Deck 17: Futures Markets and Risk Management

Question 1

An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A) pay; pay
B) pay; receive
C) receive; pay
D) receive; receive

Answer 1

C

Question 2

Synthetic stock positions are commonly used by ______ because of their ______.

A) market timers; lower transaction cost
B) banks; lower risk
C) wealthy investors; tax treatment
D) money market funds; limited exposure

Answer 2

A

Question 3

A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

A) sell wheat futures
B) buy wheat futures
C) buy a contract for delivery of wheat now, and sell a contract for delivery of wheat at harvest time
D) sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

Answer 3

A

Question 4

The time on Friday with simultaneous expirations of S&P index futures,S&P index options and options on some individual stocks is commonly called the _______.

A) mad minute
B) double-witching hour
C) happy hour
D) triple-witching hour

Question 5

Interest rate futures contracts exist for all of the following except __________.

A) Federal funds
B) Eurodollars
C) banker's acceptances
D) repurchase agreements

Question 6

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

A) decrease substantially
B) increase substantially
C) remain unchanged
D) increase or decrease substantially

Question 7

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity,both on the same commodity.This is called __________.

A) a cross hedge
B) a reversing trade
C) a spread position
D) a straddle

Question 8

If an asset price declines,the investor with a _______ is exposed to the largest potential loss.

A) long call option
B) long put option
C) long futures contract
D) short futures contract

Question 9

Which one of the following contracts requires no cash to change hands when initiated?

A) Listed put option
B) Short futures contract
C) Forward contract
D) Listed call option

Question 10

The S&P500 index futures contract is an example of a(n)______ delivery contract.The pork bellies contract is an example of a(n)______ delivery contract.

A) cash; cash
B) cash; actual
C) actual; cash
D) actual; actual

Question 11

The clearing corporation has a net position equal to ______.

A) the open interest
B) the open interest times two
C) the open interest divided by two
D) zero

Question 12

Futures contracts have many advantages over forward contracts except that _________.

A) futures positions are easier to trade
B) futures contracts are tailored to the specific needs of the investor
C) futures trading preserves the anonymity of the participants
D) counterparty credit risk is not a concern on futures

Question 13

An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

A) pay; pay
B) pay; receive
C) receive; pay
D) receive; receive

Question 14

In the futures market the short position's loss is ___________ the long position's gain.

A) greater than
B) less than
C) equal to
D) sometimes less than and sometimes greater than

Question 15

The open interest on silver futures at a particular time is the number of __________.

A) all outstanding silver futures contracts
B) long and short silver futures positions counted separately on a particular trading day
C) silver futures contracts traded during the day
D) silver futures contracts traded the previous day

Question 16

Recently most of the growth in the number of contracts traded on the Chicago Board of Trade has come in the _______ contracts.

A) metals
B) agriculture
C) financial
D) commodity

Question 17

The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates _________ risk.

A) market
B) credit
C) interest rate
D) basis

Question 18

Which of the following provides the profit to a long position at contract maturity?

A) Original futures price - Spot price at maturity
B) Spot price at maturity - Original futures price
C) Zero
D) Basis

Question 19

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have a(n)_______.

A) arbitrage
B) cross-hedge
C) over-hedge
D) spread-hedge

Question 20

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

A) liquidity; all traders must trade a small set of identical contracts
B) credit risk; all traders understand the risk of the contracts
C) pricing; convergence is more likely to take place with fewer contracts
D) trading cost; trading volume is reduced

Question 21

On February 25,2008 you could have purchased a futures contract from Intrade that would pay you $1 if Barack Obama wins the 2008 Democratic Party nomination.At a price of $0.81,the contract for Obama carried the highest price of any Democratic candidate.This tells you _______________.

A) that the market believed that Obama had 81% chance of winning
B) that the market believed that Obama had the least chance of winning
C) nothing about the markets' belief concerning the odds of Obama winning
D) that the market believed Obama's chances of winning were about 19%

Question 22

An investor would want to __________ to exploit an expected fall in interest rates.

A) sell S&P 500 index futures
B) sell treasury bond futures
C) buy treasury bond futures
D) buy wheat futures

Question 23

Which one of the following refers to the daily settlement of obligations on future positions?

A) Marking to market
B) The convergence property
C) The open interest
D) The triple witching hour

Question 24

Probably the most active forward market is for _____________.

A) agricultural commodities
B) metals and minerals
C) financial futures
D) foreign currencies

Question 25

Futures markets are regulated by the __________.

A) AIMR
B) CFTC
C) CIA
D) SEC

Question 26

Which of the following provides the profit to a short position at contract maturity?

A) Original futures price - Spot price at maturity
B) Spot price at maturity - Original futures price
C) Zero
D) Basis

Question 27

The CME weather futures contract is an example of ______________.

A) a cash settled contract
B) an agricultural contract
C) a financial future
D) a commodity future

Question 28

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

A) Index arbitrage
B) Marking to market
C) Reversing trades
D) Settlement transactions

Question 29

An established value below which a trader's margin may not fall is called the ________.

A) daily limit
B) daily margin
C) maintenance margin
D) convergence limit

Question 30

Margin requirements for futures contracts can be met by ______________.

A) cash only
B) cash or highly marketable securities such as Treasury bills
C) cash or any marketable securities
D) cash or warehouse receipts for an equivalent quantity of the underlying commodity

Question 31

A company which mines bauxite decides to short aluminum futures.This is an example of __________ to limit its risk.

A) cross hedging
B) long hedging
C) spreading
D) speculating

Question 32

Which one of the following is a true statement?

A) A margin deposit can only be met by cash
B) All futures contracts require the same margin deposit
C) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract
D) The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call

Question 33

A futures contract __________.

A) is a contract to be signed in the future by the buyer and the seller of a commodity
B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract
C) is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract
D) gives the buyer the right, but not the obligation, to buy an asset some time in the future

Question 34

Single stock futures,as opposed to stock index futures,are _______________.

A) not yet being offered by any exchanges
B) offered overseas but not in the U.S.
C) currently trading on OneChicago, a joint venture of several exchanges
D) scheduled to begin trading in 2010 at various exchanges

Question 35

The daily settlement of obligations on futures positions is called _____________.

A) a margin call
B) marking to market
C) a variation margin check
D) initial margin requirement

Question 36

At maturity of a future contract,the spot price and futures price must be approximately the same because of __________.

A) marking to market
B) the convergence property
C) the open interest
D) the triple witching hour

Question 37

A hog farmer decides to sell hog futures.This is an example of __________ to limit its risk.

A) cross hedging
B) short hedging
C) spreading
D) speculating

Question 38

Margin must be posted by ________.

A) buyers of futures contracts only
B) sellers of futures contracts only
C) both buyers and sellers of futures contracts
D) speculators only

Question 39

You are currently long in a futures contract.You then instruct a broker to enter the short side of a futures contract to close your position.This is called __________.

A) a cross hedge
B) a reversing trade
C) a speculation
D) marking to market

Question 40

Initial margin is usually set in the region of ________ of the total value of a futures contract.

A) 5%-15%
B) 10%-20%
C) 15%-25%
D) 20%-30%

Question 41

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A) long; long
B) long; short
C) short; long
D) short; short

Question 42

On January 1,you sold one April S&P 500 index futures contract at a futures price of 1300.If the April futures price is 1250 on February 1,your profit would be __________ if you close your position.(The contract multiplier is 250.)

A) -$12,500
B) -$15,000
C) $15,000
D) $12,500

Question 43

In the context of a futures contract,the basis is defined as ______________.

A) the futures price minus the spot price
B) the spot price minus the futures price
C) the futures price minus the initial margin
D) the profit on the futures contract

Question 44

When dividend paying assets are involved,the spot-futures parity relationship can be stated as _________________.

A) F₁ = S₀(1 + r_f)
B) F₀ = S₀(1 + r_f - d)^T
C) F₀ = S₀(1 + r_f + d)^T
D) F₀ = S₀(1 + r_f)^T

Question 45

If the S&P 500 index futures contract is overpriced relative to the spot S&P 500 index,you should __________.

A) buy all the stocks in the S&P 500 and write put options on the S&P 500 index
B) sell all the stocks in the S&P 500 and buy call options on S&P 500 index
C) sell S&P 500 index futures and buy all the stocks in the S&P 500
D) sell short all the stocks in the S&P 500 and buy S&P 500 index futures

Question 46

Forward contracts _________ traded on an organized exchange and futures contracts __________ traded on an organized exchange.

A) are; are
B) are; are not
C) are not; are
D) are not; are not

Question 47

The current level of the S&P 500 is 1250.The dividend yield on the S&P 500 is 3%.The risk-free interest rate is 6%.The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

A) 1274.33
B) 1286.95
C) 1268.61
D) 1291.29

Question 48

Violation of the spot-futures parity relationship results in _______________.

A) fines and other penalties imposed by the SEC
B) arbitrage opportunities for investors who spot them
C) suspension of delivery privileges
D) suspension of trading

Question 49

At year end,taxes on a futures position _______________.

A) must be paid if the position has been closed out
B) must be paid if the position has not been closed out
C) must be paid regardless of whether the position has been closed out or not
D) need not be paid if the position supports a hedge

Question 50

A speculator will often prefer to buy a futures contract rather than the underlying asset because ____________.
I)gains in futures contracts can be larger due to leverage
II)transaction costs in futures are typically lower than in spot markets
III)futures markets are often more liquid than the markets of the underlying commodities

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

Question 51

Futures contracts are said to exhibit the property of convergence because _______________.

A) the profits from long positions and short positions must ultimately be equal
B) the profits from long positions and short positions must ultimately net to zero
C) price discrepancies would open arbitrage opportunities for investors who spot them
D) the futures price and spot price of any asset must ultimately net to zero

Question 52

An investor would want to __________ to hedge a long position in treasury bonds.

A) buy interest rate futures
B) buy treasury bonds in the spot market
C) sell interest rate futures
D) sell S&P 500 futures

Question 53

If you expect a stock market downturn,one potential defensive strategy would be to __________.

A) buy stock index futures
B) sell stock index futures
C) buy stock index options
D) sell foreign exchange futures

Question 54

The world's largest futures and options exchange is the _______.

A) CBOE
B) CBOT
C) CME
D) Eurex

Question 55

An investor establishes a long position in a futures contract now (time 0)and holds the position until maturity (Time T).The sum of all daily settlements will be __________.

A) F₀ - F_T
B) F₀ - S₀
C) F_T - F₀
D) F_T - S₀

Question 56

The spot price for is $650.The dividend yield on the S&P 500 is 2.5%.The risk-free interest rate is 5%.The futures price for gold for a one year contract should be __________.

A) $658.58
B) $675.43
C) $682.50
D) $666.25

Question 57

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

A) long; long
B) long; short
C) short; long
D) short; short

Question 58

Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date,and those who take long positions agree to __________ delivery of the commodity.

A) make; make
B) make; take
C) take; make
D) take; take

Question 59

Approximately __________ of futures contracts result in actual delivery.

A) 0%
B) 1% to 3%
C) 5% to 15%
D) 60% to 80%

Question 60

A long hedger will __________ from an increase in the basis a short hedger will __________.

A) be hurt; be hurt
B) be hurt; profit
C) profit; be hurt
D) profit; profit

Question 61

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
At the close of day Tuesday your cumulative rate of return on your investment is

A) 16.2%
B) -5.8%
C) -0.16%
D) -2.2%

Question 62

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

A) $20 million
B) $200 million
C) $200 billion
D) $200 trillion

Question 63

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
Your cumulative rate of return on your investment after Wednesday is a/an ____.

A) 79.9% loss
B) 2.6% loss
C) 33.0% gain
D) 53.9% loss

Question 64

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
If r_f is greater than d then we know that _______________.

A) the futures price will be higher as contract maturity increases
B) F₀ < S₀
C) F_T > S_T
D) arbitrage profits are possible

Question 65

The ________ and the _______ have the lowest correlations with the large-cap indexes.

A) Nasdaq Composite; Russell 2000
B) NYSE; DJIA
C) S&P500; DJIA
D) Russell 2000; S&P500

Question 66

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
On which of the given days do you get a margin call?

A) Monday
B) Tuesday
C) Wednesday
D) None

Question 67

The use of leverage is practiced in the futures markets due to the existence of _________.

A) banks
B) brokers
C) clearinghouse
D) margin

Question 68

The _________ contract dominates trading in stock index futures.

A) S&P500
B) DJIA
C) Nasdaq 100
D) Russell 2000

Question 69

Interest rate swaps involve the exchange of ________________.

A) fixed rate bonds for floating rate bonds
B) floating rate bonds for fixed rate bonds
C) net interest payments and an actual principal swap
D) net interest payments based on notional principal, but no exchange of principal

Question 70

A one year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%.
Based on the above data,which of the following set of transactions will yield positive riskless arbitrage profits?

A) Buy gold in the spot with borrowed money and sell the futures contract
B) Buy the futures contract and sell the gold spot and invest the money earned
C) Buy gold spot with borrowed money and buy the futures contract
D) Buy the futures contract and buy the gold spot using borrowed money

Question 71

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct.This market exhibits positive cost of carry for all contracts.To take advantage of this you should ______________.

A) buy the September contract and sell the June contract
B) sell the September contract and buy the June contract
C) sell the September contract and sell the June contract
D) buy the September contract and buy the June contract

Question 72

At contract maturity the basis should equal ___________.

A) 1
B) 0
C) risk-free interest rate
D) -1

Question 73

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098.The contract has a $100,000 underlying par value bond.If the futures price falls to $108,000 you will experience a ______ percent loss on your money invested.

A) 31
B) 41
C) 52
D) 64

Question 74

On Monday morning you sell one June T-bond futures contract at 97:27 or for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700 and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer questions 67 through 70.
After Monday's close the balance on your margin account will be ________.

A) $2,700.00
B) $2,000.00
C) $3,137.50
D) $2,262.50

Question 75

You own a $15 million bond portfolio with a modified duration of 11 years and you want to limit your risk but institutional constraints prohibit trading the bond portfolio.T-bond futures are available with a modified duration of the deliverable instrument of 8 years.The futures are priced at $105,000.The proper hedge ratio to use is ______.

A) 104
B) 143
C) 196
D) 213

Question 76

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%.Sahali Trading Company then enters into an interest rate swap where they will pay LIBOR and receive a fixed 8.00% on a notional principal of $100 million.After all these transactions are considered,Sahali's cost of funds is __________.

A) 17%
B) LIBOR
C) LIBOR + 1%
D) LIBOR - 1%

Question 77

A one year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%.
A hypothetical futures contract on a non-dividend-paying stock with current spot price of $100 has a maturity of one year.If the T-bill rate is 5% what should the futures price be?

A) $95.24
B) $100
C) $105
D) $107

Question 78

A one year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%.
A hypothetical futures contract on a non-dividend-paying stock with current spot price of $100 has a maturity of four years.If the T-bill rate is 7% what should the futures price be?

A) $76.29
B) $93.46
C) $107.00
D) $131.08

Question 79

A one year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%.
The arbitrage profit implied by these prices is _____________.

A) $3
B) $4
C) $5
D) $6

Question 80

From the perspective of determining profit and loss,the long futures position most closely resembles a levered investment in a ____________.

A) long call
B) short call
C) short stock position
D) long stock position