1、Chapter 1 Market Organization and Structure PRACTICE PROBLEMS FOR CHAPTER 1 1. Akihiko Takabe has designed a sophisticated forecasting model, which predicts the movements in the overall stock market, in the hope of earning a return in excess of a fair return for the risk involved. He uses the predic
2、tions of the model to decide whether to buy, hold, or sell the shares of an index fund that aims to replicate the movements of the stock market. Takabe would best be characterized as a (n): A. hedger. B. investor. C. information-motivated trader. 2. James Beach is young and has substantial wealth. A
3、 significant proportion of his stock portfolio consists of emerging market stocks that offer relatively high expected returns at the cost of relatively high risk. Beach believes that investment in emerging market stocks is appropriate for him given his ability and willingness to take risk. Which of
4、the following labels most appropriately describes Beach? A. Hedger. B. Investor. C. Information-motivated trader. 3. Lisa Smith owns a manufacturing company in the United States. Her company has sold goods to a customer in Brazil and will be paid in Brazilian real (BRL) in three months. Smith is con
5、cerned about the possibility of the BRL depreciating more than expected against the U.S. dollar (USD). Therefore, she is planning to sell three-month futures contracts on the BRL. The seller of such contracts generally gains when the BRL depreciates against the USD. If Smith were to sell these futur
6、e contracts, she would most appropriately be described as a (n): A. hedger. B. investor. C. information-motivated trader. 4. Which of the following is not a function of the financial system? A. To regulate arbitrageurs profits (excess returns). B. To help the economy achieve allocational efficiency.
7、 C. To facilitate borrowing by businesses to fund current operations. 5. An investor primarily invests in stocks of publicly traded companies. The investor wants to increase the diversification of his portfolio. A friend has recommended investing in real estate properties. The purchase of real estat
8、e would best be 1 characterized as a transaction in the: A. derivative investment market. B. traditional investment market. C. alternative investment market. 6. A hedge fund holds its excess cash in 90-day commercial paper and negotiable certificates of deposit. The cash management policy of the hed
9、ge fund is best described as using: A. capital market instruments. B. money market instruments. C. intermediate-term debt instruments. 7. An oil and gas exploration and production company announces that it is offering 30 million shares to the public at $45.50 each. This transaction is most likely a
10、sale in the: A. futures market. B. primary market. C. secondary market. 8. Consider a mutual fund that invests primarily in fixed-income securities that have been determined to be appropriate given the funds investment goal. Which of the following is least likely to be a part of this fund? A. Warran
11、ts. B. Commercial paper. C. Repurchase agreements. 9. A friend has asked you to explain the differences between open-end and closed-end funds. Which of the following will you most likely include in your explanation? A. Closed-end funds are unavailable to new investors. B. When investors sell the sha
12、res of an open-end fund, they can receive a discount or a premium to the funds net asset value. C. When selling shares, investors in an open-end fund sell the shares back to the fund whereas investors in a closed-end fund sell the shares to others in the secondary market. 10. The usefulness of a for
13、ward contract is limited by some problems. Which of the following is most likely one of those problems? A. Once you have entered into a forward contract, it is difficult to exit from the contract. B. Entering into a forward contract requires the long party to deposit an initial amount with the short
14、 party. C. If the price of the underlying asset moves adversely from the perspective of the long party, periodic payments must be made to the short party. 2 11. Tony Harris is planning to start trading in commodities. He has heard about the use of futures contracts on commodities and is learning mor
15、e about them. Which of the following is Harris least likely to find associated with a futures contract? A. Existence of counterparty risk. B. Standardized contractual terms. C. Payment of an initial margin to enter into a contract. 12. A German company that exports machinery is expecting to receive
16、$10 million in three months. The firm converts all its foreign currency receipts into euros. The chief financial officer of the company wishes to lock in a minimum fixed rate for converting the $10 million to euro but also wants to keep the flexibility to use the future spot rate if it is favorable.
17、 What hedging transaction is most likely to achieve this objective? A. Selling dollars forward. B. Buying put options on the dollar. C. Selling futures contracts on dollars. 13. A book publisher requires substantial quantities of paper. The publisher and a paper producer have entered into an agreeme
18、nt for the publisher to buy and the producer to supply a given quantity of paper four months later at a price agreed upon today. This agreement is a: A. futures contract. B. forward contract. C. commodity swap. 14. The Standard & Poors Depositary Receipts (SPDRs) is an investment that tracks the S&P
19、 500 stock market index. Purchases and sales of SPDRs during an average trading day are best described as: A. primary market transactions in a pooled investment. B. secondary market transactions in a pooled investment. C. secondary market transactions in an actively managed investment. 15. The Stand
20、ard & Poors Depositary Receipts (SPDRs) is an exchange-traded fund in the United States that is designed to track the S&P 500 stock market index. The current price of a share of SPDRs is $113. A trader has just bought call options on shares of SPDRs for a premium of $3 per share. The call options ex
21、pire in five months and have an exercise price of $120 per share. On the expiration date, the trader will exercise the call options (ignore any transaction costs) if and only if the shares of SPDRs are trading: A. below $120 per share. B. above $120 per share. C. above $123 per share. 16. Which of t
22、he following statements about exchange-traded funds is most correct? 3 A. Exchange-traded funds are not backed by any assets. B. The investment companies that create exchange-traded funds are financial intermediaries. C. The transaction costs of trading shares of exchange-traded funds are substantia
23、lly greater than the combined costs of trading the underlying assets of the fund. 17. Jason Schmidt works for a hedge fund and he specializes in finding profit opportunities that are the result of inefficiencies in the market for convertible bondsbonds that can be converted into a predetermined amou
24、nt of a companys common stock. Schmidt tries to find convertibles that are priced inefficiently relative to the underlying stock. The trading strategy involves the simultaneous purchase of the convertible bond and the short sale of the underlying common stock. The above process could best be describ
25、ed as: A. hedging. B. arbitrage. C. securitization. 18. Pierre-Louis Robert just purchased a call option on shares of the Michelin Group. A few days ago he wrote a put option on Michelin shares. The call and put options have the same exercise price, expiration date, and number of shares underlying.
26、Considering both positions, Roberts exposure to the risk of the stock of the Michelin Group is: A. long. B. short. C. neutral. 19. An online brokerage firm has set the minimum margin requirement at 55 percent. What is the maximum leverage ratio associated with a position financed by this minimum mar
27、gin requirement? A. 1.55. B. 1.82. C. 2.22. 20. A trader has purchased 200 shares of a non-dividend-paying firm on margin at a price of $50 per share. The leverage ratio is 2.5. Six months later, the trader sells these shares at $60 per share. Ignoring the interest paid on the borrowed amount and th
28、e transaction costs, what was the return to the trader during the six-month period? A. 20 percent. B. 33.33 percent. C. 50 percent. 21. Jason Williams purchased 500 shares of a company at $32 per share. The stock was bought on 75 percent margin. One month later, Williams had to pay interest on the a
29、mount borrowed at a rate of 2 percent per month. At that time, Williams received 4 a dividend of $0.50 per share. Immediately after that he sold the shares at $28 per share. He paid commissions of $10 on the purchase and $10 on the sale of the stock. What was the rate of return on this investment fo
30、r the one-month period? A. 12.5 percent. B. 15.4 percent. C. 50.1 percent. 22. Caroline Rogers believes the price of Gamma Corp. stock will go down in the near future. She has decided to sell short 200 shares of Gamma Corp. at the current market price of 47. The initial margin requirement is 40 perc
31、ent. Which of the following is an appropriate statement regarding the margin requirement that Rogers is subject to on this short sale? A. She will need to contribute 3,760 as margin. B. She will need to contribute 5,640 as margin. C. She will only need to leave the proceeds from the short sale as de
32、posit and does not need to contribute any additional funds. 23. The current price of a stock is $25 per share. You have $10,000 to invest. You borrow an additional $10,000 from your broker and invest $20,000 in the stock. If the maintenance margin is 30 percent, at what price will a margin call firs
33、t occur? A. $9.62. B. $17.86. C. $19.71. 24. You have placed a sell market-on-open ordera market order that would automatically be submitted at the markets open tomorrow and would fill at the market price. Your instruction, to sell the shares at the market open, is a(n): A. execution instruction. B.
34、 validity instruction. C. clearing instruction. 25. A market has the following limit orders standing on its book for a particular stock. The bid and ask sizes are number of shares in hundreds. 5 What is the market? A. 9.73 bid, offered at 10.14. B. 9.81 bid, offered at 10.10. C. 9.95 bid, offered at
35、 10.02. 26. Consider the following limit order book for a stock. The bid and ask sizes are number of shares in hundreds A new buy limit order is placed for 300 shares at 123.40. This limit order is said to: A. take the market. B. make the market. C. make a new market. 27. Currently, the market in a
36、stock is “$54.62 bid, offered at $54.71.“ A new sell limit order is placed at $54.62. This limit order is said to: A. take the market. B. make the market. C. make a new market. 28. Jim White has sold short 100 shares of Super Stores at a price of$42 per share. He has also simultaneously placed a “go
37、od-till-cancelled, stop 50, limit 55 buy“ order. Assume that if the stop condition specified by White is satisfied and the order becomes valid, it will get executed. Excluding transaction costs, what is the maximum possible loss that White can have? A. $800. B. $1,300. C. Unlimited. 29. You own shar
38、es of a company that are currently trading at $30 a share. Your technical analysis of the shares indicates a support level of $27.50. That is, if the price of the shares is going down, it is more likely to stay above this level rather than fall below it. If the price does fall below this level, howe
39、ver, you believe that the price may continue to decline. You have no immediate intent to sell the shares but are concerned about the possibility of a huge loss if the share price declines below the 6 support level. Which of the following types of orders could you place to most appropriately address
40、your concern? A. Short sell order. B. Good-till-cancelled stop sell order. C. Good-till-cancelled stop buy order. 30. In an underwritten offering, the risk that the entire issue may not be sold to the public at the stipulated offering price is borne by the: A. issuer. B. investment bank. C. buyers o
41、f the part of the issue that is sold. 31 . A British company listed on the Alternative Investment Market of the London Stock Exchange, announced the sale of 6,686,665 shares to a small group of qualified investors at 0.025 per share. Which of the following best describes this sale? A. Shelf registra
42、tion. B. Private placement. C. Initial public offering. 32. A German publicly traded company, to raise new capital, gave its existing shareholders the opportunity to subscribe for new shares. The existing shareholders could purchase two new shares at a subscription price of 4.58 per share for every
43、15 shares held. This is an example of a(n): A. rights offering. B. private placement. C. initial public offering. 33. Consider an order-driven system that allows hidden orders. The following four sell orders on a particular stock are currently in the systems limit order book. Based on the commonly u
44、sed order precedence hierarchy, which of these orders will have precedence over others? A. Order I (time of arrival of 9:52:01 ). B. Order II (time of arrival of 9:52:08). C. Order III (time of arrival of 9:53:04) 7 34. Zhenhu Li has submitted an immediate-or-cancel buy order for 500 shares of a com
45、pany at a limit price of CNY 74.25. There are two sell limit orders standing in that stocks order book at that time. One is for 300 shares at a limit price of CNY 74.30 and the other is for 400 shares at a limit price of CNY 74.35. How many shares in Lis order would get cancelled? A. None (the order
46、 would remain open but unfilled). B. 200 (300 shares would get filled). C. 500 (there would be no fill). 35. A market has the following limit orders standing on its book for a particular stock: Ian submits a day order to sell 1,000 shares, limit 19.83. Assuming that no more buy orders are submitted
47、on that day after Ian submits his order, what would be Ians average trade price? A. 19.70. B. 19.92. C. 20.05. 36. A financial analyst is examining whether a countrys financial market is well functioning. She finds that the transaction costs in this market are low and trading volumes are high. She c
48、oncludes that the market is quite liquid. In such a market: A. traders will find it hard to make use of their information. B. traders will find it easy to trade and their trading will make the market less informationally efficient. C. traders will find it easy to trade and their trading will make th
49、e market more informationally efficient. 37. The government of a country whose financial markets are in an early stage of development has hired you as a consultant on financial market regulation. Your first task is to prepare a list of the objectives of market regulation. Which of the following is least likely to be included in this list of objectives? A. Minimize agency problems in the financial markets. 8 B. Ensure that financial markets are fair and orderly. C. Ensure that investors in the stock market achieve a rate of retu
