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Answer the following essay question as completely as possible.

What is the S&P 500 Index? What is significance and possible advantage in watching and studying indexes such as the S&P Index?

Consider the Big Charts, graph that has been provided:

#Describe the information being depicted o In your answer,

Discuss- time frame, frequency, index numbers and volume.

Discuss - 200 day moving average ?Discuss - the lower indicator of Volume +

Discuss - any apparent trend, trend reversal and/or price patterns

#Can you follow the general market character by following the SPX? If so, what can be said about the character over the last six months? Considering class discussion when can be said about the trend over the last six years.

#Consider "The Big Picture?and the "Market Pulse.”

Discuss the correlation between these and the chart under review.

#Use what we discussed in class. Big Charts, IBD, your technical training, and your understanding of current geo-political, economic and market conditions to provide a forecast for future market direction.

o The last quarter of 2014

o One year from now

o Three years from now

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Irving Heathcote
Irving HeathcoteLv2
6 Jan 2018

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Answer the following essay question as completely as possible.

What is the NASDAQ Index? Discuss, and explain its relationship to the ETF {Exchange Traded Fund) described as QQQ.

Consider the Big Charts, graph that has been provided:

#Describe the information being depicted

In your answer,

Discuss- time frame, frequency, price and volume.

Discuss - moving averages

Discuss - the three lower indicators of Volume +, MACD, and Fast Stochastic

Discuss - any apparent trend and/or price patterns

#If you had perfect information, (ie - knew this chart would take on these characteristics) one year ago how would you have “Traded” this chart?

Discuss when you would have bought and sold QQQ ?

Identify entry, stop loss and target prices

Explain why you chose these prices

Can you follow the general market character by following the QQQ? If so, what can be said about the character over the last year? Considering your charting skill, current geo-political, economic and market conditions provide a forecast for future market direction for the rest of this year, one year out and three years out.

6. Institutional portfolios can take advantage of what is called "portfolio margining" under the rules of the CBOE and other options exchanges. What IS portfolio margining? Choose only one answer.

A. You only pay attention to the bottom margin of the portfolio.

B. Great leverage is possible, as the intercorrelations and natural offsets (or what we call in English a "wash") are taken into consideration.

C. No margin is required, because these are not individual investors.

7. What does the symbol ^VVIX mean?

A. Apple's volatility.

B. An exchange-traded (ETF) volatility fund.

C. The implied volatility of the VIX options themselves.

8. An example of purchasing a "real" option is a company's opening of a Shanghai office, in order to have the capacity to pursue business in China.

True

False

9. A hedge fund is "short" a portfolio of VIX call options. It's "theta" is $16,788 per day. This means, barring some big market or political or terrorist event, the fund's net asset value will increase by about $16,788 per day.

True

False

10. Imagine an equity-oriented state pension fund (such as the State of Maryland Pension funds). Suppose their equity portfolio is NOT identical to the S&P 500 index. Further, suppose that due to a state budget shortfall, the year's additions to the pension fund are likely to be less than actuarially sound. Thus, the fund is becoming very risk-averse. And it needs to implement this feeling by hedging. CHOOSE THE BEST ANSWER, even though there might be more than one true answer. This is actually a question about hedge ratios. A. If the equity portfolio's beta is close to 0, then they could decide to match the overall exposure, via S&P Index futures contracts, to the fund's value. That is, # of contracts times the contract multiplier times the index would approximately equal the value of the fund.

B. If the equity portfolio's beta is close to .4, then they would have a tough time using S&P 500 contracts, so they would instead use foreign exchange contracts.

C. If the equity portfolio's beta is close to 1, then they could decide to match the overall exposure, via S&P Index futures contracts, to the fund's value. That is, # of contracts times the contract multiplier times the index would approximately equal the value of the fund.

11. Go to CMEGROUP.COM We are going to hedge ULSD https://en.wikipedia.org/wiki/Ultra-low-sulfur_diesel for a railroad, that uses ultra-light diesel fuel. Choose June 2017 as the underlying future. Let's pretend we are buying ten futures contracts. What would ten contracts cost you, using the last trade as our price? Show your math, i.e., #gallons times price per futures contract. Is this contract in contango, or normal backwardation?

12. Long options positions(long does not mean long-dated) have positive gamma, and short positions have negative gamma.

True

False

13. In valuing credit default swaps, one must estimate default probabilities. A start would be to obtain historical data for default rates from rating agencies such as Standard & Poor's. But a more complete risk profile, or risk prediction, limiting ourselves to the US market (US-based companies) would be to [pick only one choice, the best one, in your opinion]:

A. Also consider the risk of another earthquake in Japan.

B. Also consider the systematic risk associated with an economic downturn in the US, accompanied by a downturn in US stocks.

C. Also consider the possibility that Facebook options are trading at an implied volatility that is not as high as it should be, considering the lofty level of its P/E ratio.

14. A total return swap can be a form of financing vehicle to allow an investor to buy a specific bond, because: (there are two correct answers, you must pick two)

A. The payer (a financial institution) could agree to pay the bond's capital appreciation or depreciation, plus the interest payments, in return for receiving LIBOR plus some basis points.

B. The payer (a financial institution) could agree to receive the bond's capital appreciation or depreciation, plus the interest payments, in return for receiving LIBOR plus some basis points.

C. The payer retains ownership of the bond for the life of the contract.

You recently graduated from college and accepted a job at M&D, Inc. The HR manager informs you about the company’s new 401 (k) plan. A 401 (k) plan is a tax deferred retirement plan, meaning that no current taxes are paid on the money deposited. For example, assuming a $30,000 salary per year and a $1,500 contribution to your 401 (k), the taxable income is reduced to $28,500. No taxes will be due on any capital gains or plan income while you are invested in the plan, but you will pay taxes when you withdraw the money at retirement. You can contribute up to 15% of your salary to the plan and the company has a 5% match program. This means that the company will match your contribution dollar for dollar up to 5% of your salary, but you must contribute to get the match. The 401(k) plan has several options for investments, most of which are mutual funds. When you purchase shares in a mutual fund, you are actually purchasing partial ownership of the fund’s assets, similar to purchasing shares of stock in a company. The return of the fund is the weighted average of the return of the assets owned by the fund, minus any expenses, with the largest expense being the management fee paid to managers to manage the fund. The retirement investments options offered by M&D are as follows:

a) Company stock. (stock in M&D) The company is currently privately held and its stock is appraised annually. You will be purchasing the stock at a 20% discount from the appraised value. The company is expected to go public in 3 to 5 years. If you need to sell the stock before the company becomes public, the company would buy it back at the then-current appraised value.

b) Vanguard S&P500 Index Fund. This mutual fund tracks the S&P 500 index, so its return is approximately the return on the S&P 500 minus the expenses. Vanguard charges expenses of 0.2% of assets per year

c) Vanguard Small Cap Fund. This fund primarily invests in small capitalization stocks. As such, the returns of the fund are more volatile. The fund charges 1.7% of assets in expenses per year.

d) Vanguard Large Cap Fund. This fund invests primarily in large capitalization stocks of the US companies. The fund manager has outperformed the market in 7 of the last ten years. The fund charges 1.5% in expenses.

Questions:

1. What advantages/disadvantages do the mutual funds offer compared to company stock for your retirement investing?

2. The company matches your contributions up to 5% of your salary. What return on your investment does this represent? What does your answer suggest about matching programs?

3. What are the advantages / disadvantages of choosing Vanguard Large Cap Fund over the Vanguard S&P 500 Index Fund?

4. Why would you consider investing in the Vanguard Small Cap Fund? How do the expenses charged by the fund affect your decision to invest in the fund?

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