2019 CFA level 3 qbank reading 32 risk management applications of forward and futures strategies questions

10/12/2018 Learning Management System Question #1 of 49 An S&P500 index manager knows that he will have $60,000,000 in funds available in three months He is very bullish on the stock market and would like to hedge the cash in ow using S&P 500 futures contracts The S&P 500 futures contract stands at 1100.00 and one contract is worth 250 times the index Which of the following is the most accurate hedge for this portfolio? A) Sell 218 contracts B) Buy 284 contracts en tre in C) Buy 218 contracts Question #2 of 49 bo ok c Michael Hallen, CFA, manages an equity portfolio with a current market value of $78 million and a beta of 0.95 Convinced the market is poised for a signi cant upward movement, Hallen would like to increase the beta of the portfolio by 40 percent, using S&P 500 futures currently trading at 856 The multiplier is 250 What is the number of futures contracts, rounded up to m the nearest whole number, that will be needed to achieve Hallen's objective? o A) 139 w C) 144 w w B) 143 Question #3 of 49 A manager of $40 million of mid-cap equities would like to move $5 million of the position to large-cap equities The beta of the mid-cap position is 1.1, and the average beta of large-cap stocks is 0.9 The betas of the corresponding mid and large-cap futures contracts are 1.1 and 0.95 respectively The mid and large-cap futures prices are $252,000 and $98,222 respectively What is the appropriate strategy? Short: A) 23 mid-cap futures and go long 42 large-cap futures https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 1/18 10/12/2018 Learning Management System B) 29 mid-cap futures and go long 29 large-cap futures C) 20 mid-cap futures and go long 48 large-cap futures Question #4 of 49 To synthetically create the risk/return pro le of an underlying common equity security: A) Sell short the corresponding futures contract and invest in a T-bill .in B) Buy the corresponding futures contract and invest in a T-bill en tre C) Buy the corresponding futures contract and borrow at the risk-free rate bo ok c Question #5 of 49 When using stock index futures contracts and cash to create a synthetic stock index, the larger the index multiplier: A) there is no such thing as an index multiplier m B) the fewer the number of needed contracts w w o C) the greater the number of needed contracts w Question #6 of 49 A manager has a 70/30 stock and bond portfolio To synthetically create a portfolio that is 60 percent stock and 40 percent bonds, the manager should: A) go long the bond futures and short the stock index futures B) short the bond futures and go long the stock index futures C) go long both bond futures and stock index futures https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 2/18 10/12/2018 Learning Management System Question #7 of 49 A manager has a position in Treasury bills worth $175 million with a yield of 2% For the next months, the manager wishes to have a synthetic equity position approximately equal to this value The manager chooses S&P 500 index futures, which has a dividend yield of 3% The futures price is 1,050 and the multiplier is $250 How many contracts will this take? A) 673 contracts B) 421 contracts en tre in C) 655 contracts Question #8 of 49 A manager has a $100 million portfolio that consists of 50% stock and 50% bonds The beta of bo ok c the stock position is The modi ed duration of the bond position is The manager wishes to achieve an e ective mix of 60% stock and 40% bonds The price and beta of the stock index futures contracts are $277,000 and 1.1 respectively (The futures price includes the e ect of the index multiplier.) The price, modi ed duration, and yield beta of the futures contracts are $98,000, 6, and respectively What is the appropriate strategy? m A) Short 40 bond futures and go long 106 stock index futures .o B) Short 85 bond futures and go long 33 stock index futures w w w C) Go long 53 bond futures and go long 40 stock index futures Question #9 of 49 Which of the following statements about portfolio hedging is least accurate? A) To synthetically create the risk/return pro le of an underlying common equity security, buy the corresponding futures contract, sell the common short, and invest in a T-bill B) For a xed portfolio insurance horizon, using put options generally requires less rebalancing and monitoring than with the use of futures contracts C) Futures contracts have a symmetrical payo pro le https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 3/18 10/12/2018 Learning Management System Question #10 of 49 An investor has a cash position currently invested in T-Bills but would like to "equitize" it by using S&P futures contracts Which of the following trades will create the desired synthetic equity position? A) Selling S&P 500 futures contracts short B) Selling the T-Bills and buying S&P 500 futures contracts en tre in C) Buying S&P 500 futures contracts Question #11 of 49 An asset manager says he has perfectly hedged an equity portfolio that is denominated in a bo ok c foreign currency by only using forward currency contracts We know then that the: A) asset manager is not telling the truth B) number of contracts used is greater than that used on a comparable equity position w w o m C) number of contracts used is equal to that used on a comparable equity position Question #12 of 49 w With respect to the practice of using forward contracts to eliminate the exchange-rate risk associated with a receiving a future payment in a foreign currency, which of the following is correct? A rm that expects to receive a foreign-currency payment is: A) “short” the currency and should short the forward contract on the foreign currency B) “short” the currency and should go long the forward contract on the foreign currency C) “long” the currency and should short the forward contract on the foreign currency Question #13 of 49 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 4/18 10/12/2018 Learning Management System The exchange-rate risk associated with falling asset values in foreign subsidiaries caused by currency uctuations is called: A) transaction exposure B) translation exposure C) economic exposure .in Question #14 of 49 Tom Corser is the manager of the $140,000,000 Intrepid Growth Fund Corser's long-term view en tre of the equity market is negative, and as a result, his portfolio is allocated defensively with a beta of 0.85 Despite his negative long-term outlook, Corser thinks the market is temporarily mispriced, and could rise signi cantly over the next few weeks Corser has implemented tactical asset allocation measures in his fund sporadically over the years, and thinks now is another bo ok c time to so Because he likes his long-term holdings, he decides to use a futures overlay rather than trading assets to implement his view of the market Corser decides he wants to increase the beta of his portfolio to 1.25 The appropriate futures contract has a beta of 1.03 and the total futures price is $310,000 What is the appropriate tactical allocation strategy for m Corser to accomplish his objective? A) Sell 175 equity futures contracts .o B) Buy 175 equity futures contracts w w w C) Buy 373 equity futures contracts Question #15 of 49 An investor has a $100 million stock portfolio with a beta of 1.2 He would like to alter his portfolio beta using S&P 500 futures contracts The contracts are currently trading at 596.90 The futures contract has a multiple of 250 Which of the following is the CORRECT trade required to double the portfolio beta? A) Buy 1608 contracts B) Sell 804 contracts https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 5/18 10/12/2018 Learning Management System C) Buy 804 contracts Question #16 of 49 A manager of a $20,000,000 portfolio wants to decrease beta from the current value of 0.9 to 0.5 The beta on the futures contract is 1.1 and the futures price is $105,000 Using futures contracts, what strategy would be appropriate? A) Short 69 contracts .in B) Short 19 contracts bo ok c Question #17 of 49 en tre C) Long 69 contracts In the hedging of currency risk, the issue of basis risk is: A) not a concern when using either futures contracts or options m B) a concern when using futures contracts and not options w w o C) a concern when using options and not futures contracts w Question #18 of 49 A manager wishes to make a synthetic adjustment of a mid-cap stock portfolio The goal is to increase the beta of the portfolio by 0.5 The beta of the futures contract the manager will use is one If the value of the portfolio is 10 times the futures price, then the futures contract position needed is a: A) long position in 20 contracts B) short position in contracts C) long position in contracts https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 6/18 10/12/2018 Learning Management System Question #19 of 49 A portfolio holds $20 million of its assets in an index fund that mimics the return of the Dow Jones Industrial Average (DJIA) The dividend yield on the DJIA index is 2.8% The manager of the portfolio would like to synthetically convert half of the position to cash for a one month period The futures contract on the DJIA that expires in a month is priced at 14520.01 It has a multiplier equal to $10 The risk-free rate is 3.85% The number of contracts the fund needs to use is closest to: A) 66 B) 69 en tre in C) 72 bo ok c Question #20 of 49 If a manager shorts a forward currency contract to hedge the expected value of a foreign-equity portfolio in one year The worst-case scenario is if the portfolio's return is: A) less than the expected value and the currency appreciates m B) less than the expected value and the currency depreciates w w o C) greater than the expected value and the currency appreciates w Question #21 of 49 If a manager plans to use currency forwards to hedge a long position in foreign equities, then which of the following would represent a strategy that would prevent over-hedging? A) Short an amount that is less than the current equity position B) Short an amount that is more than the current equity position C) Go long an amount that is more than the current equity position Question #22 of 49 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 7/18 10/12/2018 Learning Management System The practice of taking long positions in futures contracts to create an exposure that converts a yet-to be received cash position into a synthetic equity or bond position is: A) called pre-investing B) illegal C) called leveraging down .in Question #23 of 49 A maker of large computers has just received an order for some of its products The agreed en tre upon price is in British pounds: ₤8 million The rm will receive the pounds in 60 days The current exchange rate is $1.32/₤ and the 60-day forward rate is $1.35/₤ If the rm uses the forward contract to hedge the corresponding exchange rate risk, how many dollars will it expect to receive? bo ok c A) $5,925,926.00 B) $10,560,000.00 o m C) $10,800,000.00 w w Question #24 of 49 A portfolio manager knows that a $10 million in ow of cash will be received in a month The w portfolio under management is 70% invested in stock with an average beta of 0.8 and 30% invested in bonds with a duration of The most appropriate stock index futures contract has a price of $233,450 and a beta of 1.1 The most appropriate bond index futures has a duration of and a price of $99,500 How can the manager pre-invest the $10 million in the appropriate proportions? Take a: A) long position in 25 of the stock futures and 28 of the bond futures B) short position in 25 of the bond futures and 22 of the stock futures C) long position in 22 of the stock futures and 25 of the bond futures https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 8/18 10/12/2018 Learning Management System Jackson Inc is a multi-national company based in the U.S that makes freight cars One third of Jackson's freight car sales occur in the Netherlands To manufacture the cars, the rm must import approximately one half of their raw materials from Canada Heretofore, Jackson's CFO Pete Moore ignored exchange rate risk, guring that currency uctuations even out over time However, Jackson is doing more and more business abroad, and Moore is beginning to rethink his position In addition, Moore believes that exchange rates have become more volatile, thus hedging currency exposure might make sense Given his new mindset, Moore decides to hedge some of the company's currency exposure Two months from now, Jackson plans to sell freight cars to a Dutch rm for 15 million To in protect the company from any adverse moves in exchange rates, Moore enters into a 15 million forward contract due in 60 days Moore also enters into a 60-day forward contract to lock in 8.5 en tre million Canadian dollars which will be used to purchase steel from a Canadian supplier to be delivered in months The current Euro-to-U.S dollar exchange rate is 0.79/$, while the Canadian dollar-to-U.S dollar bo ok c exchange rate is C$1.30/$ The 60-day forward Euro-to-U.S dollar exchange rate is 0.80/$, while the 60-day forward Canadian dollar-to-U.S dollar exchange rate is C$1.33/$ At the end of two months, the actual Euro/U.S dollar exchange rate is 0.90/$ and the actual Canadian dollar/U.S dollar rate is C$1.20/$ In addition to his duties at Jackson, Moore is a Level III CFA Candidate To assist with his studies o following two tables m and gain insights that will help him with Jackson's hedging strategy, Moore has put together the w w Table 1: Types of Exchange Rate Risks Types of Exposure De nition Translation Exposure The risk that multinational corporations might see a decline in the value of their assets that are denominated in foreign currencies when those foreign currencies depreciate Transaction Exposure It is the loss of sales that a domestic exporter might experience if the domestic currency appreciates relative to a foreign currency w Economic Exposure The risk that exchange rate uctuations will make contracted future cash ows from foreign trade partners' decrease in domestic currency value Table 2: Hedging Currency Positions https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 9/18 10/12/2018 Learning Management System Currency Exposure Position Action Receiving foreign currency Long Buy forward contract Paying foreign currency Short Sell forward contract Up to now, Moore has used only forward contracts to hedge the foreign currency exposure However, after reading about futures contracts, he thinks futures may be appropriate To help him decide, Moore makes a list of the advantages and disadvantages of using futures contracts Pros & Cons of Futures vs Forwards in Futures contracts are standardized contracts, forward contracts are not Futures contracts are less regulated than forward contracts, and thus have higher default en tre risk Forward contracts can be established for any settlement date, futures contracts have a Question #25 of 49 bo ok c limited number of available settlement dates With respect to Table 1, which of the following statements is most accurate? The de nition for: m A) economic exposure is correct; the de nition for transaction exposure is correct B) translation exposure is correct; the de nition for transaction exposure is incorrect w w o C) translation exposure is incorrect; the de nition for transaction exposure is incorrect w Question #26 of 49 When hedging their exchange rate risk on the freight car sale, Moore used a forward contract to: A) buy 15 million in exchange for $18.75 million B) sell 15 million in exchange for $18.75 million C) sell 15 million in exchange for $16.67 million https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 10/18 10/12/2018 Learning Management System Question #27 of 49 To hedge the foreign exchange risk relative to the Canadian dollar, Jackson should: A) sell a forward contract to exchange $6,390,977 for CAD 8.5 million B) buy a forward contract to exchange $6,390,977 for CAD 8.5 million C) buy a forward contract to exchange $7,083,333 for CAD 8.5 million en tre In regard to Table , which of the following is CORRECT? The: in Question #28 of 49 A) receiving foreign currency position is incorrect; the action is also incorrect B) paying foreign currency position is correct; the action is correct m Question #29 of 49 bo ok c C) receiving foreign currency position is correct; the action is incorrect w w A) Statement .o Regarding the advantages of futures contracts, which statement is least accurate? B) Statement w C) Statement Question #30 of 49 All of the following are advantages of using futures and forward contracts to hedge risk in a portfolio, relative to adjusting the actual debt and equity positions, EXCEPT: A) the manager gets a leverage e ect with futures because the only required “investment” is the margin deposit https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 11/18 10/12/2018 Learning Management System B) liquidity, at least for shorter maturity contracts, is often greater in the futures market than in the underlying market C) it is typically less expensive to use derivatives than to adjust the actual portfolio Question #31 of 49 When investing in foreign equity assets, the exchange-rate dimension of the investment generally: B) increases the total risk Question #32 of 49 bo ok c C) diversi es the position and thus lowers risk en tre in A) can be completely hedged If the value of a stock portfolio equals 16 times the futures price of the appropriate equity index contract and beta of the equity portfolio and futures price were equal, how many m contracts would it take to reduce the beta of the equity index to zero? o A) A long position in 16 contracts w w B) A long position in contracts w C) A short position in 16 contracts Question #33 of 49 A manager of a $10,000,000 portfolio wants to increase beta from the current value of 0.9 to 1.1 The beta on the futures contract is 1.2 and the futures price is $245,000 Using futures contracts, what strategy would be appropriate? A) Short contracts B) Long 11 contracts https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 12/18 10/12/2018 Learning Management System C) Long contracts Question #34 of 49 A manager wants to synthetically convert to cash $45 million of a diversi ed stock portfolio for three months The manager will use the CME E-mini S&P stock index futures contract, which has a multiplier equal to $50, and the price of the three month contract is 1610.50 The dividend yield on the portfolio is 2.4% The risk-free rate is 4.04% The number of contracts the in fund needs to use is closest to: en tre A) 532 B) 564 Question #35 of 49 bo ok c C) 588 m When expecting to make a future payment in a foreign currency, a rm should take a: A) long forward position in the currency to hedge a depreciation of that currency .o B) long forward position in the currency to hedge an appreciation of that currency w w w C) short forward position in the currency to hedge an appreciation of that currency Question #36 of 49 A manager of $30 million in mid-cap equities would like to move half of the position to an exposure resembling small-cap equities The beta of the mid-cap position is 1.0, and the average beta of small-cap stocks is 1.6 The betas of the corresponding mid and small-cap futures contracts are 1.05 and 1.5 respectively The mid and small-cap futures prices are $260,000 and $222,222 respectively What is the appropriate strategy? A) Short 55 mid-cap futures and go long 72 small-cap futures B) Short 17 mid-cap futures and go long 17 small-cap futures https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 13/18 10/12/2018 Learning Management System C) Short 17 small-cap futures and go long 17 mid-cap futures Question #37 of 49 The risk associated with a fall in demand for a rm's product caused by an appreciation of the home currency of the rm is called: A) transaction exposure .in B) translation exposure en tre C) economic exposure bo ok c Question #38 of 49 Redden Capital Management manages an intermediate, high-quality bond portfolio with a value of $12 million dollars The modi ed duration of the portfolio is 4.4 years with a yield beta of 1.0 Scott Stuart, the manager of the portfolio is concerned about rising interest rates over the next few months and wants to make a tactical adjustment and cut the duration of the portfolio in m half Stuart asks Amy Swemba, a junior portfolio manager with Redden, to accomplish this task .o Swemba is aware that a Treasury bond futures contract exists with a value of $102,000, with a modi ed duration of 8.2 years Swemba replies to Stuart's comments with the following w w statements: The fastest and most cost-e ective way to reduce the duration of the portfolio by half would be to sell $6 million dollars worth of the actual bonds in the portfolio Statement 2: The portfolio's duration could also be adjusted by selling 40 of the Treasury bond futures contracts w Statement 1: After listening to Swemba's statements, Stuart should: A) agree with Statement 1, but disagree with Statement B) disagree with both Statement and Statement C) disagree with Statement 1, but agree with Statement https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 14/18 10/12/2018 Learning Management System Question #39 of 49 An investor has a $100 million stock portfolio with a beta of 1.1 He would like to hedge his portfolio using S&P 500 futures contracts, which are currently trading at 596.70 The futures contract has a multiple of 250 Which of the following is the CORRECT trade required to create a synthetic T-bill? A) Buy 670 contracts B) Sell 670 contracts en tre in C) Sell 737 contracts Question #40 of 49 In order to perfectly hedge an investment in foreign equities, a manager would most likely have bo ok c to use: A) both currency futures and equity forwards B) currency forwards only .o m C) both currency forwards and equity futures w w Question #41 of 49 An investment of $240,000,000 in T-bills earning percent is combined with 886 stock index w futures that have a price of 1,100 and a multiplier of 250 In three months, when the futures mature and the index value is 1,120, what will be the value of the position at that time? A) $243,650,000.00 B) $248,080,000.00 C) $246,210,097.00 Question #42 of 49 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 15/18 10/12/2018 Learning Management System The performance of a synthetically reallocated portfolio, e.g., a synthetic adjustment from stocks to bonds, would not exactly match the target position for all of the following reasons EXCEPT: A) the risk free rate is not zero B) duration is not constant C) rounding of the number of contracts used .in Question #43 of 49 en tre To create a synthetic cash position: A) buy the common equity, sell short the corresponding futures contract, invest in a T-bill B) buy the common equity and sell short the corresponding futures contract m Question #44 of 49 bo ok c C) sell short the common equity, buy the corresponding futures contract, invest in a T-bill .o Robert Zorn, CFA, manages an equity portfolio with a current market value of $150 million The beta of the portfolio is 1.23 and Zorn is forecasting a short-term market adjustment that will w w signi cantly lower equity values and will occur in the near future Zorn has decided to use S&P 500 futures, currently trading at 1260, to reduce the portfolio's systematic risk exposure by 30 w percent The multiplier is 250 What is the number of futures contracts, rounded up to the nearest whole number, that will be needed to achieve Zorn's objective? A) Sell 169 B) Sell 176 C) Buy 182 Question #45 of 49 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 16/18 10/12/2018 Learning Management System A portfolio manager has a net long position in both stocks and bonds and no cash When preinvesting a future cash in ow, to replicate the existing portfolio, using bond and stock futures, which of the following statements is most accurate? The manager will: A) go long the stock futures but short the bond futures B) go long both stock and bond futures C) have to choose a single futures contract and net the bond and stock position .in Question #46 of 49 en tre Derivatives are most often used to hedge which type of exchange-rate risk? A) Economic exposure C) Transaction exposure m Question #47 of 49 bo ok c B) Translation exposure .o An investor has an $80 million stock portfolio with a beta of 1.1 He would like to partially hedge his portfolio using S&P 500 futures contracts The contracts are currently trading at 596.70 The w w futures contract has a multiple of 250 Which of the following is the CORRECT trade to reduce the portfolio beta by 50 percent? w A) Sell 295 contracts B) Buy 295 contracts C) Sell 590 contracts Question #48 of 49 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 17/18 10/12/2018 Learning Management System A manager wants to synthetically convert to cash $12 million of a diversi ed stock portfolio for three months The manager will use the CME E-mini S&P stock index futures contract, which has a multiplier equal to $50, and the price of the three month contract is 1598.80 The dividend yield on the portfolio is 2.8% The risk-free rate is 3.96% To accomplish this, the best choice would be to: A) take a long position in 152 contracts B) take a short position in 152 contracts Question #49 of 49 en tre in C) take a short position in 156 contracts When hedging the exchange-rate risk of a foreign currency-denominated equity portfolio, a manager must recognize that the position has: B) exchange-rate risk only w w w o m C) equity risk only bo ok c A) both equity risk and foreign exchange risk https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447974/print 18/18 ... in 25 of the stock futures and 28 of the bond futures B) short position in 25 of the bond futures and 22 of the stock futures C) long position in 22 of the stock futures and 25 of the bond futures. .. https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 47974/print 13/ 18 10/12/2018 Learning Management System C) Short 17 small-cap futures and go long 17 mid-cap futures Question #37 of 49 The risk associated... makes a list of the advantages and disadvantages of using futures contracts Pros & Cons of Futures vs Forwards in Futures contracts are standardized contracts, forward contracts are not Futures contracts