11. Although arbitrage presents potential profit opportunities, the likelihood of individual investors finding arbitrage opportunities is limited byA. the tendency for stock values to fall away from the efficient frontier.B. hedge strategies that combine option and stock purchases all but eliminate arbitrage opportunities.C. stock and option exchange managers, who are required to notify market makers when arbitrage opportunities present themselves.D. market makers, who are in a better position to detect and quickly capitalize before gaps narrow.12. You know that leverage increases risk becauseA. leverage increases the opportunity for greater profits and losses.B. when you lend money to businesses, you increase your exposure to default risk.C. leverage magnifies the potential return on an investment.D. leverage brings with it downside risk caused by the time-limited feature of options.13. If you owned the stock of a company that had also issued a warrant on its stock, how could you use the warrant to limit your risk in the stock?A. Buy the warrant and write a put on the stock.B. Sell the warrant short.C. Buy a put on the stock.D. Buy a put on the stock, and buy the warrant.14. Suppose that you’re a corn farmer preparing to plant. You want to reduce the risk that corn prices will drop below $2.20 per bushel next September when you harvest. What is the best strategy to reduce your risk?A. Enter a long position in corn futures to accept in September to enhance your profit if corn prices rise.B. Enter a futures contract to deliver September corn at a price under $2.20.C. Enter a long position in corn for futures contracts to accept corn in July.D. Enter a futures contract to deliver September corn at a price above $2.20.15. Which of the following is most likely to use currency futures to reduce risk?A. Foreign currency speculatorsB. Corporations that accept and make payments in foreign currenciesC. Households located near international bordersD. Wheat farmers who sell to U.S. exporters developing markets in China16. You have a long position in soybean futures at $4.75 per bushel. The contract is for 5,000bushels, and initial margin is $1,215. Maintenance margin is $900. An unexpected late frost destroys newly planted crops in the Midwestern United States, and the futures price rises to $5.20 per bushel over the next few trading days. Which of the following results is most likely?A. You receive a margin call from your broker.B. The futures exchange imposes a temporary hold on trading in soybean futures.C. The contract value rises to $25,000D. The contract value rises $2,250.17. You enter a short position in an oats futures contract. The trading unit is 5,000 bushels,the futures price is $1.08 per bushel, initial margin is $270, and maintenance margin is$200. The futures price rises $.02 to $1.10 on projections of poor yields. What is the most likely result?A. You consider closing your position to capitalize on a $100 profit.B. You get a margin call for $70.C. You get a margin call for $100.D. The long position exercises the futures contract.18. Which of the following investors would reduce risk by shorting municipal bonds with futures?A. Someone who owns a large portfolio of municipal bondsB. An investor who has entered a contract to deliver municipal bondsC. Someone who has entered a futures contract to accept Treasury notesD. A city that has issued municipal bonds19. If you were CFO of a U.S.-based international corporation with significant operationsin Switzerland, which of the following would be the best way to reduce currency risk through derivatives?A. Enter a short position in the Swiss franc.B. Purchase Swiss francs and invest them in Swiss certificates of deposit.C. Enter a swap agreement so that U.S. operating expenses are paid on behalf of a corporation based in Switzerland.D. Enter a swap agreement so that Swiss operating expenses are paid by a corporation based in Switzerland.20. Which of the following events would increase a futures price?A. Inflation declines during the term of the contract.B. Spot price declines because of excess volume in the commodity.C. The broker increases the maintenance marginD. Interest rates rise faster than expected.
This question was answered on: Sep 21, 2023
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