Question 1

Plutonium is trading at a one-year futures price of $5,000 per gram.A futures contract comprises 100 grams.The initial margin is $100,000 and the maintenance margin is $80,000.You are short one futures contract.There is a margin call when the price per gram of plutonium changes to

A)$4,750
B)$4,900
C)$5,100
D)$5,250

D

Accepted Answer

When you are short a futures contract, a margin call occurs if the price of the underlying asset increases, causing the value of the contract to move against you. The initial margin is $100,000, and the maintenance margin is $80,000. If the price per gram of plutonium increases, you need to calculate at what price the loss on the contract reduces the margin in your account to the maintenance margin level or below. The contract comprises 100 grams, and the initial price is $5,000 per gram, making the initial value of the contract $500,000 (100 grams * $5,000/gram). If the price increases to $5,250 per gram, the new value of the contract is $525,000 (100 grams * $5,250/gram). The loss on the contract is $25,000 ($525,000 - $500,000), which would reduce the margin in the account to $75,000 ($100,000 initial margin - $25,000 loss), triggering a margin call since it falls below the maintenance margin of $80,000.

Question 2

You go short oil 10 futures contracts on NYMEX when the futures price of oil is $79 a barrel and close out your position three days later at a futures price of $83 a barrel.One futures contract is for 1,000 barrels.Ignoring interest on the margin account,the futures trading has resulted in a

A)Gain of $790,000.
B)Loss of $4,000
C)Gain of $4,000
D)Loss of $40,000

D

Accepted Answer

Since you shorted 10 futures contracts, you sold 10,000 barrels of oil at $79 per barrel. Three days later, you bought back those 10,000 barrels at $83 per barrel. The profit/loss can be calculated as follows:
Profit/Loss = (Sell Price - Buy Price) x Number of Barrels
Profit/Loss = ($79 - $83) x 10,000
Profit/Loss = -$40,000
Therefore, you have made a loss of $40,000 from this futures trading. Option D is the only choice that indicates a loss of $40,000.

Question 3

The cheapest-to-deliver option&#10;A)Hurts the holder of the long position in the futures contract.&#10;B)Improves the quality of the position hedged by the futures.&#10;C)Makes it easy to price the futures contract.&#10;D)Makes it easier for market players to implement short squeezes.

Accepted Answer

The cheapest-to-deliver option refers to the cheapest underlying asset that can be delivered to fulfill a futures contract. This option hurts the holder of the long position in the futures contract because they will receive the cheapest asset possible, even if it is of lower quality or value than they expected. This is why it is important for the long position holder to do their due diligence in selecting a futures contract with a favorable delivery option.

Question 4

An investor enters into a long position in 10 gold futures contracts at a futures price of $1000/oz and closes out the position at a price of $1020/oz.If one gold futures contract is for 50 ounces,what are the investor's gains or losses?

A)$100
B)$1,000
C)$5,000
D)$10,000

Accepted Answer

First, calculate the initial value of the position:

10 contracts x 50 oz/contract x $1000/oz = $5,000,000

Then, calculate the final value of the position:

10 contracts x 50 oz/contract x $1020/oz = $5,100,000

The investor's profit is the difference between the final value and the initial value:

$5,100,000 - $5,000,000 = $100,000

Therefore, the answer is D) $10,000.

Question 5

A calendar spread futures position comprises&#10;A)A long position in a futures contract of one maturity and a short position in another futures contract of a different maturity.&#10;B)A contract on the difference between two different-maturity futures prices.&#10;C)A portfolio of long futures contracts of different maturities.&#10;D)A portfolio of futures contracts spanning more than one year.

Accepted Answer

A calendar spread futures position involves simultaneously taking a long position in a futures contract of one maturity and a short position in another futures contract of a different maturity. This strategy can be used to capture price differences between the two contracts and can be a way to manage risk in a futures trading portfolio.

Question 6

For a futures contract on an asset to be successful compared to the alternative of forward contracts,which of the following features would help?&#10;A)The most appropriate standardized grade for the contract is difficult to identify.&#10;B)Counterparty credit risk is high.&#10;C)Bid-ask spreads in the spot market are high.&#10;D)The underlying spot asset is difficult to short.

Accepted Answer

Counterparty credit risk is high in forward contracts because they are private agreements between two parties. Futures contracts, traded on exchanges, mitigate this risk through daily settlements and the backing of the clearinghouse, making them more attractive in scenarios where counterparty credit risk is a concern.

Question 7

A price tick is&#10;A)The maximum amount by which the price can move in a day.&#10;B)The minimum amount by which the price can move.&#10;C)The bid-ask spread on the price.&#10;D)The minimum amount of trading required on the exchange per trade.

Accepted Answer

A price tick is the minimum increment by which the price of a security can move. It represents the smallest possible change in price, typically expressed as a fraction of a unit of currency. Therefore, option B, which states that a price tick is the minimum amount by which the price can move, is the correct choice.

Question 8

The level of margining in a futures contract takes as an important input&#10;A)The trading volume that underlies the contract.&#10;B)The credit quality of counterparties trading in the futures market.&#10;C)The volatility of the asset underlying the futures contract.&#10;D)The difference between the initial and maintenance margin in the futures.

Accepted Answer

The level of margining in a futures contract takes into account the volatility of the asset underlying the futures contract. This is because the more volatile the asset, the greater the risk of losses incurred by the parties involved in the trade. Therefore, higher levels of margin are required to protect against this risk. The trading volume, credit quality of counterparties, and the difference between initial and maintenance margin may also be considered but are not as significant as the volatility of the underlying asset.

Question 9

When the futures-spot basis weakens&#10;A)The difference between futures and spot prices drops.&#10;B)The correlation between changes in futures and spot prices drops.&#10;C)A hedger experiences more risk.&#10;D)A hedger loses money on the hedge.

Accepted Answer

When the futures-spot basis weakens, it means that the difference between futures and spot prices is decreasing. Therefore, Choice A is the correct answer.

Question 10

Futures contracts are more likely to be cash-settled when&#10;A)The asset underlying the contract is too costly to deliver physically.&#10;B)There is no &#34;underlying&#34; for the futures contract.&#10;C)There are more futures contracts in notional value than the physical stock of the underlying asset.&#10;D)The maturity date of the futures is not the last day of the month.

Accepted Answer

(Note that c is also sometimes specified as a possible reason,but is not always valid. )

Question 11

A &#34;stack-and-roll&#34; strategy makes profits from the &#34;roll&#34; part when&#10;A)The market is in backwardation.&#10;B)The market is in contango.&#10;C)There is a sharp fall in commodity prices.&#10;D)The correlation between long- and short-term futures prices is less than 0.5.

Accepted Answer

The answer of A &#34;stack-and-roll&#34; strategy makes profits from the...

Question 12

When a counterparty to a futures contract fails to perform under the contract,&#10;A)The futures exchange informs the party on the other side of the amount of loss they will bear.&#10;B)The futures exchange bears the loss,&#10;C)The futures exchange sues the failed counterparty.&#10;D)The futures exchange replaces the failed counterparty with a solvent one.

Accepted Answer

The answer of When a counterparty to a futures contract...

Question 13

In the absence of arbitrage,the futures price at maturity should equal&#10;A)The price at inception plus interest on the margin account for the period of the contract.&#10;B)The spot price of the underlying asset at that point.&#10;C)The price at inception plus the storage cost for the asset over the contract period.&#10;D)The price of the underlying asset minus a convenience yield.

Accepted Answer

The answer of In the absence of arbitrage,the futures price...

Question 14

Which of the following types of orders does not involve specifying a price limit or trigger price as part of the order?&#10;A)Stop order.&#10;B)Market-if-touched order.&#10;C)A fill-or-kill limit order.&#10;D)A spread order.

Accepted Answer

The answer of Which of the following types of orders...

Question 15

September corn futures are currently trading at $3.80 a bushel while the spot price of corn is $3.65 a bushel,so the "basis" (the futures price minus the spot price)is $0.15 a bushel.If you expect the basis to weaken (i.e. ,to fall)significantly in the next few days,you can speculate on your view by

A)Going long the September futures contract.
B)Going long spot corn.
C)Going long spot corn and short September futures.
D)Going long September futures and short spot corn.

Accepted Answer

The answer of September corn futures are currently trading at...

Question 16

March what futures are trading at $4.20 a bushel and May wheat futures are trading at $4.35 a bushel.You expect the spread between May and March futures prices to widen.To speculate on this view,you would

A)Go long March futures and short May futures.
B)Go long May futures and short March futures.
C)Go long May futures.
D)Go long March futures.

Accepted Answer

The answer of March what futures are trading at $4.20...

Question 17

The most widely traded futures are of the following type:&#10;A)Equity.&#10;B)Interest rate.&#10;C)Agricultural.&#10;D)Commodity.

Accepted Answer

The answer of The most widely traded futures are of...

Question 18

Which of the following features distinguish futures markets from forwards markets?&#10;A)Standardization of contracts.&#10;B)The use of margin accounts to manage risk.&#10;C)Ease in reversing positions.&#10;D)All of the above.

Accepted Answer

The answer of Which of the following features distinguish futures...

Question 19

If the market is in backwardation&#10;A)Spot prices are less than forward prices.&#10;B)Futures prices are less than forward prices.&#10;C)Spot prices are less than futures prices.&#10;D)None of the above.

Accepted Answer

The answer of If the market is in backwardation&#10;A)Spot prices...

Question 20

Ignoring convenience yields,the theoretical futures price for a commodity with a positive cost of carry should typically exhibit&#10;A)Backwardation.&#10;B)Contango.&#10;C)Either backwardation or contango depending on the delivery month.&#10;D)Either backwardation or contango depending on the initial level of the spot price.

Accepted Answer

The answer of Ignoring convenience yields,the theoretical futures price for...

Deck 2: Futures Markets