Deck 21: Commodity and Financial Futures

Question 1

If a firm expects to buy a commodity in the future,it may hedge against a price increase by taking a short position in the futures contract.

Answer 1

False

Question 2

Futures contracts are bought and sold in organized markets such as the Chicago Board of Trade.

Answer 2

True

Question 3

If an investor enters into a contract to sell corn,that position is closed by delivering the contract.

Answer 3

False

Question 4

Investing in futures contracts is considered to be among the riskiest of all investment alternatives.

Question 5

The Futures Trading Commission enforces the federal laws regulating commodity transactions.

Question 6

The daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.

Question 7

Since the SEC does not have jurisdiction over commodity trading,these markets are unregulated.

Question 8

Since there are many grades of corn,the seller of a contract may deliver any type of corn.

Question 9

When an investor sells a contract and subsequently offsets (closes)the position,the individual experiences neither losses nor profits.

Question 10

Selling a commodity contract is a long position.

Question 11

A position in a futures contract is canceled (offset)by entering into the opposite position.

Question 12

Investors can only buy futures,since these contracts cannot be sold.

Question 13

The amount of margin required to enter into a futures contract is at least 50 percent of the value of the contract.

Question 14

When an investor purchases commodity contracts,the individual takes physical delivery of the goods.

Question 15

Buying a futures contract is a long position.

Question 16

If an investor has a short position in corn,the position is closed by buying corn.

Question 17

The primary advantage offered investors (speculators)by commodity futures is the large amount of leverage.

Question 18

A farmer hedges by simultaneously buying and selling futures contracts.

Question 19

The investor must maintain a minimum amount of equity (i.e.,maintenance margin)to maintain a futures position.

Question 20

Margin is required only of those investors who take long positions in futures contracts.

Question 21

If the commodity's futures price declines 1.the long position profits
2)the short position profits
3)the buyer of the contract profits
4)the seller of the contract profits

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

Question 22

Hedging with commodity futures

A) reduces the risk of loss
B) results when an investor buys a contract
C) occurs when the individual takes delivery
D) is the opposite of selling short

Question 23

If an investor expects the stock market to rise,that individual enters into a short position in stock index futures.

Question 24

Speculators who are short

A) expect prices to rise
B) are not seeking capital gains
C) are hedging their long positions
D) anticipate lower prices

Question 25

The cost of carrying a commodity suggests that the futures price will be less than the spot price.

Question 26

If speculators anticipate interest rates will rise,they enter into contracts to sell bonds.

Question 27

A swap agreement converts a futures contract into a spot contract.

Question 28

Currency futures refer to contracts to buy and sell foreign monies (i.e.,foreign exchange).

Question 29

Hedging using commodity futures locks in a price for the supplier of a commodity.

Question 30

If an individual has a long position in bond futures,that investor is anticipating lower interest rates.

Question 31

A currency swap is an agreement to convert payments in a foreign currency to payments in the domestic currency.

Question 32

Programmed trading (index arbitrage)transfers changes in the futures markets to the stock market.

Question 33

Futures contracts offer the advantage of

A) potential leverage
B) liquidity
C) safety
D) tax savings

Question 34

The maximum daily price increase that is permitted in futures markets is

A) the daily limit
B) the daily range
C) $1 per contract
D) 5% per contract

Question 35

A futures contract to take delivery is canceled by

A) entering into a contract to make delivery
B) refusing to take delivery
C) refusing to make delivery
D) letting the contract expire

Question 36

Investing in futures is

A) investing in physical goods
B) entering into contracts for future delivery
C) executing contracts for prior delivery
D) selling a contract in anticipation of price increases

Question 37

If a speculator is short and the price of the commodity rises,the individual 1.can expect a margin call
2)may take profits out of the position
3)may close the position at a loss

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 38

Commodity contracts 1.are bought and sold through commodity exchanges
2)are considered to be speculative investments
3)permit investors to take either long or short positions

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 39

Swap agreements are tools that help financial managers reduce their risk exposure.

Question 40

Speculators take the opposite positions of hedgers.

Question 41

A swap agreement may be used to convert

A) variable payments into fixed payments
B) short-term gains into long-term gains
C) bonds into stock
D) futures prices into spot prices

Question 42

An individual with a large stock portfolio can hedge the position by

A) buying a stock index futures
B) selling a stock index futures
C) selling the stocks
D) maintaining the position

Question 43

If an individual expected securities prices to fall,that investor could
1)buy put options
2)sell a stock index futures contract
3)sell stock short

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of these choices

Question 44

The futures price of gold is $250.Futures contracts are for 100 ounces of gold,and the margin requirement is $3,000 a contract.The maintenance market requirement is $1,500.A speculator expects the price of gold to rise and enters into a contract to buy gold.
a.How much must the speculator initially remit?
b.If the futures price of gold rises to $255,what is the profit and return on the position?
c.If the futures price of gold declines to $2.48,what is the loss on the position?
d.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 45

One use for futures markets is "price discovery," that is,the futures price mirrors the current consensus of the futures price.If the current price of corn is $2.00 a bushel and the cost of carry is 7 percent,explain what an investor would do if the futures price of corn were $2.40.Is the investor at risk?