Chapter 2 Practice Questions
1. José purchases a 3-month Eurodollar futures contract at 96.50. At the end of the first business day after his purchase, the annualized, expected 90-day LIBOR rate rises by 0.02%. Which of the following is true?
A. The expected LIBOR rate is now 3.48.
B. An amount of $50 will be put into José’s margin account.
C. An amount of $50 will be taken out of José’s margin account.
D. An amount of $5 will be taken out of José’s margin account.
2. Andrew shorts one Eurodollar futures contract at 95.20. His initial margin is $820 with a maintenance margin of $630. If the contract later settles at 95.40 and Andrew conducts no other transactions, how much is Andrew required to deposit as additional margin?
A. $0
B. $310
C. $320
D. $500
3. Leon shorts a Eurodollar futures contract at 96.20. His initial margin is $840 and he has a maintenance margin of $620. If the contract later settles at 95.90, how much additional margin must Leon deposit?
A. $0
B. $40
C. $250
D. $350
4. In mid-December City Bank decides it must borrow $1 million for 90 days at the LIBOR rate beginning on March 15. Because its directors think interest rates will soon rise, the firm shorts a Eurodollars futures contract with an expiration date of March 15. The IMM index at the time the contract is shorted is 97.25. On March 15, when the firm closes its position, the 90-day LIBOR is 2.85. What is City Bank’s profit or loss?
A. There is no profit or loss
B. $250 profit
C. $250 loss
D. $4,000 profit
5. Which of the following is true of a 30-day federal funds futures contract?
A. Its price is based on the federal funds rate at the end of the preceding calendar month.
B. The contract is cash settled on the last day of the month.
C. Its price is based on the market’s opinion of the average overnight federal funds rate for the delivery month.
D. Its tick size is one basis poin