Deck 15: Commodities and Financial Futures

Question 1

The commodities exchanges are regulated primarily by the SEC.

Answer 1

False
Explanation: The activities of the commodity exchanges are primarily regulated by the Commodity Futures Trading Commission (CFTC), a federal regulatory agency established by Congress in 1975. The CFTC has had a number of jurisdictional disputes with the SEC over the regulation of financial futures.

Question 2

Commodity trading is based on the use of margin rather than actual cash dollars.

Answer 2

True
Explanation: Commodity trading is based on the use of margin rather than on actual cash dollars.

Question 3

Cross-hedging refers to the practice of using one form of security to reduce risk on another form of security.

Answer 3

True
Explanation: Cross-hedging occurs by using one form of security (Treasury bonds) to hedge another form of security (corporate bonds). This is often necessary. Even when the same security is used, there may be differences in maturity dates, so that a perfect hedge is difficult to establish.

Question 4

Most commodity futures contracts are closed out before the actual transaction is to take place.

Question 5

A hedger reduces risk of loss and enhances additional profit opportunities.

Question 6

Speculators are not significant participants in the commodities markets.

Question 7

The commodity exchanges are primarily regulated by the Federal Reserve.

Question 8

Corporate financial managers use interest rate futures to reduce the risk of loss from a change in interest rates.

Question 9

The use of financial futures will most likely increase as financial managers gain a greater understanding and appreciation of their uses.

Question 10

As in the stock and bond markets, interest is paid on a margined commodity contract.

Question 11

Trading in financial futures is similar to trading in commodities except for considerably higher margin requirements for financial futures.

Question 12

Commodities can usually be purchased with a very small margin requirement.

Question 13

Because of price movement limitations, the commodities market is not always in equilibrium.

Question 14

To close a position, the seller/buyer of a contract would buy/sell a similar contract.

Question 15

A requirement of a futures contract is that the buyer takes possession on a given date.

Question 16

Hedging is the basic reason for the existence of the commodity exchanges.

Question 17

For a hedge to work, the futures contract must continue until actual delivery takes place.

Question 18

The margin requirement on commodities futures is generally the same as or lower than financial futures.

Question 19

The futures markets were originally set up to allow livestock producers to speculate in their positions in a given commodity.

Question 20

Initial margin requirements usually run 70-80% of the contract price.

Question 21

Which of the following is not one of the primary categories of commodities?

A)Food and fiber
B)Wood
C)Gemstones
D)All of the above are primary categories

Question 22

The primary participants in the commodities market include both the speculators and the hedgers.

Question 23

Hedging through futures contracts:

A)increases risk of loss if prices fall.
B)eliminates profit maximization potential.
C)is considered to be speculative in nature.
D)All of the above

Question 24

Prices in the cash market are somewhat dependent on prices in the futures market.

Question 25

The high risk in commodities contracts is due primarily to the volatility of price movements.

Question 26

Cash prices and spot prices are very different in nature.

Question 27

There is no real difference in loss potential in the options and the commodities markets.

Question 28

A(n) ______ contract is an agreement which provides for the delivery of a given amount of something at a given time in the future, at a given price.

A)seasonal
B)futures
C)options
D)None of the above

Question 29

Commodity exchanges do not limit maximum daily price movements.

Question 30

Margin requirements on commodities are much higher than those on common stock transactions.

Question 31

Treasury bonds are quoted in percent of par, taken to a 32^nd of a percentage point.

Question 32

Treasury bond futures trade on the New York Stock Exchange.

Question 33

An example of an interest rate futures contract would be a Treasury bill future.

Question 34

The basic premise behind interest rate swaps is that one party is able to trade one type of risk exposure for another.

Question 35

The margin requirement, relative to size, is less for financial futures than traditional commodities.

Question 36

If a corporate treasurer wants to hedge against interest rate increases on a new bond issue to be floated, he can sell short in the futures market.

Question 37

The daily trading limits do not affect the efficiency of the market much because the commodity exchanges place very broad limitations on maximum daily price movements.

Question 38

A cross hedge uses the same form of security to hedge against potential rate changes, even though there may be different maturity dates in the securities.

Question 39

If a financial manager wishes to protect against an interest rate drop, he can go long in the futures market.

Question 40

Margin maintenance requirements usually run 5-10% of the initial margin.

Question 41

Which of the following is not a major category of financial futures?

A)Commodity futures
B)Currency futures
C)Interest rate futures
D)Stock index futures
E)None of the above are major categories

Question 42

The New York Futures Exchange specializes in:

A)transactions involving companies listed on AMEX and NYSE.
B)American-produced commodities.
C)financial futures.
D)grains and livestock.
E)More than one of the above

Question 43

The interest rate futures market includes all of the following except:

A)Treasury bonds, notes and bills.
B)Eurodollars.
C)GNMA certificates and bank CDs.
D)All of the above are traded in the interest rate futures market

Question 44

Which of the following exchanges is more important within the financial futures market?

A)AMEX Commodity Exchange
B)New York Futures Exchange
C)IMM of the Chicago Mercantile Exchange
D)May be either A or B

Question 45

The difference between the cash market and the futures market is:

A)that commodity prices cannot be negotiated in the futures market, while they can be in the cash market.
B)that larger margins are used in the cash market.
C)that in the cash market, there must be a transfer of the physical possession of the goods.
D)that the commodities are usually less expensive in the futures market.

Question 46

The settle price is the same as the:

A)opening price.
B)closing price.
C)intraday high price.
D)None of the above

Question 47

The high-risk, speculative nature of commodities futures is due primarily to:

A)the presence of hedgers in the markets.
B)high leverage brought about by low margin requirements.
C)Both A and B
D)None of the above

Question 48

Assume you have just purchased a corn futures contract for 5,000 bushels at $3.24 per bushel. What will your percentage profit on the cash investment be if the price of corn rises $.10 per bushel in 4 months? Your initial margin requirement was $1,500.

A)3.1%
B)33%
C)9.2%
D)None of the above

Question 49

All of the following are characteristics of the cash market except:

A)that the spot price represents the actual dollar value for the immediate transfer of a commodity.
B)that there must be a transfer of the actual physical possession of the goods.
C)that prices in the cash market are independent of prices in the futures market.
D)All of the above are characteristics of the cash market

Question 50

The financial futures market has evolved recently because of:

A)volatility and risk in the foreign exchange markets.
B)the volatility of interest rates.
C)appeal to speculators due to low margin requirements.
D)All of the above

Question 51

Margin requirements on commodities contracts:

A)are much higher than those on common stock transactions.
B)vary over time, and even among exchanges, for a given commodity.
C)typically are 2-10% of the value of the contract.
D)None of the above are true

Question 52

Assume you have purchased a contract for 25,000 British pounds for $35,000. Your margin requirement is $2,000. If the value of a pound increases .01, what is your percentage profit?

A)10.0%
B)12.5%
C)15.0%
D)8.0%
E)None of the above

Question 53

Which of the following statements about the margin requirements on commodities contracts is NOT true?

A)Use of margin is less common than trading with actual cash dollars
B)They are generally much lower than those on stock transactions
C)It is merely a good faith payment against losses
D)All of the above are true

Question 54

Financial futures consist of:

A)gold and foreign currencies.
B)foreign exchange and interest rate futures.
C)corporate bonds and common stock.
D)None of the above

Question 55

The primary difference between options and futures is that:

A)the option premium is the full liability of the purchaser, while a futures contract may call for additional margin to hold the position.
B)options are more speculative than futures.
C)futures require the physical transfer of goods, while options do not.
D)More than one of the above

Question 56

The difference between speculators and hedgers is that speculators are ______, while hedgers are _____.

A)risk-takers; risk-averters
B)individual investors; financial managers
C)short term; long-term
D)None of the above

Question 57

While hedging through interest rate futures reduces or eliminates the risk of loss, it also:

A)is illegal in some cases.
B)has not been accepted by most corporate financial managers.
C)eliminates the possibility of an abnormal gain.
D)None of the above

Question 58

Commodity trading is based on the use of:

A)actual dollars.
B)a margin.
C)a hedge.
D)fictitious money.

Question 59

Corn futures are traded on the:

A)New York Futures Exchange.
B)Chicago Board of Trade.
C)International Money Market of the CME.
D)All of the above

Question 60

In what city are the two largest commodities exchanges?

A)Chicago
B)New York
C)Kansas City
D)Minneapolis

Question 61

Given a 5,000 bushel futures contract on grain at a price of $3.25 per bushel, a margin requirement of 5%, and a maintenance margin of 80%, your customer wants to know (for a single contract) how much would the price per bushel have to fall before additional margin would be required?

Question 62

A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the annualized gain?

A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%

Question 63

Margin maintenance contracts normally represent what percent of the initial margin?

A)2-10%
B)20-50%
C)60-80%
D)100%

Question 64

You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. If you wanted to hedge one-half of your exposure to a drop in the value of soybeans, how many futures contracts would you buy or sell?

A)Sell 16 futures contracts
B)Buy 16 futures contracts
C)Sell 8 futures contracts
D)Buy 8 futures contracts
E)Sell 4 futures contracts

Question 65

Interest rate swaps are __________ structured than futures and options contracts.

A)usually less
B)usually more
C)always more
D)Never less

Question 66

If a pension fund manager is afraid interest rates may go down on his short-term portfolio of 90-day Treasury bills, he could hedge by going:

A)long on Treasury bill futures contracts.
B)short (sell) on Treasury bill futures contracts.
C)long on U.S. dollar contracts.
D)short (sell) on the U.S. dollar contracts.

Question 67

If a $100,000 Treasury bond futures contract changes by 15/32, what is the dollar change?

Question 68

Using paper gains to expand the number of contracts outstanding is referred to as:

A)horizontal pyramiding.
B)vertical pyramiding.
C)reserve pyramiding.
D)inverse pyramiding.

Question 69

A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the percentage of profit?

A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%

Question 70

A banker who is paying a fixed 6% rate on CDs for the next two years, and is afraid interest rates may go down on new loans, may hedge this exposure with interest rate swaps by:

A)swapping a fixed rate for a variable rate.
B)swapping a variable rate for a fixed rate.
C)swapping short-term exposure for long-term exposure.
D)swapping long-term exposure for short-term exposure.

Question 71

The currency futures market is different than the other types of futures markets, because:

A)the contracts are standardized.
B)the currency futures market provides a strong secondary market.
C)the currency market has communication networks throughout the world, whereas the other ones do not.
D)A and B

Question 72

You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. You decide to hedge one-half of your exposure to a drop in the value of soybeans. Assume that in three months, when you take the soybeans to market, you close out the futures contracts and the price has fallen to $5.80. What was your overall net gain or loss when considering the actual gain or loss when taking the actual soybeans to market and the partial hedge in the futures market?

A)$800 gain
B)$800 loss
C)$400 gain
D)$400 loss
E)$320 gain

Question 73

An interest rate futures contract represents a bet or hedge on:

A)the direction of future interest rates.
B)the direction of future bond prices.
C)the expectation of future interest rates.
D)All of the above

Question 74

In the futures market, the yen may strengthen against the dollar for all of the following reasons except:

A)declining inflation in Japan.
B)increasing inflation in the U.S.
C)decreasing Japanese interest rates.
D)decreasing U.S. interest rates.

Question 75

An investor may be asked to put up more margin if:

A)the price of the commodity goes up in a long position.
B)the price of the commodity goes down in a short position.
C)the price of the commodity goes up in a short position.
D)the contract has less than one week to run.

Question 76

An investor controls contracts on five 5,000 bushel futures contracts on grain, at a price of $3 per bushel. The margin requirement is 5%, and the maintenance margin is 80%. How much would the price per bushel have to change to provide a $750 profit?

Question 77

Given a 5,000 bushel futures contract on grain at a price of $2.75 per bushel, where the margin requirement is 5%, and the maintenance margin is 80%. What would the return on investment be if the price increases by $.08 per bushel?

Question 78

You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. You decide to hedge one-half of your exposure to a drop in the value of soybeans. Assume that in three months, when you take the soybeans to market, you close out the futures contracts and the price has fallen to $5.80. What is the total loss in value over the three months on the actual soybeans you produced and took to market?

A)$2,400
B)$2,000
C)$6,400
D)$4,000
E)$3,200

Question 79

As opposed to a farmer, a miller (processor of wheat) is likely to go __________ in the futures market.

A)long
B)short
C)long and short
D)around in circles