Deck 2: Mechanics of Futures Markets

Question 1

An Australian company wishes to sell 1000 bales of cotton if the market price reaches $440 per bale or above. What order should the company place when the current market price for cotton is $380 per bale? __________

Answer 1

limit order with limit price of $440 per bale.

Question 2

In the corn futures contract, a number of different types of corn can be delivered with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true? choose one

A) This flexibility tends to increase the futures price.
B) This flexibility tends to decrease the futures price.
C) This flexibility may increase and may decrease the futures price.
D) This has no effect on the futures price.

Answer 2

This flexibility tends to decrease the futures price.

Question 3

On the floor of a futures exchange, one futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest? choose one

A) No change
B) Decrease by one
C) Decrease by two
D) Increase by one

Answer 3

Decrease by one

Question 4

Which of the following is not true? choose one)

A) Futures contracts nearly always last longer than forward contracts.
B) Futures contracts are standardised; forward contracts are not.
C) Delivery or final cash settlement usually takes place with forward contracts; the same is not true for futures contracts.
D) Forward contracts usually have one specified delivery date; futures contracts often have a range of delivery dates.

Question 5

A company enters into a short futures contract to sell 50 000 units of a commodity for 70 cents per unit. The initial margin is $4000 and the maintenance margin is $3000. What is the futures price per unit, above which there will be a margin call?
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Question 6

The one-year Canadian dollar forward exchange rate is quoted as 1.0500. What is the corresponding futures quote? Give four decimal places. _ _ _ _ _ _

Question 7

Who initiates delivery in a corn futures contract? choose one)

A) The party with the long position
B) The party with the short position
C) Either party
D) The exchange

Question 8

A company enters into a long futures contract to buy 1000 barrels of oil at $60 per barrel. The initial margin is $6000 and the maintenance margin is $4000. What oil futures price will allow $2000 to be withdrawn from the margin account? _______

Question 9

A hedger takes a long position in an oil futures contract on April 1 2014 to hedge an exposure on September 1 2014. The initial futures price is $60. On June 30 2014, the futures price is $61. On September 1 2014, it is $64. The contract is closed out on September 1 2014. What gain is recognised in the financial year July 1 2013 to June 30 2014? Each contract is on 1,000 barrels of oil. _ _ _ _ _ _

Question 10

You sell one December gold futures contract when the futures price is $1010 per ounce. Each contract is on 100 ounces of gold and the initial margin per contract that you provide is $2000. The maintenance margin per contract is $1500. During the next day, the futures price rises to $1012 per ounce. What is the balance of your margin account at the end of the day? _ _ _ _ _ _

Question 11

Which of the following is true? choose one)

A) Both forward and futures contracts are traded on exchanges.
B) Forward contracts are traded on exchanges, but futures contracts are not.
C) Futures contracts are traded on exchanges, but forward contracts are not.
D) Neither futures contracts nor forward contracts are traded on exchanges.

Question 12

What is your answer to question 9 if the trader is a speculator rather than a hedger?
_ _ _ _ _ _