Deck 29: Futures and Swaps

Question 1

Selling a commodity futures (entering a contract to make delivery) is a long position.​

Answer 1

False

Question 2

A grower of corn enters a contract to make future delivery of corn to reduce the risk of loss from price fluctuations.​

Answer 2

True

Question 3

The buyers (the longs) and not the sellers (the shorts) must make margin payments when speculating with futures contracts.​

Answer 3

False

Question 4

A user of corn enters a contract to make future delivery of corn to reduce the risk of loss from price fluctuations.​

Question 5

Entering a futures contracts is not speculative because commodity prices are stable.​

Question 6

A speculator who anticipates prices rising establishes a short position.​

Question 7

The user of a commodity such as wheat hedges against a price increase by entering a contract to deliver wheat.​

Question 8

A speculator must make a good faith deposit after entering a futures contract to buy wheat.​

Question 9

A speculator who expects interest rates to fall enters a contract to buy (i.e., accept delivery) of Treasury bills.​

Question 10

The primary reason for selling a futures contract (i.e., making a contract to deliver) is the expectation of higher prices.​

Question 11

The speculator must make a good faith deposit after entering a futures contract to sell.​

Question 12

A long position in a futures contract can be canceled by selling a futures contract (i.e., a contract to make delivery).​

Question 13

As a result of the small margin requirements, investing in futures contracts is considered risky.​

Question 14

A futures contract to make delivery is a short position.​

Question 15

The amount of margin required to buy a futures contract is equal to 50 percent of the value of the contract.​

Question 16

If a speculator has a short position and the commodity's price falls, that individual will receive a margin call.​

Question 17

If an individual enters a contract to accept future delivery of Treasury bonds, that is a long position.​

Question 18

Hedgers enter commodity futures contracts because the contracts offer leverage.​

Question 19

An investor who expects the stock market to rise should enter a stock index futures contract to sell (make delivery).​

Question 20

If a speculator enters a futures contract to sell (make delivery), that individual anticipates selling the commodity.​

Question 21

Swap agreements​

A) ​transfer ownership
B) ​transfer liabilities
C) ​transfer payments
D) ​transfer tax obligations

Question 22

Hedging with commodity futures contracts​

A) ​increases price fluctuations
B) ​reduces the risk of loss from price fluctuations
C) ​increases the potential return
D) ​does not require margin delivery

Question 23

If the futures price falls,​
1) the short position sustains a profit
2) the short position sustains a loss
3) the long position sustains a loss
4) the long position sustains a profit

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

Question 24

Speculators reduce risk of loss by buying instead of selling stock index futures.​

Question 25

If a lender agrees to lend a firm $1,000,000 after six months at the going rate, that individual can hedge against the loss from a decline in interest rates by

A) ​buying a financial futures contract
B) ​selling a financial futures contract
C) ​taking a short position
D) ​making the loan now

Question 26

Which of the following statements are true concerning stock index futures?
​1) Stock index futures may be used to hedge against stock prices rising.
2) Stock index futures require substantial margin and are a source of financial leverage.
3) Stock index futures are settled in cash and not in delivery.
4) Stock index futures are settle in specific securities.

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

Question 27

Swap agreements are one means to help manage risk. tures.​

Question 28

​The margin requirement for a futures contract is a
1) small percent of the value of the contract
2) large percent of the value of the contract
3) source of leverage

A)1 and 2
B)​1 and 3
C)​2 and 3
D)​only 3

Question 29

If a financial manager must sell a product in the​ future that is currently being manufactured, that individual may reduce the risk of loss from a price decline by
1) entering a futures contract to sell the good
2) entering a futures contract to buy the good
3) establishing a short position
4) establishing a long position

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

Question 30

Small margin requirements for futures contracts implies
1) the potential profit is magnified
2) the potential loss is magnified
3) the speculator's risk exposure is increased
4) the speculator's risk exposure is decreased​

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

Question 31

The futures price and the spot price must be equal

A) ​when the contract is sold
B) ​when the contract is bought
C) ​when the contract is canceled
D) ​when the contract expires

Question 32

If interest rates increase, the short sellers of Treasury bond futures profit. accepting delivery.​

Question 33

When a stock index futures contract expires, the buyer takes delivery of the securities.​

Question 34

If an individual has a contract to accept future delivery of Treasury bills, the individual cannot close the contract without accepting delivery.​

Question 35

​If the futures price of a commodity rises,
1) the long position sustains a loss
2) the long position experiences a profit
3) the short position sustains a loss
4) the short position experiences a profit

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

Question 36

When speculators invest in commodity futures, they​

A) ​enter contracts to make future delivery
B) ​enter contracts to accept future delivery
C) ​either enter contracts to make or accept future delivery
D) ​rarely experience losses

Question 37

The futures price of a metal is $250 an ounce. Futures contracts are for 100 ounces, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price to rise and enters into a contract to buy the metal.​ a. How much must the speculat or initially remit?
b. If the futures price rises to $\$ 255$ , what is the profit and return on the position?
c. If the futures price declines to $\$ 2.48$ , what is the loss on the position?
f. If the futures price declines to $\$ 2.34$ , 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? ​

Question 38

A swap agreement transfers ownership in a stock from the seller to the buyer.​

Question 39

When a speculator invests in a financial futures contract, the individual

A) ​enters a contract to make future delivery
B) ​enters a contract to accept future delivery
C) ​either enters a contract to make or to accept future delivery
D) ​hedges to reduce the risk of loss

Question 40

If the firm must buy silver in the future and thus pay for the metal in the future, management may reduce the risk of loss from an increase in the price of silver by

A) ​taking a long position and entering a contract to buy silver
B) ​taking a short position and entering a contract to deliver silver
C) ​accepting delivery early
D) ​refusing to accept delivery if the price rises