward market is more liquid than the futures market, and forward contracts can also be customized, the risk of most bond portfolios is managed using bond forwards.” Clint is responsible for the management of an institutional fund worth $100 million The client has entered into a business agreement with a foreign company and expects to have an inflow related to a specific currency transaction The client has asked Clint to devise a strategy for managing the risk of this transaction Clint made the following comment: Statement 3: “The use of forwards for hedging risks has several advantages One is that forwards provide a much better hedge than futures, and the other is that they tend to be less costly.” During a discussion with another client, Lila Diaz, about the benefits of using derivatives, Clint made the following comment: Statement 4: “Transacting in forwards and futures has a major advantage of being less disruptive to the portfolio and its managers.” FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8813 With respect to statement 1, Clint is most likely: A correct B incorrect with respect to the process of hedging the foreign stock market risk C incorrect with respect to the portfolio return FinQuiz Question ID: 8814 With respect to statement 2, Clint is most likely: A correct B incorrect, because the risk of bond portfolios is usually managed using futures C incorrect, because the futures market is more liquid than the forward market FinQuiz Question ID: 8815 The most appropriate instrument to use for hedging the risk of the institutional client’s currency transactions is a: A forward contract B futures contract C swap contract FinQuiz Question ID: 8816 With respect to statement 3, is Clint most likely accurate with respect to the first and second advantage of forward contracts? A B C First Benefit Yes No Yes Second Benefit Yes Yes No FinQuiz Question ID: 8817 Which of the following factors is not usually a consideration in deciding whether to use futures or forwards for hedging? A Standardization vs customization B Costs C Regulatory differences between futures and forwards FinQuiz Question ID: 8818 With respect to statement 4, Clint is most likely: A correct B correct only with respect to their use for altering the allocation between asset classes C correct only with respect to their use for changing the risk of certain asset classes FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8805 Questions 7(8806) through 12(8811) relate to Reading 28 Asset Management Association (AMA) Case Scenario Asset Management Association (AMA) is a U.S based portfolio management firm offering a wide range of products to its clients Among its products is a foreign portfolio invested in European stocks worth €20 million with an average beta of 1.10 The current spot exchange rate is $1.078/€ The U.S and euro interest rates are 5.5% and 5% respectively, and both are compounded in the LIBOR manner AMA is concerned with the risk that the foreign portfolio might face in the coming six months, and is considering either hedging the European stock market risk or hedging both the stock market risk and the exchange rate risk A six month futures contract on a European stock index trades at €155,000 and has a beta of 0.95 FinQuiz Question ID: 8806 The most appropriate transaction to hedge the European market return involves: A selling 129 stock index futures contracts B selling 149 stock index futures contracts C selling 161 stock index futures contracts FinQuiz Question ID: 8807 After hedging the European market return, the return AMA should expect is closest to: A 5% B 5.5% C 2.5% FinQuiz Question ID: 8808 Assuming that AMA hedges the European market return, to hedge the exchange rate risk as well AMA should most likely use a: A currency forward contract with a notional principal of €21,000,000 B swap contract with a notional principal of €21,100,000 C currency forward contract with a notional principal of €20,500,000 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8809 10 If the portfolio is hedged against both the European stock market risk and the exchange rate risk, the amount of dollars to be received at the end of the holding period will be closest to: A $22,151,554 B $22,680,000 C $22,099,000 FinQuiz Question ID: 8810 11 Using the information in Part (ID 8809), the return in percentage terms, after converting to U.S dollars, will be closest to: A 5.50% B 2.744% C 2.5% FinQuiz Question ID: 8811 12 Hedging the foreign market risk and leaving the currency risk unhedged would be an appropriate strategy most likely in the case of a: A strong foreign stock market and a weak currency B weak foreign stock market and a strong currency C weak foreign stock market and a weak currency FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8798 Questions 13(8799) through 18(8804) relate to Reading 28 Sharon Moore Case Scenario Sharon Moore has been working as a portfolio manager at Upright Money Advisors (UMA), a financial management and advisory firm, for the last five years Currently, Moore is analyzing a potential investment, Superior Goods Inc., a U.S company that purchases raw material from Britain to maintain the quality of its products On 5th June, Superior Goods planned to purchase raw material worth ₤50 million from a company in London The payment has to be made on 5th July and the current exchange rate is $1.341/₤ A forward contract denominated in dollars/₤ has a one month forward rate of $1.355/₤ Moore is also considering investing in another company, Oil Explorers Limited Oil Explorers Ltd is a Canadian company with branches worldwide The company has to make payment to one of its branches in the U.S worth $4.5 million Upper management knows that this payment will expose them to exchange rate risk, and therefore, they are considering a forward contract with a forward rate of CAD0.987/$, to hedge this risk FinQuiz Question ID: 8799 13 To hedge the foreign currency risk, Superior Goods should most likely go: A short the forward contract B long the forward contract C long a currency swap FinQuiz Question ID: 8800 14 If after a month the spot exchange rate is $1.298/₤, Superior Goods would most likely be better off: A hedging, by an amount equal to $2.85 million B without hedging, by an amount equal to $2.85 million C without hedging, by an amount equal to $700,000 FinQuiz Question ID: 8801 15 If the forward rate is ₤0.756/$, and Superior Goods hedges the purchase of the raw material, the total payment and receipt to close the contract, will be closest to: Payment A ₤50,000,000 B $37,800,000 C $66,137,566 Receipt $67,050,000 ₤50,000,000 ₤50,000,000 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8802 16 Given the information in Question 13 (i.e 8799), if the spot rate after one month is ₤0.758/$, Superior Goods should most likely: A leave the position unhedged and benefit from $174,505 B hedge the position and benefit from $100,000 C leave the position unhedged and benefit from $1,786,939 FinQuiz Question ID: 8803 17 The most appropriate forward transaction, to eliminate exchange rate risk associated with the $4.5 million payment to be made by Oil Explorers Ltd, is to go: A long the forward contract with a notional principal of CAD4,441,500 B short the forward contract with a notional principal of $4,500,000 C long the forward contract with a notional principal of $4,500,000 FinQuiz Question ID: 8804 18 If at the expiration of the forward contract the spot exchange rate is CAD1/$, the amount to be delivered and received by OEL, to close the forward contract is closest to: Amount delivered A $4,500,000 B CAD4,441,500 C CAD4,500,000 Amount received CAD4,441,500 $4,500,000 $4,500,000 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8791 Questions 19(8792) through 24(8797) relate to Reading 28 Rosita Eastwood Case Scenario Rosita Eastwood is a currency risk manager at Equity Management Specialists (EMS), an equity portfolio management firm Eastwood manages an institutional fund worth $100 million of a U.S based company in the manufacturing industry Recently, as part of their procurement strategy, the company planned to acquire raw materials from Japan to increase their profit margins Eastwood is analyzing the exchange rate risk that the company might face subsequent to this change in strategy Eastwood lately invested $5 million in Software Solutions Inc (SSI), a U.S company that sells its products to Canada and Europe Recently, the company received a delivery order from a major European company, Blue-Ray Technologies Since the sale is denominated in euros, SSI is concerned with the exchange rate risk associated with this transaction To hedge this risk, SSI is considering entering a currency forward contract denominated in dollars/euro The sale is in the amount of €35 million and the money will be received in three months The current exchange rate is $0.894/€ and the three month forward rate is $0.997/€ FinQuiz Question ID: 8792 19 To hedge the currency risk associated with the dollar/yen exchange rate, the manufacturing company should most likely go: A short a currency forward contract B long a currency forward contract C long a currency swap contract FinQuiz Question ID: 8793 20 With regards to the sale to Blue-Ray Technologies, Software Solutions Inc is most likely: A long the euro and therefore should go short the forward contract B short the euro and therefore should go long the forward contract C long the euro and therefore should go long the forward contract FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8794 21 Suppose SSI takes the appropriate position in the forward contract to hedge the exchange rate risk If the exchange rate at contract expiration is St and F is the forward exchange rate, the contract would be cash settled for a payment of: A St –F B St C –(St –F) FinQuiz Question ID: 8795 22 If the realized spot exchange rate in three months is $0.954, and SSI enters into the forward contract, the amount that will be paid and received by SSI to close the contract, is closest to: A B C Amount Paid $33,390,000 €50,000,000 €35,000,000 Amount received €50,000,000 €31,290,000 $34,895,000 FinQuiz Question ID: 8796 23 If the realized spot exchange rate in three months is $0.967/€, SSI would most likely: A receive $1,050,000 less than if it had hedged using the forward contract B receive 1,070,000 more than if it had hedged using the forward contract C receive $1,089,099 less than if it had hedged using the forward contract FinQuiz Question ID: 8797 24 If instead, the realized spot exchange rate in three months is $1.253/€, SSI would most likely be better off: A not hedging the position and receive $8.96 million more B not hedging the position and receive $10.01 million more C hedging the position and receive $10.01 million more FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8773 Questions 25(8774) through 30(8779) relate to Reading 28 Kimberly Bacon Case Scenario Kimberly Bacon is part of the risk management team at Bright Investors (BI), an investment management firm with a number of branches across U.S Bacon is currently working with David Wilson, a portfolio manager at the firm, on the task of managing an institutional fund worth $375 million The fund has a 50% investment in bonds, and a 50% investment in stocks Bacon believes that future interest rates are going to decline and wants to manage this risk accordingly The current modified duration of the portfolio is 5.55 and Bacon suggests it should be increased to 7.7 on a temporary basis A futures contract on government bonds trades at a quoted price of 1500 with a multiplier of 250 and a modified duration of 6.27 The yield beta equals 1.2 Bacon made the following comment while talking to Wilson: Statement 1: “To make the desired adjustment in the modified duration of the portfolio, we need to buy 216 futures contracts.” Statement 2: “Changing the duration of a bond portfolio using futures contracts is an exact process of increasing or decreasing the risk of the portfolio to a desired level.” Statement 3: “Risk management by adjusting duration is a means of implementing a strategy in response to an outlook, and hence, its success is dependent upon how accurate the outlook is.” FinQuiz Question ID: 8774 25 With respect to statement 1, Bacon is most likely: A correct B incorrect, because the number of contracts needed is 215 C incorrect, because the number of contracts needed is 206 FinQuiz Question ID: 8775 26 If the bond portfolio and the futures yields change one-for-one, the number of contracts needed for the adjustment will be closest to: A 179 B 178 C 171 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8702 58 If the benchmark index has a beta of 1, and the reference index increases in value by 2.5%, the profit/loss from the equity position and the futures position will be closest to: Equity position A $371,875 B $875,000 C $875,000 Futures position $875,000 $371,875 $357,875 FinQuiz Question ID: 8703 59 Using the information in Part 4, the overall value of the position will be closest to: A $51.25 million B $53.48 million C $60.21 million FinQuiz Question ID: 8704 60 Using the information in Part 4, the effective beta on the portfolio will be closest to: A 0.987 B 0.997 C 0.797 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8691 Questions 61(8692) through 66(8697) relate to Reading 28 Judith Clapton Case Scenario Judith Clapton works as a portfolio manager at Equity Portfolio Management (EPM), an equity management firm established in Chicago Clapton is currently in the process of adjusting the risk exposure of a client’s equity portfolio During a client meeting, Clapton made the following comments: Statement 1: “Futures can be used to manage the risk of both stock and bond portfolios However, the risk associated with stock market volatility is greater than that of bond market volatility, but fortunately, the stock market is generally more liquid than the bond market.” Statement 2: “Portfolio managers generally use beta as a measure of stock market risk If the beta of a portfolio is 1.20, then this means the portfolio is 20 percent more volatile than the market.” Statement 3: “To manage the risk of a portfolio consisting of small-cap stocks by pairing it with a futures contract on the S&P 500, a transaction designed to increase risk could end up decreasing it.” Statement 4: “At the start of each day, the dollar beta of a combination of stock and futures, if the target beta is achieved, is the product of the target beta and the market value of the stock portfolio.” Statement 5: “If we want to increase the beta of our stock portfolio, we would either buy or sell futures contracts depending upon whether the beta of the futures exceeds the target beta or not.” Statement 6: “One factor that can affect a transaction designed to manage the risk of a stock portfolio is the payment and reinvestment of dividends.” Statement 7: “Futures can be used to adjust the beta of a stock portfolio from its actual level to the desired level This may be necessary when a portfolio manager expects the market to perform better or worse than what everyone else is expecting, or merely because of a change in the market value of the portfolio.” FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8692 61 With regard to Statement 1, Clapton is most likely: A correct B incorrect, because the risk associated with bond market volatility is greater than that of stock market volatility C incorrect, because the stock market is not more liquid than the bond market FinQuiz Question ID: 8693 62 Statement least likely ignores any: A idiosyncratic risk B systematic risk C asset-specific risk FinQuiz Question ID: 8694 63 Statement would be accurate if: A the portfolio and the S&P 500 index are positively correlated B large-cap stocks move with small-cap stocks C the portfolio is negatively correlated with the index FinQuiz Question ID: 8695 64 With respect to statement 4, Clapton is most likely: A correct B incorrect, because the dollar beta of the combined portfolio would also include the dollar beta of the futures contract C incorrect, because the dollar beta would equal the target beta multiplied by the value of the futures position FinQuiz Question ID: 8696 65 Clapton is most accurate with respect to: A statement only B statement only C both statements and FinQuiz Question ID: 8697 66 With respect to statement 7, Clapton is most likely: A correct B incorrect, because beta adjustments not depend on market performance C incorrect, because beta does not need to be adjusted merely because of a change in market value of the portfolio FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8675 Questions 67(8676) through 72(8681) relate to Reading 28 Jeremy Evans Case Scenario Jeremy Evans works as an equity portfolio manager at an investment management firm Evans is responsible for the management of a $37.5 million equity portfolio of Susan Longoria, one of the firm’s oldest clients Longoria wants her portfolio to be more aggressive for the next three to six months, since she expects the market to outperform everyone’s expectations During a meeting with Longoria, Evans made the following comment: Statement 1: “Futures contracts can be used to adjust the beta of an equity portfolio In this way, a portfolio manager can either increase or decrease the portfolio’s total risk.” Statement 2: “If there is no mispricing in the market, an increase or decrease in the market as a whole will always result in an effective beta of a portfolio equal to its target beta.” Longoria’s portfolio has a dollar beta of $25.125 million, and Longoria wants to increase it to $45 million Evans will use a futures contract with a beta of 1.35 and a price of $300,000 for this beta adjustment To discuss the process, Evans approached his boss and made the following comment: Statement 3: “To adjust the beta of a stock portfolio, a futures contract that is highly correlated with the portfolio should be used.” FinQuiz Question ID: 8676 67 Evans is least accurate with respect to: A statement only B statement only C both statements and FinQuiz Question ID: 8677 68 To adjust the beta of Longoria’s portfolio, the most appropriate transaction will be to: A sell 40 contracts B buy 49 contracts C buy 53 contracts FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8678 69 If the market increases by 3.5%, the rate of return on the combined portfolio will be closest to: A 4.201% B 4.189% C 4.197% FinQuiz Question ID: 8679 70 If Evans sells 60 contracts, the target beta would be closest to: A 0.022 B C 0.010 FinQuiz Question ID: 8680 71 If the portfolio’s dollar beta was $41.25 instead, the number of contracts needed for the beta adjustment would most likely be: A less than previously needed B greater than previously needed C equal to the number previously needed FinQuiz Question ID: 8681 72 With respect to statement 3, Evans is most likely: A correct B incorrect, because the futures contract should be uncorrelated with the portfolio C incorrect, because correlation is not a factor when selecting the futures contract to use for the risk adjustment FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8659 Questions 73(8660) through 78(8665) relate to Reading 28 James Forman Case Scenario James Forman, a portfolio manager, works for Skillful Money Management (SMM), an equity management firm in the U.S Forman is planning to construct a synthetic index fund denominated in euros and invested in European stocks The dividend yield on the European stock index and the U.S stock index is 2.75% and 3%, respectively A futures contract on the U.K index that expires in three months has a quoted price of €1890 and a multiplier of €50 The U.K risk free rate is 4% and the U.S risk free rate is 5% Both the dividend yields and the risk free rates are stated as annually compounded figures Rubella Thomas also works for the firm as a portfolio manager During a discussion over lunch with Forman, Thomas made the following comments: Statement 1: “All synthetic replication strategies capture only the index performance without the dividends Hence, transactions associated with such strategies not capture the dividends that would be earned if one held the underlying stocks directly.” Statement 2: “One concern with synthetic replication strategies is the maturity of the futures contract.” FinQuiz Question ID: 8660 73 Assuming that fractions of futures contracts can be traded and Forman buys 1602.94 contracts, the amount originally invested will be closest to: A €149,641,396 B €149,999,821 C €150,666,457 FinQuiz Question ID: 8661 74 If we cannot buy fractions of futures contracts, the amount actually invested is closest to: A €147,832,758 B €151,276,001 C €150,005,435 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8662 75 The number of units of stock effectively purchased at the start is closest to: A 79,608.25 B 79,559.89 C 79,367.95 FinQuiz Question ID: 8663 76 At the expiration of the futures contract, the number of units of stock received and the amount paid will be closest to: Units of stock received A 79,608 B 80,150 C 81,333 Amount paid €150,005,435 €151,483,500 €151,483,499 FinQuiz Question ID: 8664 77 With respect to statement 1, Thomas is most likely: A correct B incorrect, because synthetic replication strategies always capture the effect of dividends C incorrect, because synthetic replication strategies based on total return indices capture the dividends earned and reinvested FinQuiz Question ID: 8665 78 With respect to statement 2, if the futures contract expires later than the desired date, the strategy will most likely be: A unsuccessful B successful, only if the contract can be closed without incurring undue transaction costs C successful, only if the futures contract is correctly priced when the strategy is completed FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8649 Questions 79(8650) through 84(8655) relate to Reading 28 Patricia Underwood Case Scenario Patricia Underwood works for Equity Managers Inc (EMI) as a senior portfolio manager Underwood has managed portfolios for many clients, both institutional and private wealth, over her ten year long career One of her clients, Kieran Cash, has decided to increase the exposure of her portfolio to market risk, since she expects the market to perform well over the next quarter The covariance between Cash’s $20 million worth stock portfolio and the market index is 0.04235 and the variance of the index is 0.0484 A futures contract on the index trades at 250 times its quoted price of 1555 The futures dollar beta is $505,375 and Cash wants to increase her portfolio’s beta to 1.4 FinQuiz Question ID: 8650 79 The number of contracts needed to adjust the beta of Cash’s portfolio is closest to: A 35 contracts B 28 contracts C 21 contracts FinQuiz Question ID: 8651 80 Holding all else constant, when compared to the information provided in the question, which of the following is most accurate? A The higher the covariance between Cash’s portfolio and the market index, the lesser will be the number of contracts needed for the risk adjustment B The more risky the equity market is, the lesser will be the number of contracts needed for the beta adjustment C The higher the dollar beta of the futures contract (given a futures price), the greater will be the number of contracts needed for the adjustment FinQuiz Question ID: 8652 81 If the target beta is achieved, the dollar beta of the combined portfolio at the start of the next day will be closest to: A $28 million B $28.505 million C $28.544 million FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8653 82 Over the next quarter, if the market increases by 2.5%, and the stock portfolio increases to $20.46 million, the rate of return for the combined portfolio will be closest to: A 3.511% B 3.63% C 3.42% FinQuiz Question ID: 8654 83 Given the information in LOS 41.a.Q10, the difference between the target beta and the effective beta of the portfolio will be closest to: A 0.005, and the effective beta will be higher than the target beta by this amount B 0.066, and the effective beta will be lower than the target beta by this amount C 0.051, and the effective beta will be higher than the target beta by this amount FinQuiz Question ID: 8655 84 Given the information in Part 4, if the effective beta is 1.78, the return on the overall portfolio will be closest to: A 3.99% B 4.45% C 4.01% FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8642 Questions 85(8643) through 90(8648) relate to Reading 28 Financial Specialists Inc (ESI) Case Scenario Financial Specialists Inc (FSI) is a U.S equity management firm Suzanne Pasha works as a portfolio manager at the firm Pasha is responsible for the management of the equity portion of a government sponsored pension plan The total portfolio of the fund is worth $200 million including equity and fixed income securities The equity allocation is 46.75% of the overall value of the fund Pasha has recently been instructed to reduce the beta of the equity portfolio to 0.8 The current dollar beta of the portfolio equals $112.2 million The futures contract to be used for this risk adjustment has a quoted price of 1750, a multiplier of 75, and a dollar beta of $170,625 FinQuiz Question ID: 8643 85 The number of contracts needed for the risk adjustment of the equity allocation of the pension plan is closest to: A 219 B 250 C 278 FinQuiz Question ID: 8644 86 If the stock market decreases by 6.75%, the overall value of the position would be closest to: A $90.617 million B $88.993 million C $88.448 million FinQuiz Question ID: 8645 87 Using the information in LOS 41.a.Q2, the effective beta of the position would be closest to: A 0.8001 B 0.8003 C 0.8005 FinQuiz Question ID: 8646 88 If Pasha sold 235 contracts instead (assuming everything else remains unchanged), and the market increased by 4.35%, the overall value of the position would be closest to: A $92.885 million B $96.636 million C $98.377 million FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8647 89 Using the information in LOS 41.a.Q4, if selling 235 contracts exactly meets the pension funds objective, the difference between the effective beta and the target beta would be closest to: A B 0.0011 C 0.0211 FinQuiz Question ID: 8648 90 Suppose after a month, the reference index increases by 3.33% If the return on the futures position is – 1.67%, and assuming the pension plan’s target beta is 0.8, the effective beta will be closest to: A 0.756 B 0.698 C 0.779 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8632 Questions 91(8633) through 96(8638) relate to Reading 28 Tim Casey Case Scenario Tim Casey works as a portfolio manager at Fine Money Management (FMM) Casey manages a portfolio worth $35 million for Chris Douglas, a private wealth client Douglas’s portfolio is as risky as the average stock in the market; however, Douglas wants to double his portfolio’s risk Casey has selected a three month forward contract for this purpose; the futures price is 1750 and the multiplier is 50 The contract has a beta of 1.5 FinQuiz Question ID: 8633 91 The number of contracts needed to meet Douglas’s objective is closest to: A 267 B 253 C 266 FinQuiz Question ID: 8634 92 If Casey wants to completely hedge his portfolio against market risk, the most appropriate transaction would be to: A sell as many contracts as needed to decrease the portfolio’s risk by 100% B buy as many contracts as needed to increase the portfolio’s risk C buy as many contracts as needed to decrease the portfolio’s risk FinQuiz Question ID: 8635 93 If Casey buys 100 futures contracts, the combined portfolio’s beta would be closest to: A 1.375 B 1.400 C 2.375 FinQuiz Question ID: 8636 94 If Douglas’s objective is met, and the market decreases by 4.3%, the rate of return for the stock portfolio and for the futures position is closest to: Stock portfolio A – 6.5% B – 4.3% C – 5% Futures position – 7% – 4.3% – 5.5% FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8637 95 Using the information in Part 4, the effective beta of the portfolio is closest to: A 2.00 B 1.99 C 2.01 FinQuiz Question ID: 8638 96 If Douglas decreases the portfolio’s beta from its current level, an increase in the market as a whole will most likely: A increase the return on the stock portfolio B reduce the return on the futures position C reduce the return on the combined portfolio FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Item-set ID: 8625 Questions 97(8626) through 102(8631) relate to Reading 28 James Petri Case Scenario James Petri is a portfolio manager working for an equity management firm Petri manages an institutional fund worth $40 million that consists mainly of large-cap stocks The research department at the firm has generated positive forecasts for the large-cap market, so Petri wants to increase exposure to large-cap stocks to the extent permitted by the portfolio’s IPS The current beta of the portfolio is 1.1 and Petri wants to increase it to 1.7 for the next three months A futures contract on large-cap stocks has a beta of 1.3, a quoted price of 2000 and a multiplier of 50 Petri also manages a portfolio for a private wealth client, Karol Knightly, a successful entrepreneur Knightly’s portfolio is worth $55 million and she wants to hedge her portfolio against downturns in the market Her portfolio has a beta of 0.65 and she wants to reduce it by 50% The futures contract Petri has selected for this purpose has a price of $355,000 and a beta of 0.82 FinQuiz Question ID: 8626 97 The appropriate number of futures contracts to adjust the beta for the institutional fund is closest to: A 215 B 199 C 185 FinQuiz Question ID: 8627 98 If Petri wants to eliminate exposure to large-cap stocks completely, the number of contracts needed would be closest to: A 338 B 357 C 400 FinQuiz Question ID: 8628 99 If Petri adjusts the beta to 1.7 and the market as a whole increases by 5%, the effective beta would be closest to: A 1.700 B 1.701 C 1.703 FinQuiz.com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz.com FinQuiz Question ID: 8629 100 The effective beta might not equal the target beta most likely because: A of the rounding up of the actual number of futures contracts needed, to a whole number B the portfolio and the futures contracts might be perfectly correlated with the reference index C the portfolio and the futures contracts might have positive, but equal correlations with the reference index FinQuiz Question ID: 8630 101 To adjust the beta of Knightly’s portfolio, the most appropriate transaction would be to: A sell 62 contracts B buy 62 contracts C sell 61 contracts FinQuiz Question ID: 8631 102 If instead, the futures contract used to adjust the beta of Knightly’s portfolio had a beta of 1.1, the number of contracts needed would: A be greater than when using a contract with a beta of 0.82 B be less than when using a contract with a beta of 1.5 C be greater than when using a contract with a beta of 1.3 FinQuiz.com © 2018 - All rights reserved ... rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz. com FinQuiz Item- set ID: 8 632 Questions 91(8 633 ) through 96(8 638 ) relate to Reading 28 Tim Casey... futures FinQuiz. com © 2018 - All rights reserved Reading 28 Risk Management Applications of Forward and Futures Strategies FinQuiz. com FinQuiz Item- set ID: 8 730 Questions 43( 8 731 ) through 48(8 736 )... Management Applications of Forward and Futures Strategies FinQuiz. com FinQuiz Item- set ID: 87 63 Questions 31 (8764) through 36 (8769) relate to Reading 28 Financial Advisory Group (FAG) Case Scenario Financial