Deck 15: Commodities and Financial Futures

Question 1

All futures contracts trade continuously between 7:30 a.m.and 2:00 p.m., Monday through Friday.

Answer 1

False

Question 2

Which of the following are specifically stated in futures contracts?
I)the quantity of the commodity to be delivered.
II)the quality of the commodity to be delivered.
III)the exact price at which the commodity must be delivered
V)the time and place at which the commodity must be delivered

A) I and II only
B) II and IV only
C) I, II and III only
D) I, II, and IV only

Answer 2

D

Question 3

The use of futures contracts for commodities is a key method of controlling risk.

Answer 3

True

Question 4

Because a futures contract deals with very large trading units, even a modest price change in the price of the underlying commodity can have a large impact on the market value of the contract.

Question 5

The majority of trading in futures contracts takes place on
I)the Chicago Mercantile Exchange
II)the Chicago Board of Trade
III)the American Exchange
IV)the New York Mercantile Exchange

A) I and III only
B) II and IV only
C) I, II, and IV only
D) I, II, III, and IV

Question 6

Which of the following characteristics apply to futures contracts?
I)Futures contracts are an important tool to control risk.
II)Futures contracts are highly risky and involve speculation.
III)Futures contracts specify both the quantity and the quality of the item.
IV)The buyer must hold the contract until maturity.

A) I and II only
B) II and IV only
C) I, II and III only
D) I, II, III and IV

Question 7

With a futures contract, an investor cannot lose more than the price of the contract itself.

Question 8

The amount paid at the time a futures contract is sold

A) represents the maximum loss for the buyer of the contract.
B) represents the maximum profit for the buyer of the contract.
C) is simply a refundable security deposit.
D) is the total value of the goods being traded in the future.

Question 9

Unlike stocks and bonds, futures contracts trade only at specific times during normal working hours.

Question 10

The Chicago Mercantile Exchange recently merged with

A) the Chicago Board of Trade
B) the American Exchange
C) the New York Mercantile Exchange
D) NASDAQ

Question 11

A futures contract
I)obligates the buyer of the contract to buy a specified amount of a commodity.
II)grants the buyer the right to either buy or sell a specified amount of a commodity.
III)uses specified settle prices that vary with the type of commodity.
IV)establishes the delivery price based on the selling price of the futures contract.

A) I and III only
B) I and IV only
C) II and III only
D) II and IV only

Question 12

The maximum loss on a futures contract is the price paid for the contract.

Question 13

The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.

Question 14

The seller of a futures contract

A) has the option of canceling the contract the following day if the price is not acceptable to him/her.
B) is legally bound to make delivery of the specified item on the specified day.
C) receives the entire contract amount at the time the contract is made.
D) must make delivery before receiving any monies on the contract.

Question 15

An investor's margin in a futures contract is checked each day under a procedure known as mark-to-the-market.

Question 16

Commodity prices react to a unique set of economic, political, and international pressures, as well as to the weather.

Question 17

The normal initial margin requirement for commodities or financial futures ranges from about 2% to 10% of the value of the contract.

Question 18

With futures contracts, the price at which the commodity must be delivered is

A) set when the futures contract is sold.
B) set when the contract expires.
C) is equivalent to the strike price for an options contract.
D) changes frequently during the life of the contract.

Question 19

Speculators provide liquidity to the futures market.

Question 20

All trading in the futures market is done on a margin basis.

Question 21

Fred purchased a futures contract on live hogs through Broker A.After purchasing the contract, Fred moved his investments to Broker B.During the transition, the contract on the hogs was forgotten.When the delivery date for the futures contract arrived,

A) the pigs were not delivered because Fred did not ask for them.
B) the futures contract was not exercised.
C) Fred took delivery of live hogs.
D) Broker A had to pay for the hogs so that they would not be delivered to Fred.

Question 22

The margin deposit associated with the purchase of a futures contract

A) is a partial payment on the contract with the amount of the payment equal to 10% or more of the contract value.
B) represents the purchasers equity in the contract with the balance of the contract financed with borrowed funds at the margin rate of interest.
C) is related to the value of the item underlying the contract.
D) is used to cover any loss in market value of the contract resulting from adverse price fluctuations.

Question 23

A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by

A) buying soy bean futures for delivery near the time of harvest.
B) selling soy bean futures for delivery near the time of harvest.
C) buying contracts in alternative crops for delivery near the time of harvest.
D) buying contracts in unrelated commodities for delivery near the time of harvest.

Question 24

Failure to meet a margin call will cause an investor's futures contract to be sold.

Question 25

The seller of a futures contract in euros hopes that the dollar will strengthen against the euro.

Question 26

Eric has just purchased a heating oil contract at $2.05 per gallon.The contract size is 21,000 gallons.Initial margin is $6,075; maintenance margin is $4,500.If the price of heating oil is $2.15 when the contract expires, Eric's profit or loss is ________

A) $(2,100) loss.
B) $2,100 profit.
C) $(3,975) loss.
D) $(2,400) loss

Question 27

The minimum amount of margin that must be kept in an account for futures contracts is known as the

A) round-trip cost.
B) forward basis.
C) maintenance deposit.
D) initial deposit.

Question 28

The futures market contains two basic types of traders: hedgers and speculators.Define the role played by each of these types of traders.

Question 29

Nearly all futures contracts traded in the United States are traded on the over-the-counter (OTC)market.

Question 30

Fred has just sold short 3 contracts of May wheat on the CBT.These are 5,000 bushel contracts.The initial deposit is $1,500 per contract with a maintenance margin of $1,200.
(a)What is Fred's total initial margin?
(b)How much of an increase in the price of wheat is necessary to cause a margin call?

Question 31

All futures contracts are traded on a margin basis.

Question 32

All futures contracts are traded on a margin basis.What does "margin" mean, and how does the use of margin affect the inherent risk-return nature of the futures market?

Question 33

Larry is a corn farmer.To attempt to maximize the value of his crop, Larry is most likely to benefit from

A) selling his crop at the market price when it is harvested.
B) buying a futures contract on corn for delivery at harvest time.
C) selling a futures contract on corn for delivery at harvest time.
D) buying a futures contract on corn and selling a futures contract on wheat.

Question 34

The purchaser of a futures contract

A) is required to obtain a margin loan equal in amount to the cost of the contract minus the cash down payment.
B) is generally required to make a cash deposit of 10 to 20% of the contract price at the time the contract is entered.
C) does not have to worry about margin calls since margin loans are not required.
D) is affected by the daily procedure known as mark-to-the-market.

Question 35

There is no limit to the amount of loss than can occur with a futures contract.

Question 36

Futures contracts have two sources of return namely the capital gains that can be earned when prices move in a favorable fashion, and dividend income from the underlying asset.

Question 37

If the purchaser of a futures contract fails to meet a margin call,

A) his/her contract will be sold at the current market price.
B) his/her contract will automatically be executed along with immediate delivery.
C) their local broker can decide to waive the call.
D) they will be given a 30-day grace period before payment is required.

Question 38

Which of the following is(are)correct statements about the buyer of a futures contract?
I)The contract buyer is short on the position.
II)The contract buyer wants the price of the item to increase.
III)The buyer can liquidate the position with an offsetting transaction.
IV)The majority of the buyers actually take delivery of the item.

A) II only
B) I and II only
C) I and IV only
D) II and III only

Question 39

Investors can trade futures on electricity and natural gas.

Question 40

In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account.This procedure is called

A) checking the maintenance margin.
B) checking the maintenance deposit.
C) settling.
D) mark-to-the-market.

Question 41

The open interest at the end of the trading day indicates the number of contracts in existence at that time.

Question 42

A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels.If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is

A) $529
B) $2,645
C) $26,450
D) $9,451.80

Question 43

In commodities trading, open interest at the end of a trading day is equal to

A) the net change in price from the prior day's close.
B) the number of speculative positions sold in the last 60-day period.
C) the number of contracts presently outstanding.
D) the advances minus the declines.

Question 44

The November 12, 2009 on-line edition of the Wall Street Journal listed the following information on oat futures.

Based on this information, which one of the following statements is correct?

A) Oats trade on the New York Mercantile Exchange.
B) The highest price at which the May oats contract traded was $291.20 per contract.
C) The cost of a March 2010 contract was $13,430 at the market close.
D) The price of the March 2010 oats contract at the close was $100 higher than the previous day's closing price.

Question 45

The maximum amount that the price of a futures contract can change during the day is referred to as

A) the swing limit.
B) the maximum daily range.
C) the daily margin limit.
D) the leverage restriction.

Question 46

The return on a futures contract is calculated as

A) (purchase price - selling price)/purchase price.
B) (selling price - purchase price)/purchase price.
C) (purchase price - selling price)/margin deposit.
D) (selling price - purchase price)/margin deposit.

Question 47

For individual investors to adequately hedge their personal portfolios, they should always use the S&P 500 Stock Index futures contract.

Question 48

Every commodity contract specifies all the following EXCEPT

A) the settle price.
B) the product.
C) the delivery month.
D) the unit size of the contract.

Question 49

One reason that commodities appeal to investors is because they

A) act as hedges against inflation during periods of rapidly rising consumer prices.
B) offer high returns for low risks.
C) do not require much specialized knowledge on the part of the investor.
D) are a suitable investment vehicle for one's retirement savings.

Question 50

A corn futures contract closed yesterday at a price of $3.90 a bushel.The maximum daily price range is $0.70 and the daily price limit is $0.35.Therefore, the

A) highest closing price for today is $4.25 a bushel.
B) most the price can fluctuate today is $0.35 a bushel.
C) minimum change in the price today is $0.35 a bushel.
D) lowest closing price for today is $3.55 a bushel.

Question 51

The rate of return on a futures contract is based on the size of the initial margin deposit.

Question 52

Producers and industrial users of commodities who also buy and sell futures contracts are known as speculators.

Question 53

The return on a futures contract

A) is highly related to the low margin requirement.
B) is always equal to or greater than zero.
C) tends to be fairly stable from one trading day to the next.
D) is solely related to the current price of the underlying item.

Question 54

The open interest at the end of the trading day indicates the volume of contracts traded during the day.

Question 55

For a commodities contract, the maximum daily price range is usually equal to twice the daily price limit.

Question 56

Which of the following statements concerning futures are correct?
I)Investors in financial futures can earn both dividend income from the underlying security as well as the potential capital gain from the futures contract.
II)The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit.
III)It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage.
IV)Conservative investors tend to purchase one futures contract as a means of increasing the return on their portfolio while maintaining minimal risk.

A) I and II only
B) II and III only
C) I, II and IV only
D) I, II and III only

Question 57

What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.

A) 116.5%
B) 119.0%
C) 123.5%
D) 127.4%

Question 58

Each commodity quote identifies the product, the exchange on which the contract is traded, the size of the contract, the price of the contract, and the delivery month.

Question 59

A successful hedge results in a guaranteed sales price to the producers of commodities.

Question 60

The high rates of returns, either positive or negative, on futures contracts are primarily due to the high initial margin requirement.

Question 61

One of the advantages of speculating with stock-index futures is that they eliminate the need to predict the future course of the stock market.

Question 62

The owner of a currency future has a claim on a specified amount of a specified foreign currency.

Question 63

George purchased a futures contract at 349.The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit.George sold the contract at 278.What is George's return on invested capital?

A) -255.4%
B) -203.4%
C) -155.4%
D) -103.4%

Question 64

Briefly discuss futures options.What are they, and what advantage do they offer an investor?

Question 65

Which one of the following statements concerning financial futures is correct?

A) Except for short-term securities, interest rate futures are quoted based on a percentage of the par value of the underlying debt security.
B) Stock-index futures are priced at an amount equal to the value of the index.
C) Foreign currency futures are based on 100,000 units of the foreign currency.
D) An investor who is long on a financial future losses money when the value of the future rises.

Question 66

Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss.This practice is called

A) speculating.
B) spreading.
C) gambling.
D) market making.

Question 67

Hedging in the commodities market is a strategy primarily used by

A) individual investors with high risk tolerance levels for commodities.
B) institutional investors on behalf of their conservative investors.
C) by producers and processors of commodities.
D) investors looking for short-term capital gains.

Question 68

Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?

A) The speculator expects to profit from a decline in the price of the contract.
B) The speculator stands to make an unlimited amount of profit since there is no limit to how high the price of the underlying commodity or financial instrument can rise.
C) The speculator is hoping to gain some of the benefit derived from the volatile price while limiting his/her exposure to loss.
D) The speculator may be hedging if the underlying commodity is not in the speculator's possession.

Question 69

The seller of a stock-index future is obligated to deliver a specified number of shares of the underlying security.

Question 70

If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following?
I)realize that making a profit is relatively easy
II)be mentally prepared for an enormous loss
III)be financially able to meet repeated margin calls
IV)spend all of their available cash on margin deposits

A) I, II and III only
B) II and III only
C) II and IV only
D) II, III and IV only

Question 71

Businesses that engage in international trade can hedge their exchange rate risk with futures contracts.

Question 72

Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce.The initial deposit is $2,500.(Show all work.)

Question 73

Which of the following are advantages of using options for futures speculation?
I)increased leverage
II)potential losses are limited to the cost of the option
III)options are available on a broad range of commodity, index, and currency futures
IV)investors avoid the possibility of having to take delivery of the commodity.

A) I and II only
B) II and III only
C) I, II and IV only
D) I, II, III and IV

Question 74

Assume the initial margin on a Swiss franc futures contract is $2,000.If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?

A) 3%
B) 50%
C) 100%
D) 125%

Question 75

The basic reason why investors use spreading strategies when speculating in commodities is to

A) increase leverage
B) increase profits
C) reduce risk
D) decrease transaction costs

Question 76

Given that futures contracts on the Japanese yen are traded in units of 12.5 million yen and are quoted in cents per yen, it follows that a Japanese yen contract quoted at 01.171 would be worth $14,637,500.

Question 77

You short sell contract A at 428 and buy contract B at 333.After one month, you close contract A at 435 and contract B at 339.What is you net profit in points?

A) -13
B) -1
C) 1
D) 13

Question 78

Midge feels that the price of gold is going to fall because inflation is on the decline.To profit from her prediction, assuming she is correct, Midge should

A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.

Question 79

Joseph bought a contract for future delivery of 5000 bushels of corn at $2.80 per bushel and sold a later contract at $2.90 a bushel.A month later, corn prices were rising and Joseph sold his long contract for $3.10 per bushel and covered his short by purchasing the same contract for $3.25 per bushel.Ignoring trading costs, Joseph

A) broke even
B) made $500
C) lost $750
D) made $750

Question 80

Interest rate futures are traded on all the following EXCEPT

A) savings bonds.
B) Treasury notes.
C) Treasury bills.
D) municipal bonds.