Sample Exam Questions

Document Sample
Sample Exam Questions Powered By Docstoc
					                             Sample Exam Questions

1. Today the S&P 500 index is at 1228. Assume that the dividend yield for the index
   is expected to be 3% over the next 6 months. If the current LIBOR rate is 3% for
   3 month maturities and 5% for 6 month maturities what should be the price of a 6
   month S&P 500 futures contract? Assume that you actually saw a price of 1235
   for the 6 month S&P forward contract. How would you exploit this arbitrage
   (show the exact trades and profit calculations. Also, not that you can borrow or
   lend at 3% or 5% as needed.)

2. Demonstrate how one might use a forward contract to effectively borrow at the
   risk-free rate. Illustrate your answer using the gold spot price and gold futures
   data below. You may assume that you already have a short or long position in
   gold, as needed. Also, you may ignore marking to market issues (i.e. treat the
   futures prices as forward prices) and you may assume that storage costs are 0.

                       Gold Spot Price             417.75
                       November 2004 Futures       418.80
                       December 2004 Futures       419.50
                       February 2005 Futures       421.10

3. Assume that you are the manager of a mutual fund. Your mutual fund currently
   has a β of .50. You feel that stocks are poised to increase in value over the next
   several months, and as a result you are ready to increase your exposure to stock so
   that you know want to increase your β to 1.35. Assume that you will use S&P 500
   index futures to do this, and that your portfolio has value of $30,000,000. Further,
   assume that the S&P is currently at 1225. What position should you take in the
   S&P 500 contract, and how many contracts must you use?

Shared By: