Deck 19: Commodity and Financial Futures Private

Question 1

The amount of margin required to enter into a futures contract is at least 50 percent of the value of the contract.

Answer 1

False

Question 2

Entering a futures contract to sell corn is a long position.

Answer 2

False

Question 3

The investor must maintain a minimum amount of equity (i.e., maintenance margin) to maintain a futures position.

Answer 3

True

Question 4

Investing in futures contracts is considered to be among the riskiest of all investment alternatives.

Question 5

A farmer hedges by simultaneously buying and selling futures contracts.

Question 6

A position in a futures contract is canceled (offset) by entering into the opposite position.

Question 7

If an investor has a short position in corn, the position is closed by buying corn.

Question 8

An important advantage offered investors (speculators) by futures contracts is the large amount of leverage.

Question 9

Investors can only buy futures, since these contracts cannot be sold.

Question 10

If a firm expects to buy a commodity in the future, it may hedge against a price increase by taking a short position in the futures contract.

Question 11

Margin is required only of those investors who take long positions in futures contracts.

Question 12

When an investor sells a contract and subsequentlyoffsets (closes) the position, the individual experiences neither losses nor profits.

Question 13

Entering a futures contract to buy the S&P 500 stock index is a long position.

Question 14

When an investor enters (also referred to as "purchases") commodity contracts, the individual takes physical delivery of the goods.

Question 15

Futures contracts are bought and sold in organizedmarkets such as the Chicago Board of Trade.

Question 16

The Futures Trading Commission enforces the federal laws regulating commodity transactions.

Question 17

The daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.

Question 18

If an investor enters into a contract to sell corn, that position is closed by delivering the contract.

Question 19

Since neither the SEC nor the Federal Reserve have jurisdiction over commodity trading, these markets are unregulated.

Question 20

Since there are many grades of corn, the seller of a futures contract may deliver any type of corn.

Question 21

Investing in futures is

A) investing in physical goods
B) entering into contracts for future delivery
C) executing contracts for prior delivery
D) selling a contract in anticipation of price increases

Question 22

If an individual has a long position in bond futures, that investor is anticipating lower interest rates.

Question 23

Hedging by using commodity futures locks in a price for the supplier of a commodity.

Question 24

Commodity contracts are1. bought and sold through commodity exchanges2. considered to be speculative investments3. permit investors to take either long orshort positions

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 25

Currency futures refer to contracts to buy and sell foreign moneys (i.e., foreign exchange).

Question 26

If an investor expects the stock market to rise, that individual enters into a short position in stock index futures.

Question 27

If a speculator is short and the price of thecommodity rises, the individual1. can expect a margin call2. may take profits out of the position3. may close the position at a loss

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 28

Hedging with commodity futures

A) reduces the risk of loss
B) results when an investor buys a contract
C) occurs when the individual takes delivery
D) is the opposite of selling short

Question 29

Speculators who are short

A) expect prices to rise
B) are not seeking capital gains
C) are hedging their long positions
D) anticipate lower prices

Question 30

Futures contracts offer the advantage of

A) potential leverage
B) liquidity
C) safety
D) tax savings

Question 31

Speculators take the opposite positions of hedgers.

Question 32

The cost of carrying a commodity suggests that thefutures price will be less than the spot price.

Question 33

A currency swap is an agreement to convert paymentsin a foreign currency to payments in the domestic currency.

Question 34

A swap agreement converts a futures contract into aspot contract.

Question 35

A futures contract to take delivery is canceled by

A) entering into a contract to make delivery
B) refusing to take delivery
C) refusing to make delivery
D) letting the contract expire

Question 36

A swap agreement may be used by a financial manager to reduce risk exposure.

Question 37

If the commodity's futures price declines1. the long position profits2. the short position profits3. the buyer of the contract profits4. the seller of the contract profits

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 38

If speculators anticipate interest rates will rise,they enter into contracts to sell bonds.

Question 39

Programmed trading (index arbitrage) transfers changes in the futures markets to the stock markets.

Question 40

The maximum daily price increase that is permittedin the futures markets is

A) the daily limit
B) the daily range
C) $1 per contract
D) 5% per contract

Question 41

Investors acquiring of gold futures contracts

A) do not have to meet margin requirements
B) may anticipated an increase in inflation
C) are considered to have unleveraged positions
D) have less speculative positions

Question 42

If an individual expected securities prices tofall, that investor could1. buy put options2. sell a stock index futures contract3. sell stock short

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 43

A swap agreement may be used to convert

A) variable payments into fixed payments
B) short-term gains into long-term gains
C) bonds into stock
D) futures prices into spot prices
PROBLEMS

Question 44

One use for futures markets is "price discovery," that is, the future price mirrors the current consensus of the future price. If the current price of corn is $2.00 a bushel and the cost of carry is 7 percent, explain what an investor would do if futures price of wheat were $2.40. Is the investor at risk

Question 45

An individual with a large stock portfolio canhedge the position by

A) entering a stock index futures to buy
B) entering a stock index futures to sell
C) selling the stocks
D) maintaining the positions

Question 46

The futures price of gold is $1,000. Futures contracts are for 100 ounces of gold, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price of gold to rise and enters into a contract to buy gold.
a. How much must the speculator initially remit?
b. If the futures price of gold rises to $1,005, what is the profit and return on the position?
c. If the futures price of gold declines to $998, what is the loss on the position?
d. If the futures price declines to $984, what must the speculator do?
e. If the futures price continues to decline to $982, how much does the speculator have in the account?

Question 47

The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.60, what is the profit and return on the position?
c. If the futures price declines to $2.47, what is the loss on the position?
d. If the futures price rises to $2.70, what must the speculator do?
e. If the futures price continues to decline to $2.32, how much does the speculator have in the account?
SOLUTIONS TO PROBLEMS