Investment Alternatives and Financial Markets
Investment Alternatives
Two investment alternatives are proposed:
A) Invest in Treasury bills for one year that currently provide a 2% interest and reinvest the earnings for another year.
B) Invest in public debt strips with two years of residual life, which offer a 4% interest.
If you operate under the pure model of expectations, you will invest in:
d) It does not matter which option to choose since both will offer the same performance.
Financial Concepts and Statements
Determine the incorrect statement:
c) According to the theory of preference for liquidity, investors prefer long-term assets over short-term securities. (Corrected: Investors generally prefer short-term assets due to their liquidity.)
Among the utilities of knowledge of the ETTI (likely referring to a yield curve or similar economic indicator) is:
d) All of the following answers are correct.
- a) Allows the analysis of credit and interest risk in fixed income portfolios.
- b) It makes it possible to value financial assets.
- c) It is a source of information of enormous importance in monetary policy.
Futures Contracts and Market Mechanics
The sale of a futures contract:
c) Forces us to sell the underlying asset at a future date at a price agreed upon at the time of formalization of the contract.
The Compensation Chamber (likely referring to a clearinghouse):
d) All of the following answers are correct.
- a) Acts as a counterpart of the contracting parties.
- b) Liquidates daily the losses and profits generated in a session.
- c) Guarantees all contracts made through it.
The negotiating member on their own (MNCP) in MEFF (likely referring to a specific market participant):
b) You must focus your activity on investment on your own.
Margin Requirements and Futures Trading
We have taken a long position in a stock futures contract. The purchase price of the future has been 12 euros/share and the size of the contract is 100 shares. Our intermediary requires an initial margin of 15% and a maintenance margin of 120 euros. What variation must occur in the closing price of the future so that our agent requires us to provide new guarantees?
a) It must fall to be below 11.40 euros/share.
An agent has sold a futures contract on shares (delivery type) of TELEFONICA with a March maturity at 17.50 euros. The nominal value of the contract is 100 shares and the expiration share price is 16 euros. On the expiration date, the agent can:
A) Deliver 100 shares of Telefónica to the buyer, receiving from the Chamber 1,750 euros plus the margins contributed.
Theoretical Pricing and Hedging Strategies
If we assume a risk-free interest rate of 3%, what would be the theoretical price of the future on a stock index that quotes in cash at 10,600 points and which has 10 days left until expiration (suppose a year of 365 days) when no dividend distribution is foreseen?
a) 10,608.72 points.
A Spanish company plans to carry out a large issue of company promissory notes within 1 month and wants to protect against a rise in interest rates. You would advise:
b) Sell futures contracts.
If the previous titles have a maturity of 3 months, what contract would you recommend?
b) The 3-month Euribor contract negotiated in EUREX.
We have decided to make a long coverage on a portfolio of actions that replicates faithfully the IBEX-35. At the time of making the coverage, the IBEX-35 is 11,800 points and that of the future is 11,820. In the event that at the close of the same the IBEX-35 is located around 11,900 points, the overall result of coverage will be:
d) Answers (a) and (b) are correct.
- a) A loss equal to the basis at the time of contracting the coverage.
- b) A loss equal to the difference of bases.
Point out the INCORRECT statement about the futures contract Mini on the IBEX-35 negotiated in MEFF:
b) There is a maximum fluctuation in the price of the session of 15% on the price of opening. (This statement’s accuracy depends on the specific rules of the MEFF, but it’s likely incorrect as most futures markets have circuit breakers that halt trading if prices move too drastically.)
Currency Exchange Rates and Markets
The extinct peseta went through the following stages, in terms of fixing its exchange rate, from 1948 to 1998 inclusive:
a) 1948-1959: Multiple exchange rates. 1959-1974: Fixed exchange rate. 1974-1998: Floating exchange rate. (Corrected the starting year from 1984 to 1948)
Some advantages of floating exchange rates with respect to fixed exchange rates are the following:
c) Softer adjustments of the imbalances in the balance of payments and increased independence of the national economic policy, in particular its monetary and fiscal aspects.
Decide which of these statements is correct:
d) The peseta entered the European Monetary System (EMS) in June 1989 within the broadband oscillation (± 6%).
In recent times, the euro has had the following evolution in its exchange rate with respect to the dollar:
b) Strong uninterrupted appreciation from 2006 to 2008.
Strictly speaking, they are not foreign currency:
b) Bills of exchange and promissory notes and banknotes in foreign currency.
A bank, a market maker in foreign currencies, can:
a) Orient your USD/EUR quotes in the euro selling sense, buying them and selling them cheaper than their competitors.
Foreign Exchange Formulas and Concepts
In the formula: iF = (TF – T0 / T0) * (360 / t):
b) T0 = Spot exchange rate, TF = Forward exchange rate, t = Time in days.
The theory of Interest Rate Parity (IRP) establishes equality:
c) Between the appreciation or depreciation of the exchange rate of a currency futures, over another that serves as a reference, and the differences in interest rates between said currencies.
Currency SWAP operations:
b) They are exchanged principally at the beginning and end or only at the end of the swap.