Market Organization and Structure

Which of the following is not a function of the financial system?

• To regulate arbitrageurs’ profits (excess returns)

• To help the economy achieve allocational efficiency.

• To facilitate borrowing by businesses to fund current operations.

• All are correct

A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and the transaction costs, what was the return to the trader during the six-month period?

• 20%

• 33.33%

• 50%

• 66.67%

Lee Smith is young and has substantial wealth. A significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of relatively high risk. Smith believes that investment in emerging market stocks is appropriate for him given his ability and willingness to take risk. Which of the following labels most appropriately describes Smith?

• Hedger

• Investor

• Information-motivated trader

• Speculator

A financial analyst is examining whether a country’s financial market is well functioning. She finds that the transaction costs in this market are low and trading volumes are high. She concludes that the market is quite liquid. In such a market:

• traders will find it hard to make use of their information

• traders will find it easy to trade and their trading will make the market less informationally efficient.

• traders will find it easy to trade and their trading will make the market more informationally efficient.

• Nothing is correct

The usefulness of a forward contract is limited by some problems. Which of the following is most likely one of those problems?

• Once you have entered into a forward contract, it is difficult to exit from the contract.

• Entering into a forward contract requires the long party to deposit an initial amount with the short party

• If the price of the underlying asset moves adversely from the perspective of the long party, periodic payments must be made to the short party.

• When investors sell the forward contract, they can receive a discount or a premium to the contract. 

A German company that exports machinery is expecting to receive $10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable. What hedging transaction is most likely to achieve this objective?

• Selling dollars forward.

• Buying put options on the dollar.

• Selling futures contracts on dollars.

• Buying call options the dollar

A Volkswagen company listed on the Germany Stock Exchange announced the sale of 8,000,000 shares to a small group of qualified investors at €0.025 per share. Which of the following best describes this sale?

• Shelf registration

• Private placement

• Initial public offering.

• rights offering

The government of a country whose financial markets are in an early stage of development has hired you as a consultant on financial market regulation. Your first task is to prepare a list of the objectives of market regulation. Which of the following is least likely to be included in this list of objectives?

• Minimize agency problems in the financial markets.

• Ensure that financial markets are fair and orderly.

• Minimize moral hazard and avoid asymmetric information

• Ensure that investors in the stock market achieve a rate of return that is at least equal to the risk-free rate of return.

A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds (see file attached). What is the market?

• 9.81 bid, offered at 10.10.

• 9.73 bid, offered at 10.14.

• 9.95 bid, offered at 10.14. 

• 9.95 bid, offered at 10.02.

Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on 75 percent margin. One month later, Williams had to pay interest on the amount borrowed at a rate of 2 percent per month. At that time, Williams received a dividend of $0.50 per share. Immediately after that he sold the shares at $28 per share. He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was the rate of return on this investment for the one-month period?

• -12.5%

• -15.4%

• -25%

• -50.1%

Answer explanation

Total cost of the purchase = $16,000 = 500 × $32 Equity invested = $12,000 = 0.75 × $16,000 Amount borrowed = $4,000 = 16,000 – 12,000 Interest paid at month end = $80 = 0.02 × $4,000 Dividend received at month end = $250 = 500 × $0.50 Proceeds on stock sale = $14,000 = 500 × $28 Total commissions paid = $20 = $10 + $10 Net gain/loss = −$1,850 = −16,000 − 80 + 250 + 14,000 − 20 Initial investment including commission on purchase = $12,010 Return = −15.4% = −$1,850/$12,010