FMI Futures

Interest rate futures are not available on

• Treasury Bonds

• Treasury Notes

• Eurodollar CDs

• S&P 500 index

____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.

• Hedgers

• Day traders

• Position traders

• None of the above

If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.

• increase; selling

• increase; buying

• decrease; selling

• decrease; purchasing a call option on

Assume that speculators had purchased a futures contract at the beginning of the year. If the price of a security represented by a futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for.

• increased; more

• decreased; less

• remains the same; more

• increased; less

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____ and the position in futures contracts will result in a ____.

• increase; gain

• increase; loss

• decrease; gain

• decrease; loss

The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.

• True

• False

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.

• purchasing; Treasury bonds

• purchasing; the S&P 500 index

• purchasing; a Municipal Bond Index

• selling; a Municipal Bond index

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

• liquidates its stocks whenever it expects a market downturn

• maintains a constant buy position in stock index futures

• maintains a constant sell position in stock index futures

• none of the above

Financial leverage, when used in association with a futures contract, ____ the positive returns and ____ losses.

• magnifies; reduces

• reduces; magnifies

• magnifies; magnifies

• reduces; reduces

Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____.

• sell; loss

• purchase; gain

• purchase; loss

• sell; gain