Question #1 of 55 Question ID: 1397436

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 significant upward movement,
Hallen would like to increase the beta of the portfolio by 40%, using S&P 500 futures
currently trading at 856. The multiplier is 250. What is the number of futures contracts,
rounded up to the nearest whole number, that will be needed to achieve Hallen's objective?

A) 144.
B) 139.
C) 143.

Question #2 of 55 Question ID: 1397406

Andrew Jeremy is a UK fixed income manager that wishes to use interest rate swaps to
increase the duration of his bond portfolio. The existing portfolio has a market value of
£20m and a modified duration of 7. Jeremy wishes to increase the modified duration of his
portfolio to 9 for the next two years. Two-year payer swaps currently have a duration of −5.
What type of swap and what amount of notional principal will Jeremy require to achieve his
stated goal?

A) Receiver swap notional principal £8m.

B) Payer swap notional principal £20m.
C) Receiver swap notional principal £20m.

Question #3 of 55 Question ID: 1397442

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.
B) Short 19 contracts.
C) Long 69 contracts.

Question #4 of 55 Question ID: 1397438

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 significantly 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%. 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) Buy 182.
B) Sell 176.
C) Sell 169.

Question #5 of 55 Question ID: 1397437

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 futures contract has a multiple of 250. Which of the following is the correct trade
to reduce the portfolio beta by 50%?

A) Buy 295 contracts.

B) Sell 590 contracts.
C) Sell 295 contracts.

Question #6 of 55 Question ID: 1397426

Which of the following statements related to equity swaps is least accurate?

An investor gaining exposure to equity using swaps will not have voting rights in the
A)
underlying equity.
 The fixed or floating rate cash outflow that the equity return receiver pays will
B)
always be offset by an inflow from the return on the equity index.
Equity swaps can be used to gain exposure to equity markets without incurring
C)
custody fees.

Question #7 of 55 Question ID: 1397440

A portfolio manager knows that a $10 million inflow of cash will be received in a month. The
portfolio under management is 70% invested in stock with an average beta of 0.8 and 30%
invested in bonds with a duration of 5. 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 6 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 22 of the stock futures and 25 of the bond futures.

B) short position in 25 of the bond futures and 22 of the stock futures.
C) long position in 25 of the stock futures and 28 of the bond futures.

Question #8 of 55 Question ID: 1397422

If the USD is trading at positive basis, which of the following statements regarding cross-
currency swaps is least accurate?

A) Covered interest parity must not hold.

A non-US investor can earn returns greater than their domestic return by lending
B) their domestic currency using a cross-currency swap and investing in the US debt
markets.
Additional returns can be earned on the USD relative to the interest rate suggested
C)
by covered interest rate parity.

Question #9 of 55 Question ID: 1397455

Alan Carney manages a fixed income fund and is concerned that the Federal Open Market
Committee will increase the target rate. Alan has collected the following data:

Current Fed Funds Target 1.75% − 2.00%

Fed Funds Futures Price* 98

*Nearest futures contract maturity after the date of the next FOMC meeting.

The implied probability of a 25BP increase in the target rate at the next FOMC meeting is
closest to:

A) 50%.
B) 25%.
C) 12.5%.

Question #10 of 55 Question ID: 1397431

Which of the following statements regarding the VIX Index is most accurate?

VIX is a measure of implied volatility derived from look-back options traded on the
A)
S&P 500.
VIX is the annualized standard deviation of the expected percentage changes in the
B)
index with 68% confidence.
C) VIX measures realized 3-month volatility on the S&P 500 index.

Question #11 of 55 Question ID: 1397447

Tom Corser is the manager of the $140,000,000 Intrepid Growth Fund. Corser's long-term
view 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 significantly over the next few weeks. Corser has
implemented tactical asset allocation measures in his fund sporadically over the years, and
thinks now is another time to do 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 Corser to accomplish his objective?

A) Buy 175 equity futures contracts.

B) Sell 175 equity futures contracts.
C) Buy 373 equity futures contracts.

Question #12 of 55 Question ID: 1397420

Which of the following statements regarding cross-currency swaps is least accurate?

In a USD-EUR currency swap, the party receiving dollars at the swap’s initiation will
A)
pay dollar interest over the life of the swap.
Principal payments are exchanged at the beginning of the swaps life, and again at
B)
the same exchange rate at the end.
If the euro has negative basis against the dollar, the party paying euro interest will
C)
pay more than Euribor at each settlement date.

Question #13 of 55 Question ID: 1397404

A company has issued a 5-year semi-annual-pay FRN with coupons equal to £ LIBOR + 60 BP,
with a par value of £50m. The company enters a 5-year semi-annual interest rate swap, with
notional principal of £50m, as the fixed rate payer. The fixed rate in the swap is 4%. 180 day
£ LIBOR at day 360 is 5%. What is the net interest cost to the firm at the third settlement
date on the swap?

A) £2,300,000.
B) £1,400,000.
C) £1,150,000.

Question #14 of 55 Question ID: 1397449

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) 20 mid-cap futures and go long 48 large-cap futures.

B) 23 mid-cap futures and go long 42 large-cap futures.
C) 29 mid-cap futures and go long 29 large-cap futures.

Question #15 of 55 Question ID: 1397405

Jeanne Leon is the portfolio manager for a US fixed income fund. Leon is concerned that
central bank policy will lead to rising interest rates over the next two years. In anticipation of
this, Leon wishes to reduce the duration of his portfolio. Which of the following derivatives is
most likely to achieve his goals?

A) Series of short FRA positions.

B) Short position in treasury bond futures.
C) Two year receiver swap.

Question #16 of 55 Question ID: 1397421

CorePro Incorporated, based in the United States, wishes to borrow €30m to finance a
subsidiary in Italy. CorePro has decided to borrow domestically in dollars and then enter into
a cross-currency basis swap to exchange the USD for euros. The basis on the euro-dollar
swap is quoted as −20 basis points. The current $/€ exchange rate is $1.2. The swap has a
10-year tenor with quarterly settlement dates. At the last settlement date, 90-day USD LIBOR
was 2%, and 90-day Euribor was 2.5%. The interest paid and received by CorePro at the next
settlement date will be closest to:

A) Pays $180,000 and receives €172,500.

B) Pays €187,500 and receives $198,000.
C) Pays €172,500 and receives $180,000.

Question #17 of 55 Question ID: 1397403

A company has substantial bank loans and pays interest at LIBOR +80 BP. The central bank
has signaled its intention to increase target interest rates over the next 12-month period.
What type of interest derivatives would the company most appropriately enter into to
mitigate its floating rate exposure?

A) Long short-term interest rate futures.

B) A payer swap.
C) Short FRA contracts.

Question #18 of 55 Question ID: 1397451

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) Buying S&P 500 futures contracts.

B) Selling the T-Bills and buying S&P 500 futures contracts.
C) Selling S&P 500 futures contracts short.
Question #19 of 55 Question ID: 1397432

The VIX futures market is currently in backwardation. The VIX is currently at 40, front month
futures are priced at 35 and second-month futures are priced at 30. Assuming the term
structure remains constant over the next two months, which of the following trades is most
likely to result in a position that benefits from roll yield?

A) Buy the front-month future and sell the second-month future.

B) Buy the second-month future and sell the front month future.
C) Buy the second-month future and sell the VIX spot.

Question #20 of 55 Question ID: 1397408

Kevin McMahon believes that Euribor will rise over the next six months and wishes to
speculate on this view using three-month Euribor futures. McMahon enters into three
futures contracts with 12 months to maturity that have the following characteristics:

Contract size €1,000,000

12-month futures price 100.350

McMahon closes out his position after six months when the futures price is 99.95 for a
contract with six-months to expiry. The profit on McMahon's trade is closest to:

A) €3,000.
B) €1,500.
C) €2,250.

Question #21 of 55 Question ID: 1397402

A U.S. firm that borrows dollars and uses a plain-vanilla currency swap to obtain euros for an
investment in Europe is most likely trying to:

A) lower borrowing costs.

B) increase the duration of the position.
C) create a synthetic pay-fixed dollar loan.
Question #22 of 55 Question ID: 1397407

Justin Nate wishes to speculate on the direction of interest rates, based on his belief that
they will rise over the coming year. Specifically, Nate plans to use interest rate derivatives
that are based on 30-day loan periods and that mature in 240 days. Current 240-day USD
LIBOR is 5% and 270-day LIBOR is 5.2%. Which of the following statements is least accurate?

The current forward price for an FRA with a 30-day loan period that matures in 240-
A)
days is 6.6%.
B) The futures price of the Eurodollar future is 99.45.
The forward price of the FRA and the forward rate implied by the Eurodollar future
C)
should be the same.

Question #23 of 55 Question ID: 1397410

Ashley Catrina works for a UK based private equity fund. A potential new portfolio company
has been identified and the fund is considering making the acquisition. Due to cash flow
timings the fund will require a 3-month £50m bridge loan commencing in 9-months' time.
Catrina wishes to lock in the interest rate on the bridge loan and so sells 3-month Sterling
futures maturing in 9 months at 99.25. The contract size is £500,000. In nine months' time,
Catrina initiates the loan at 0.90% and closes out the hedge at 99.10. The effective interest
rate on the loan is closest to:

A) 0.90%.
B) 0.75%.
C) 0.80%.

Question #24 of 55 Question ID: 1397445

Sheila manages a $100 million fixed-income portfolio. The portfolio duration is currently 4.9
and she would like to increase it to 5.7. She selects a swap with a net duration of 6.1. Based
only on the information provided, which of the following statements is least likely correct?

A) Sheila should have a receive-floating/pay-fixed position in the swap.

B) Sheila should have a pay-floating/receive-fixed position in the swap.
Sheila should select a swap with a notional principal of approximately $13 million to
C)
achieve the desired duration.

Question #25 of 55 Question ID: 1397415

Samantha Holly is the fund manager of a German fixed-income fund. The fund has a market
value of €90m and a modified duration of 14. Holly believes that the European Central bank
will end its policy of lower target interest rates and would like to reduce the duration of her
portfolio. Holly has identified the following Bund Future which she would like to use:

Government bond futures German Bund

Contract size €100,000
Future price €174.50
CTD price €104.83
CTD conversion factor 0.5955
CTD modified duration 15.81

How many contracts will Holly need to sell to achieve a target duration of 8?

A) Sell 453 contracts.

B) Sell 194 contracts.
C) Sell 326 contracts.

Question #26 of 55 Question ID: 1397435

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 7 contracts.
B) Long 11 contracts.
C) Long 7 contracts.
Question #27 of 55 Question ID: 1397417

A portfolio manager has a net long position in both stocks and bonds and no cash. When
pre-investing a future cash inflow, to replicate the existing portfolio, using bond and stock
futures, which of the following statements is most accurate? The manager will:

A) go long both stock and bond futures.

B) go long the stock futures but short the bond futures.
C) have to choose a single futures contract and net the bond and stock position.

Question #28 of 55 Question ID: 1397425

To create a synthetic cash position:

sell short the common equity, buy the corresponding futures contract, invest in a T-
A)
bill.
B) buy the common equity and sell short the corresponding futures contract.
buy the common equity, sell short the corresponding futures contract, invest in a T-
C)
bill.

Question #29 of 55 Question ID: 1397430

Shota Hideaki manages a Japanese equity fund with a market value of ¥21,712,000,000 and a
beta relative to the Nikkei 225 of 0.75. Due to recent sales, a cash balance of ¥1,065,500,000
has built up and Hideaki has become concerned about the cash drag. Hideaki wishes to
create a cash overlay to equitize these funds. Hideaki is considering using Nikkei 225 futures
and wishes the cash overlay to have the same beta as his existing portfolio. The current
futures price is 21,500 with a multiplier of ¥1,000. In order to correctly execute the cash
overlay, Hideaki would most appropriately:

A) purchase 50 contracts.
B) purchase 44 contracts.
C) purchase 37 contracts.
Question #30 of 55 Question ID: 1397454

Oskar Dieter manages a fund with exposures to both German equity and fixed-income. The
fund has a market value of €450m, with 60% exposure to equity and 40% to fixed-income.
The equity portfolio has a beta of 1.4 relative to the DAX 30 and the fixed-income portfolio
has a modified duration of 12.6.

Dieter wishes to adjust the asset allocation to 70% equity and 30% fixed income using the
following futures contracts:

DAX 30 futures Euro Bund Futures

Futures price 13,400 Futures price €174.50
Tick size 0.5 points Contract size €100,000
Tick value €12.50 CTD price €99.90
Multiplier €25 Conversion factor 0.5723
CTD modified duration 9.86

Taking which of the following positions is most likely to achieve Dieter's required asset
allocation?

A) Long 134 Dax 30 Index futures, short 576 Euro Bund futures.
B) Long 329 Euro Bund futures, Short 134 Dax 30 Index futures.
C) Long 188 Dax 30 Index futures, short 329 Euro Bund futures.

Question #31 of 55 Question ID: 1397429

Sofia Chiara manages an equity fund that invests in Italian stocks. The fund has a market
value of €120m at the start of the period. Chiara sold 563 futures contracts at the start of
the period to give her overall portfolio a beta (relative to the FTSE MIB) of 0.8. The equity
portion of her portfolio has a beta of 1.3. The FTSE MIB has a value of 21,350 at the start of
the period and the futures price was 21,315.

Twelve months later, the index has fallen to 21,050 and the futures price is 21,025. Assuming
that the beta remains constant at 1.3 over the period and the futures contract multiplier is
€5 per index point, the return on her fund at the end of the 12-month period is closest to:

A) −€1,348,946.
B) −€1,375,687.
C) −€1,347,537.

Question #32 of 55 Question ID: 1397450

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.
C) Short 17 small-cap futures and go long 17 mid-cap futures.

Question #33 of 55 Question ID: 1397409

Eagle Jones purchased Eurodollar interest rate futures nine months ago. The contracts have
now matured.

Contract size $1,000,000

Nine-month futures price (at initiation) 96.45
Number of contracts purchased 10
Three-month USD LIBOR at futures' maturity 4.5%

Using the contract details above, the profit on Jones' position at contract maturity is closest
to:

A) +$2,400.
B) −$9,500.
C) −$23,750.

Question #34 of 55 Question ID: 1397413

Simon Feldberg sold treasury futures that have now reached their delivery date. Which of
the three eligible bonds below should Feldberg deliver?

Bond A Bond B Bond C

Bond coupon 5.7% 5.75% 5.8%
Bond maturity 20 years 19 years 18 years
Clean price $144.18 $144.17 $143.96
Accrued interest* $0 $0 $0
Conversion factor 0.9653 0.9719 0.9782
Futures settlement price $148.75
Contract size $100,000

Accrued Interest* = accrued interest at futures delivery (assumed zero)

A) Bond B.
B) Bond A.
C) Bond C.

Question #35 of 55 Question ID: 1397434

David Climo purchased a 12-month variance swap on the S&P 500 with a vega notional of
$60,000 and a strike of 6%. Seven months have passed and the S&P has a realized volatility
of 6.5% over this period. The strike of a variance swap with 5 months to maturity is quoted
at 5.8% at this time and 5-month USD LIBOR is 3%. The current value of the swap is closest
to:

A) $31,250.
B) $13,300.
C) $13,136.

Question #36 of 55 Question ID: 1397416

Sarah Finley wishes to hedge her portfolio of US bonds against a rise in US interest rates.
Her portfolio has a weighted average maturity of 15 years. Sarah would most appropriately
choose to:

A) sell a strip of Eurodollar futures.

B) sell bond futures.
C) enter into a receiver interest rate swap.

Question #37 of 55 Question ID: 1397401

A firm has outstanding floating rate debt on which they pay LIBOR + 200 basis points, and
management expects interest rates to increase in the very near future. In order to create
synthetic fixed-rate debt, the best strategy for the firm is to enter into a swap in which they:

A) receive floating and pay floating.

B) pay fixed and receive floating.
C) pay floating and receive fixed.

Question #38 of 55 Question ID: 1397414

David Lizotte wishes to completely hedge his $40m US fixed-income portfolio against parallel
movements in the yield curve. David is considering using the following US Treasury Bond
Future:

US Treasury Bond Future

Futures price $154.88
Futures contract size $100,000
CTD 3.7% 20 years to maturity
CTD price $113.71
CTD conversion factor 0.7342
CTD modified duration 14.51

Lizotte's fixed-income portfolio currently has a modified duration of 12. The most
appropriate futures contract transaction to fully hedge the portfolio would be to:
A) sell 291 contracts.
B) buy 291 contracts.
C) sell 214 contracts.

Question #39 of 55 Question ID: 1397419

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) greater than the expected value and the currency appreciates.

B) less than the expected value and the currency depreciates.
C) less than the expected value and the currency appreciates.

Question #40 of 55 Question ID: 1397412

Which of the following comments relating to fixed-income (bond) futures is least accurate?

A) The cheapest-to-deliver bond will have the highest basis and lowest repo rate.
The seller (short) party has the option of which bond and when to deliver in the
B)
delivery month.
The futures price is calculated using the cheapest-to-deliver bond and a conversion
C)
factor.

Question #41 of 55 Question ID: 1397423

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
contracts would it take to reduce the beta of the equity index to zero?

A) A short position in 16 contracts.

B) A long position in 16 contracts.
C) A long position in 4 contracts.
Question #42 of 55 Question ID: 1397453

Nicholas Avery manages a US equity fund with a market value of $990 million. Currently the
fund is invested 70% in large cap equity and 30% in small cap equity, but Avery wishes to
alter the allocation to 60% in large cap and 40% in small cap equity. Avery's large cap
portfolio has a beta of 1.2 relative to the S&P 500, and his small cap portfolio has a beta of
0.9 relative to the MSCI USA Small Cap Index. Avery plans to make use of the following
futures contracts to achieve his target asset allocation:

S&P 500 Futures MSCI USA Small Cap Index Futures

Futures price 3,100 720
Index multiplier $250 $100

Taking which of the following positions is most likely to achieve Avery's target asset
allocation?

A) Buy 1,238 MSCI USA Small Cap futures, sell 153 S&P 500 futures.
B) Buy 1,650 MSCI USA Small Cap futures, sell 115 S&P 500 futures.
C) Buy 1,375 MSCI USA Small Cap futures, sell 128 S&P 500 futures.

Question #43 of 55 Question ID: 1397441

To synthetically create the risk/return profile of an underlying common equity security:

A) Buy the corresponding futures contract and invest in a T-bill.

B) Sell short the corresponding futures contract and invest in a T-bill.
C) Buy the corresponding futures contract and borrow at the risk-free rate.

Question #44 of 55 Question ID: 1397418

A maker of large computers has just received an order for some of its products. The agreed
upon price is in British pounds: ₤8 million. The firm 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 firm uses the
forward contract to hedge the corresponding exchange rate risk, how many dollars will it
expect to receive?

A) $10,800,000.00.
B) $10,560,000.00.
C) $5,925,926.00.

Question #45 of 55 Question ID: 1397452

An investor has a $5,000,000 investment in small-cap stocks. The investor enters into an
equity index swap where the investor pays the return on the Russell 2000 and receives the
return on the Dow Jones Industrial Average. The notional principal of the swap is $1 million.
The resulting position is a synthetic mix of:

A) 16.67% large stocks and 83.33% small stocks.

B) 20% large stocks and 80% small stocks.
C) 25% large stocks and 75% small stocks.

Question #46 of 55 Question ID: 1397444

A manager of a $40 million dollar fixed-income portfolio with a duration of 4.2 wants to
lower the duration to 3. The manager chooses a swap with a net duration of 2.1. What
notional principal (NP) should the manager choose for the swap to achieve the target
duration?

A) $22,857,143.00.
B) $70,000,000.00.
C) $56,000,000.00.

Question #47 of 55 Question ID: 1397439

Question #47 of 55 Question ID: 1397439

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 inflow 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) Buy 284 contracts.

B) Buy 218 contracts.
C) Sell 218 contracts.

Question #48 of 55 Question ID: 1397443

A manager of a $2 million dollar fixed-income portfolio with a duration of 3 wants to

increase the duration to 4. The manager chooses a swap with a net duration of 2. The
manager should become a:

A) receive-floating counterparty in the swap with a notional principal of $1 million.

B) pay-floating counterparty in the swap with a notional principal of $2 million.
C) pay-floating counterparty in the swap with a notional principal of $1 million.

Question #49 of 55 Question ID: 1397427

Marjorie Scarlett manages a UK equity portfolio with a market value of £20m and a beta
relative to the FTSE 100 of 1.2. Scarlett wishes to increase her exposure to UK equities, and
so takes the equity return receiver position in a 2-year equity index swap with semi-annual
settlement. The swap is based on the FTSE 100, and has notional principal of £5m. The FTSE
100 at the start of the swap's life is 7,520 and 6-month £ LIBOR is 4%. At the time of the first
settlement date, the FTSE 100 is at 7,600 and 6-month LIBOR is 4.2%. Assuming that
Scarlett's existing portfolio's beta remains unchanged at 1.2. The £ return on the portfolio at
the first settlement date will be closest to:

A) £208,510.
B) £255,319.
C) £230,510.
Question #50 of 55 Question ID: 1397446

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 804 contracts.

B) Sell 804 contracts.
C) Buy 1608 contracts.

Question #51 of 55 Question ID: 1400637

Which of the following statements about portfolio hedging is least accurate?

For a fixed portfolio insurance horizon, using put options generally requires less
A)
rebalancing and monitoring than with the use of futures contracts.
B) Futures contracts have a symmetrical payoff profile.
To synthetically create the risk/return profile of an underlying common equity
C) security, buy the corresponding futures contract, sell the common short, and invest
in a T-bill.

Question #52 of 55 Question ID: 1397448

Redden Capital Management manages an intermediate, high-quality bond portfolio with a
value of $12 million dollars and a modified duration of the portfolio is 4.4 years. 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
half. Stuart asks Amy Swemba, a junior portfolio manager with Redden, to accomplish this
task. Swemba is aware that a Treasury bond futures contract exists with a value of $102,000,
with a modified duration of 8.2 years. Swemba replies to Stuart's comments with the
following statements:

Statement 1: The fastest and most cost-effective 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.

After listening to Swemba's statements, Stuart should:

A) agree with Statement 1, but disagree with Statement 2.

B) disagree with both Statement 1 and Statement 2.
C) disagree with Statement 1, but agree with Statement 2.

Question #53 of 55 Question ID: 1397411

Matthew Ricky runs a charity and is expecting to receive a donation of $20,000,000 in six
months' time. He wishes to temporarily hold the money in a deposit account for three
months, earning $LIBOR + 50 basis points, while he decides how best to use the funds. Ricky
is worried that interest rates may decline before the deposit is made and decides to hedge
the risk using Eurodollar futures. The six-month Eurodollar future is quoted at 97.50, with a
contract size of $1,000,000. Six months later, Ricky receives the donation and makes the
deposit when three-month USD LIBOR is quoted at 2%. Ricky closes out his futures position
at a price of 98. The return that Ricky earned on his deposit over the three-month period is
closest to:

A) $150,000.
B) $75,000.
C) $125,000.
Question #54 of 55 Question ID: 1397433

Which of the following statements regarding variance swaps is least accurate?

The payoff on a volatility swap is convex, resulting in gains that increase in relative
A)
magnitude as realized volatility increases.
The payoff on a variance swap is determined by the difference between actual
B)
volatility squared over a given period versus compared to implied volatility squared.
The purchaser of a variance swap will profit if the realized volatility is greater than
C)
implied volatility.

Question #55 of 55 Question ID: 1397428

Sofia Chiara manages an equity fund that invests in Italian stocks. The fund has a market
value of €120,000,000 and a beta of 1.3 relative to the major Italian index (FTSE MIB). Chiara
wishes to reduce the beta of her portfolio to 0.8 over the next 12 months. Chiara will use the
FTSE MIB future with 24 months to maturity to achieve her goal. Contract details:

FTSE MIB Future

24-months futures contract price 21,312
Multiplier €5
Current index value 21,350

The futures position that Chiara will need to take to achieve her desired beta is closest to:

A) Short 563 contracts.

B) Short 11 contracts.
C) Short 2,815 contracts.