Deck 21: Principles of the Futures Market

Question 1

Options are _____; futures are _____.

A) rights, promises
B) securities, contracts
C) paid for, margined
D) all of the above

Answer 1

all of the above

Question 2

The cash price is also called the

A) delivery price
B) settlement price
C) spot price
D) bid price

Answer 2

spot price

Question 3

The primary economic purpose of the futures market is

A) risk transfer
B) income generation
C) time value of money adjustments
D) speculation

Answer 3

risk transfer

Question 4

The clearing corporation helps eliminate

A) credit risk
B) the risk of crop failure
C) the risk of poor crop prices
D) liquidity risk

Question 5

Futures trades occur in an area called a(n)

A) arena
B) ring
C) pit
D) box

Question 6

The money a futures buyer puts down is called all of the following EXCEPT

A) premium
B) good faith deposit
C) margin
D) performance bond

Question 7

People who seek to reduce risk using futures contracts are

A) speculators
B) investors
C) gamblers
D) hedgers

Question 8

In some respects, speculators sell

A) time value
B) risk
C) insurance
D) improved credit ratings

Question 9

Someone who routinely maintains a futures position overnight is likely to be any of the following EXCEPT

A) scalper
B) position trader
C) speculator
D) hedger

Question 10

A major function of the clearing process is

A) risk reduction
B) matching trades
C) finding willing buyers
D) finding willing sellers

Question 11

The newspaper price for a particular futures contract is properly called the

A) bid price
B) ask price
C) closing price
D) settlement price

Question 12

The prices of some futures contracts are constrained by

A) initial margin requirements
B) variation margin requirements
C) daily price limits
D) capital constraints

Question 13

The three main paradigms in futures pricing include all of the following EXCEPT

A) the expectations hypothesis
B) normal backwardation
C) a full carrying charge market
D) supply and demand

Question 14

According to John Maynard Keynes, futures prices are

A) unbiased
B) biased downward
C) biased upward
D) biased either upward or downward

Question 15

The difference between a futures price and the cash price is known as the

A) basis
B) settlement price
C) vigorish
D) spread

Question 16

A futures contract represents a promise of deliver or acceptance of a commodity in a future month. A characteristic of futures contracts is that

A) this exchange occurs for 98% of all contracts
B) fewer than 2% actually result in delivery
C) they cannot be created or destroyed
D) they have no effect on the risk of the parties to the contracts

Question 17

The Clearing Corporation

A) establishes the margin requirements for futures contracts
B) ensures the integrity of each futures contract
C) often takes an opposite position in a futures contract to make the market seem continuous
D) is the primary market for futures contracts

Question 18

Hedgers in the futures market

A) often seek to leverage their position to get extra expected return
B) primarily sell risk to speculators
C) trim their holdings to the highest expected returns securities
D) diversify their investments to maximize expected return while reducing risk

Question 19

Futures contracts are marked to market, which means that

A) the gains or losses are cash settled at the end of each day
B) each contract is marked with an X when they are bought or sold
C) all contracts are sent to the Clearing Corporation where they are settled
D) all contracts have an official serial number issued by the Clearing Corporation