Options Futures and Other Derivatives 10th Edition By JohnC. – Test Bank

Options Futures and Other Derivatives 10th Edition By JohnC. – Test Bank

Hull: Options, Futures and Other Derivatives, Ninth Edition
Chapter 6: Interest Rate Futures
Multiple Choice Test Bank: Questions and Answers

1. Which of following is applicable to corporate bonds in the United States?
A. Actual/360
B. Actual/Actual
C. 30/360
D. Actual/365

Answer: C

Corporate bonds in the U.S are usually quoted with a 30/360 day count. This means that there are assumed to be 30 days per month and 360 days per year when the length of an accrual period is calculated.

2. It is May 1. The quoted price of a bond with an Actual/Actual (in period) day count and 12% per annum coupon (paid semiannually) in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?
A. 106.00
B. 106.02
C. 105.98
D. 106.04

Answer: C

The cash price is the quoted price plus accrued interest. There are 30 actual days between April 1 and May 1 and 183 actual days between April 1 and October 1. In this case the quoted price is 105 and the accrued interest is 0.06×100×30/183=0.98. The answer is therefore 105.98.

3. It is May 1. The quoted price of a bond with a 30/360 day count and 12% per annum coupon in the United States is 105. It has a face value of 100 and pays coupons on April 1 and October 1. What is the cash price?\
A. 106.00
B. 106.02
C. 105.98
D. 106.04

Answer: A

The cash price is the quoted price plus accrued interest. There are 30 assumed days between April 1 and May 1 and 180 assumed days between April 1 and October 1. In this case the quoted price is 105 and the accrued interest is 0.06×100×30/180 = 1.00. The answer is therefore 106.00.

4. The most recent settlement bond futures price is 103.5. Which of the following four bonds is cheapest to deliver?
A. Quoted bond price = 110; conversion factor = 1.0400.
B. Quoted bond price = 160; conversion factor = 1.5200.
C. Quoted bond price = 131; conversion factor = 1.2500.
D. Quoted bond price = 143; conversion factor = 1.3500.

Answer: C

The cost of delivering a bond is the quoted bond price minus the most recent settlement price times the conversion factor. This is 2.36, 2.68, 1.625, and 3.275 for bonds in A, B, C, and D, respectively. The bond in C is therefore cheapest to deliver.

5. Which of the following is NOT an option open to the party with a short position in the Treasury bond futures contract?
A. The ability to deliver any of a number of different bonds
B. The wild card play
C. The fact that delivery can be made any time during the delivery month
D. The interest rate used in the calculation of the conversion factor

Answer: D

A, B, and C describe options that the party with the short position has. D does not

6. A trader enters into a long position in one Eurodollar futures contract. How much does the trader gain when the futures price quote increases by 6 basis points?
A. $6
B. $150
C. $60
D. $600

Answer: B

The trader gains $25 for each basis point. The gain is therefore 25×6 or $150.