How would the auto industry most likely be affected by the business cycle？ The industry is most likely to

Laura James is the head portfolio manager for National Fund, a U.S. based mutual fund with a well-respected track record. National’s primary focus is on large-cap domestic equities, and the fund has consistently posted highreturns relative to its peer group over the past seven years. Much of National’s recent success is from itsinvestments in the U.S. automobile industry, which have posted extraordinary returns due to a favorable economic scenario. Over the past seven years, the U.S. economy has been expanding, foreign competition has not met consumer expectations, and oil prices have remained low. These factors have contributed to an increase in market share for the domestic producers (at the expense of foreign competitors), and the result has been strong earnings for the top U.S. automakers.

Ford Motor Company, in particular, has enjoyed tremendous success in this environment. Ford has capitalized on the trend toward bigger vehicles, particularly sport utility vehicles (SUVs), and has outperformed the other domestic auto makers. Ford jumped on the SUV bandwagon early, and established its dominance. Other domestic auto makers followed, with foreign producers being the last to embrace the trend. Ford, has increased its market share in an increasingly competitive industry.

James is constantly reviewing economic forecasts and industry data in order to assess the expected performance of the investments in National’s portfolio. Due to changes in economic policy and recent volatility in energy prices, James now believes that current market conditions exhibit signs of contraction (recession). In addition, the automobile sector may be facing additional negative factors. In particular, James has concerns regarding the SUV segment of the automobile industry. Although she believes they will remain popular, she is concerned that the market may be reaching a point of saturation. In addition, volatile energy prices may dampen consumers’ enthusiasm for large vehicles. Lastly, foreign competitors have increased efforts toward the production of SUVs, thus “crowding” the market with many new models.

Part 4)

Suppose instead that Ford’s growth of firm sales is expected to be –3% and the growth of industry sales is 1%. What is Ford’s expected change in market share?

A)3%.

B)-3%.

C)-4%.

D)4%.

Laura James is the head portfolio manager for National Fund, a U.S. based mutual fund with a well-respected track record. National’s primary focus is on large-cap domestic equities, and the fund has consistently posted highreturns relative to its peer group over the past seven years. Much of National’s recent success is from itsinvestments in the U.S. automobile industry, which have posted extraordinary returns due to a favorable economic scenario. Over the past seven years, the U.S. economy has been expanding, foreign competition has not met consumer expectations, and oil prices have remained low. These factors have contributed to an increase in market share for the domestic producers (at the expense of foreign competitors), and the result has been strong earnings for the top U.S. automakers.

Ford Motor Company, in particular, has enjoyed tremendous success in this environment. Ford has capitalized on the trend toward bigger vehicles, particularly sport utility vehicles (SUVs), and has outperformed the other domestic auto makers. Ford jumped on the SUV bandwagon early, and established its dominance. Other domestic auto makers followed, with foreign producers being the last to embrace the trend. Ford, has increased its market share in an increasingly competitive industry.

James is constantly reviewing economic forecasts and industry data in order to assess the expected performance of the investments in National’s portfolio. Due to changes in economic policy and recent volatility in energy prices, James now believes that current market conditions exhibit signs of contraction (recession). In addition, the automobile sector may be facing additional negative factors. In particular, James has concerns regarding the SUV segment of the automobile industry. Although she believes they will remain popular, she is concerned that the market may be reaching a point of saturation. In addition, volatile energy prices may dampen consumers’ enthusiasm for large vehicles. Lastly, foreign competitors have increased efforts toward the production of SUVs, thus “crowding” the market with many new models.

Part 3)

Assume domestic automakers are growing at a rate of –2%. Ford expects to increase its market share by 0.5%. What is Ford’s growth rate?

A)1.5%.

B)-3.0%.

C)-1.5%.

D)3.0%.

Laura James is the head portfolio manager for National Fund, a U.S. based mutual fund with a well-respected track record. National’s primary focus is on large-cap domestic equities, and the fund has consistently posted highreturns relative to its peer group over the past seven years. Much of National’s recent success is from itsinvestments in the U.S. automobile industry, which have posted extraordinary returns due to a favorable economic scenario. Over the past seven years, the U.S. economy has been expanding, foreign competition has not met consumer expectations, and oil prices have remained low. These factors have contributed to an increase in market share for the domestic producers (at the expense of foreign competitors), and the result has been strong earnings for the top U.S. automakers.

Ford Motor Company, in particular, has enjoyed tremendous success in this environment. Ford has capitalized on the trend toward bigger vehicles, particularly sport utility vehicles (SUVs), and has outperformed the other domestic auto makers. Ford jumped on the SUV bandwagon early, and established its dominance. Other domestic auto makers followed, with foreign producers being the last to embrace the trend. Ford, has increased its market share in an increasingly competitive industry.

James is constantly reviewing economic forecasts and industry data in order to assess the expected performance of the investments in National’s portfolio. Due to changes in economic policy and recent volatility in energy prices, James now believes that current market conditions exhibit signs of contraction (recession). In addition, the automobile sector may be facing additional negative factors. In particular, James has concerns regarding the SUV segment of the automobile industry. Although she believes they will remain popular, she is concerned that the market may be reaching a point of saturation. In addition, volatile energy prices may dampen consumers’ enthusiasm for large vehicles. Lastly, foreign competitors have increased efforts toward the production of SUVs, thus “crowding” the market with many new models.

Part 2)

In a recessionary environment, an automaker such as Ford would be expected to:

A)produce more higher end vehicles.

B)maintain the same product mix as 5 years ago.

C)gain market share if it produces high end vehicles.

D)produce more lower end vehicles.

Laura James is the head portfolio manager for National Fund, a U.S. based mutual fund with a well-respected track record. National’s primary focus is on large-cap domestic equities, and the fund has consistently posted highreturns relative to its peer group over the past seven years. Much of National’s recent success is from itsinvestments in the U.S. automobile industry, which have posted extraordinary returns due to a favorable economic scenario. Over the past seven years, the U.S. economy has been expanding, foreign competition has not met consumer expectations, and oil prices have remained low. These factors have contributed to an increase in market share for the domestic producers (at the expense of foreign competitors), and the result has been strong earnings for the top U.S. automakers.

Ford Motor Company, in particular, has enjoyed tremendous success in this environment. Ford has capitalized on the trend toward bigger vehicles, particularly sport utility vehicles (SUVs), and has outperformed the other domestic auto makers. Ford jumped on the SUV bandwagon early, and established its dominance. Other domestic auto makers followed, with foreign producers being the last to embrace the trend. Ford, has increased its market share in an increasingly competitive industry.

James is constantly reviewing economic forecasts and industry data in order to assess the expected performance of the investments in National’s portfolio. Due to changes in economic policy and recent volatility in energy prices, James now believes that current market conditions exhibit signs of contraction (recession). In addition, the automobile sector may be facing additional negative factors. In particular, James has concerns regarding the SUV segment of the automobile industry. Although she believes they will remain popular, she is concerned that the market may be reaching a point of saturation. In addition, volatile energy prices may dampen consumers’ enthusiasm for large vehicles. Lastly, foreign competitors have increased efforts toward the production of SUVs, thus “crowding” the market with many new models.

Part 1)

Assume an industry exhibits tendencies of “regression toward the mean.” This could mean all of the followingEXCEPT:

A)profits are high and competition increases from other firms in the industry.

B)profits increase as firms enter the industry.

C)profits are low and firms flee the industry.

D)prices could increase or decrease depending on the level of profits.

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 6)

Based on the information given, what initial price should Lewis recommend for a forward contract on Swiss Francs based on a discrete time calculation?

A)$1.1552.

B)$1.0053.

C)$0.9947.

D)$0.8656. 

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 5)

Based on the information given and assuming a notional principal of $10 million, what value should Lewis place on the 3 x 9 FRA at time of settlement?

A)$38,000 paid from short to long.

B)$19,000 paid from long to short.

C)$37,218 paid from long to short.

D)$19,000 paid from short to long.

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 4)

Based on the information given, what initial price should Lewis recommend for the 3 x 9 FRA?

A)4.96%.

B)4.66%.

C)5.96%.

D)5.66%.

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 3)

Suppose that instead of a forward contract on the Treasury bond, a similar futures contract was being considered. Which one of the following alternatives correctly gives the preference that an investor would have between a forward and a futures contract on the Treasury bond?

A)The futures contract will be preferred to the forward contract.

B)An investor would be indifferent between the two types of contracts.

C)It is impossible to say for certain because it depends on the correlation between the underlying asset and interest rates.

D)The forward contract will be preferred to the futures contract.

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 2)

Suppose that the price of the forward contract for the Treasury bond was negotiated off-market and the initial value of the contract was positive as a result. Which party makes a payment and when is the payment made?

A)The long pays the short at the maturity of the contract.

B)The short pays the long at the initiation of the contract.

C)The short pays the long at the maturity of the contract.

D)The long pays the short at the initiation of the contract.

Monica Lewis, CFA, has been hired to review data on a series of forward contracts for a major client. The client has asked for an analysis of a contract with each of the following characteristics:

A forward contract on a U.S. Treasury bond

A forward rate agreement (FRA)

A forward contract on a currency

Information related to a forward contract on a U.S. Treasury bond: The Treasury bond carries a 6 percent coupon and has a current spot price of $1,071.77 (including accrued interest). A coupon has just been paid and the next coupon is expected in 183 days. The annual risk-free rate is 5 percent. The forward contract will mature in 195 days.

Information related to a forward rate agreement: The relevant contract is a 3 x 9 FRA. The current annualized 90-day money market rate is 3.5 percent and the 270-day rate is 4.5 percent. Based on the best available forecast, the 180-day rate at the expiration of the contract is expected to be 4.2 percent.

Information related to a forward contract on a currency: The risk-free rate in the U.S. is 5 percent and 4 percent in Switzerland. The current spot exchange rate is $0.8611 per Swiss France (SFr). The forward contract will mature in 200 days.

Part 1)

Based on the information given, what initial price should Lewis recommend for a forward contract on the Treasury bond?

A)$1,035.12.

B)$1,073.54.

C)$1,053.66.

D)$1,070.02.