Deck 13: Financial Futures

Question 1

Trading in BAB futures reveals implicit forward interest rates.

Answer 1

False

Question 2

Futures contracts are generally preferred to FRAs for hedging interest-rate risk because they are more likely to provide an exact hedge.

Answer 2

False

Question 3

A trader closes out a long futures position by buying offsetting contracts.

Answer 3

False

Question 4

Trading futures contracts does not usually involve trading the contract item.

Question 5

The Sydney Futures Exchange was established after deregulation to help financial markets participants cope with volatility in financial variables.

Question 6

Speculators would take a long position if they believe the value of the contract item will increase above the current price by the contract's settlement date.

Question 7

A futures contract is similar to a forward contract.

Question 8

Closeout trades prior to the contract's settlement date end the trader's position and result in the settlement of the futures contract.

Question 9

The futures market has a day trading session and a night trading session.

Question 10

Futures contracts can be used by traders to transfer risk (hedge)or to accepting risk (speculation).

Question 11

The holder of the long position purchases it from the seller, by paying the agreed price.

Question 12

A futures position is the number of short or long contracts which a trader holds.

Question 13

The Sydney Futures Exchange merged with the ASX in 2006 and has since been assimilated within the ASX group.

Question 14

The Australian futures market is for use by wholesale traders only.

Question 15

Liquidity in the futures market is restricted by the use of fully standardised contracts.

Question 16

The ASX typically offers futures contracts for 12 months per year.

Question 17

Standardised contracts with few contract dates per year are more likely to result in greater turnover in each contract.

Question 18

A long futures position means that a trader holds more contracts that have a longer period to their settlement date than contracts with a shorter period to settlement.

Question 19

The futures market discovers forward prices providing the contracts are very liquid.

Question 20

Futures contracts have non-negotiable features.

Question 21

The only cost incurred in taking a futures position is the brokerage.

Question 22

BAB futures can hedge an interest rate risk exposure by providing borrowers and lenders with access to forward interest rates.

Question 23

Strip hedging with BAB futures requires the trader to take a position in contracts with successive contract dates.

Question 24

Margin payments depend on the movement in the value of futures positions.

Question 25

Speculators buy futures contracts whereas hedgers sell them.

Question 26

Futures are low-risk, low-return investments because no funds are invested.

Question 27

Borrowers would set their hedge at the market's offer price and lenders would set their hedge at the market's bid price.

Question 28

Initial margins for various types of futures contracts are the same.

Question 29

'Winners' in futures contracts receive back their margin payments.

Question 30

The BAB futures contract is for a standard parcel of 90-day bills with a face value of $1 million.

Question 31

'Novation' refers to the system of margin payments administered by the futures market's clearinghouse.

Question 32

A planned issue of $10million of BABs could be hedged by using 10 BAB futures contracts.

Question 33

BAB futures contracts can be used to manage the credit risk posed by the borrower.

Question 34

The primary futures contract for hedging exposure to movements in Australian short-term interest rates is the three-year Commonwealth Treasury bonds futures contract.

Question 35

The clearinghouse manages the default risk faced by traders in the futures market.

Question 36

The value of a BAB futures contract is 100 minus the yield.

Question 37

The primary market for a futures contract is distinct from its secondary market.

Question 38

An arbitrage trade should generate a risk-free profit.

Question 39

'Marking to market' refers to the valuation of trading positions.

Question 40

The BAB futures contract traded on the ASX stipulates mandatory cash settlement.

Question 41

Price discovery performed by the futures market does NOT:

A)occur unless markets are liquid and efficient
B)assist FRA and interest-rate swap dealers
C)identify short-term forward interest rates
D)require large trading volumes
E)benefit from the trading activities of speculators.

Question 42

The ASX futures market:

A)now only trades financial futures contracts
B)is used by wholesale but not retail traders
C)facilitates futures trading without brokers through an online trading system
D)was previously known as the Sydney Futures Exchange.
E)All of these are correct.

Question 43

Futures and forward contracts are both:

A)standardised
B)agreements to settle at a future date
C)exchange-traded
D)usually closed-out
E)usually cash settled, rather than delivered.

Question 44

Which of the following is NOT an advantage of using futures contracts to hedge an exposure compared to using forward contracts to hedge the same exposure?

A)Futures hedges are easier to unwind.
B)Futures have very low transaction costs.
C)Futures offer greater flexibility in terms of contract features.
D)Futures generally have more liquid markets.
E)Futures generally offer greater efficiency.

Question 45

A bank can hedge an exposure to an increase in the cash rate by taking a short position in 30-day interbank cash rate futures.

Question 46

A borrower can hedge against adverse movements in short-term interest rates by selling BAB futures.

Question 47

A speculator who forecasts an unexpected fall in long-term yields would consider selling bond futures contracts.

Question 48

The manager of a diversified equity portfolio can use SPI futures to maintain the portfolio's value even when share prices are falling.

Question 49

Hedging with futures generally involves basis risk.

Question 50

The cash settlement of a futures contract does NOT:

A)result in the trader realising a profit or loss on their futures trading
B)overcome the need for the futures market to arrange physical settlement of many of the contract items
C)depend on the difference between the contracts buying price and their selling price
D)require that traders own the contract item
E)end the traders obligations under the futures contract.

Question 51

The 10-year bond futures contract can be settled by the delivery of a 10-year bond with a face value of $100 000.

Question 52

An advantage of futures contracts over FRAs is that:

A)futures contracts are not standardised
B)futures contracts have a secondary market
C)futures contracts have a lower up-front cost
D)futures contracts are always deliverable
E)futures contracts are more likely to provide a 'perfect hedge'.

Question 53

The SPI futures contract can be settled by delivering a diversified portfolio of shares.

Question 54

The trader who holds the long position in a futures contract:

A)must settle it by buying the contract item on the settlement date
B)has sold the futures contract
C)can closeout their position any time prior to the settlement date by taking an offsetting short position
D)has a contractual obligation to sell the contract item on the settlement date
E)can only closed-out the position early with the agreement of the contract's seller.

Question 55

Futures contracts can be used for:

A)hedging exposures to volatile financial variables
B)speculating on the increase in the value of the contract item
C)speculating on the decrease in the value of the contract item
D)hedging the risk of an adverse movement in the future spot price.
E)All of these.

Question 56

With the S&P/ASX 200 index currently at 6200 and next month's SPI futures contracts trading at 6300, a position in 7 SPI contracts that expire next month has a total value of $1 085 000.

Question 57

Futures contracts specify:

A)the contract item
B)the settlement date
C)how the contract can be settled
D)the settlement price.
E)All of these.

Question 58

The value of the 30-day inter-bank cash rate futures contract is $3 million discounted by the 30-day interest rate.

Question 59

Which of the following contributes to the liquidity of financial futures and their price discovery function?

A)Their use by speculators.
B)The use of standardised contracts.
C)The low cost of trading.
D)The limited number of settlement dates.
E)All of these.

Question 60

Bond futures contracts are available with a range of coupon rates.

Question 61

A company is planning to issue BABs next month for which their bank charges an acceptance fee of 110 basis points.They hedge their exposure using BAB futures at a price of 94.50.It turns out the 90-day rate at the time of issue is 5.65%.The company's cost of funds is:

A)5.50%
B)5.65%
C)6.60%
D)6.75%.
E)None of these.

Question 62

Suppose that in June, when the 90-day BBSW is 5%, the prices for the September and December BAB futures contracts are 95.10 and 95.15, respectively.

A)The 180-day rate will be 4.85%.
B)The 90-day rate is expected to be 4.90% in September.
C)The 180-day rate will be 4.95%.
D)The futures market expects the RBA will cut the cash rate by 25 basis points in September.
E)There would be a normal yield curve in the money market.

Question 63

One BAB futures contract trading at 92.09 has a contract value of:

A)$980 869
B)$981 723
C)$981 540
D)$981 209
E)$980 140

Question 64

A planned issue of $20 million in BABs could be hedged by:

A)a short position in 200 BAB futures contracts
B)a long position in 200 BAB futures contracts
C)a short position in 20 BAB futures contracts
D)a long position in 20 BAB futures contracts.
E)None of these.

Question 65

A speculator in futures contracts:

A)will always have an exposure elsewhere to the contract item
B)takes a futures position has an opposite profit and loss potential to that of their physical market exposure
C)seeks to exploit occasions when prices in the spot and futures markets are misaligned
D)is seeking to profit from futures markets price changes
E)takes a position simultaneously in both the physical and futures markets in order to profit from price differences.

Question 66

Which of the following is NOT a role of the clearinghouse in the futures market?

A)To guarantee the performance of each position.
B)To close out the position of defaulting traders.
C)To act as a counterparty to buyers and the sellers.
D)To take or make delivery of the underlying asset.
E)To operate a system of margin payments.

Question 67

Mandatory cash settlement applies to all:

A)ASX futures contracts
B)deliverable futures contracts
C)non-deliverable futures contracts
D)financial futures contracts
E)non-financial futures contracts.

Question 68

Through the processes of novation and margin payments, the clearinghouse:

A)becomes counterparty to each futures transaction
B)seeks to protect traders from default risk
C)will close out the position of defaulting traders
D)guarantees the performance of futures contracts.
E)All of these are correct.

Question 69

When opening a futures position a trader will pay:

A)brokerage fees
B)an initial margin payment
C)the futures price
D)brokerage fees and an initial margin payment
E)brokerage fees, an initial margin payment and the futures price.

Question 70

Microhard Corp.borrowed via a bank bill facility and has fully hedged its exposure using BAB futures contracts.The effective borrowing rate for the funds is:

A)determined by the market interest rates on rollover dates
B)the forward yields on the BAB futures contracts
C)the current market interest rate
D)the agreed yield.
E)None of these are correct.

Question 71

Assuming that there are no brokerage fees, a trader who entered a short BAB futures position at 95.30 and later closed-out at 94.70:

A)will earn a profit of $0.60 per contract
B)will make a loss of $0.60 per contract
C)will earn a profit of $1443.64 per contract
D)will make a loss of $1443.64 per contract.
E)None of these are correct.

Question 72

A 'strip' of futures refers to:

A)futures contracts with consecutive settlement dates
B)futures contracts with the same settlement date
C)futures contracts with the same rollover dates
D)futures contracts with the same agreed rate.
E)There is more than one correct answer.

Question 73

A borrower who hedges by selling BAB futures contracts:

A)is trying to eliminate exchange rate risk
B)will profit if the futures contracts increase in value
C)will profit from a decrease in market yields
D)is managing interest rate risk in the money market by locking-in a forward rate
E)is trying to avoid the potential upside of a future physical transaction.

Question 74

Which of the following ASX futures contracts are deliverable?

A)90-day BABs
B)30-day inter-bank cash rate
C)3-year bonds
D)10-year bonds
E)SPI futures

Question 75

Say you placed an at-market order to buy a quantity of futures contracts.The counterparty in your resulting futures contract is:

A)another trader
B)a bank
C)your broker
D)the clearinghouse
E)the ASX.

Question 76

Initial margin payments vary between futures contracts according to their price risk.Of the following, which futures contract has the largest initial margin payment?

A)3-year bond futures
B)10-year bond futures
C)90-day BAB futures
D)30-day inter-bank cash rate futures
E)SPI futures

Question 77

Futures contract standardisations do NOT include:

A)the contract's settlement date
B)the contract unit, meaning what is being traded and its quantity
C)whether the contract is deliverable or non-deliverable
D)the way the contract's price is quoted
E)the maximum price movement in the contract's price.

Question 78

As a result of the following trades - buy 10 Dec 2015 BAB futures, buy 10 Mar 2016 BAB futures, sell 10 Jun 2016 BAB futures and sell 10 Dec 2015 BAB futures - the trader's position is as follows:

A)long 10 Dec 2015 BAB futures
B)short 10 Dec 2015 BAB futures
C)no position, they have closed out
D)long 10 Mar 2016 BAB futures and short 10 Jun 2016 BAB futures
E)short 10 Mar 2016 futures and long 10 Jun 2016 BAB futures.

Question 79

Which of the following statements regarding BAB futures contracts traded on the ASX is FALSE?

A)The face value of each contract is $1 million.
B)The prices at which contracts trade reveal the 90-day forward rates.
C)The value of the BAB futures contract is 100 minus the yield.
D)The contract item is always 90-day BABs.
E)Contract dates are Mar/Jun/Sep/Dec for the next 5 years.

Question 80

Except in periods of extreme volatility, the clearinghouse (in the futures market)'marks-to-market' each trader's position:

A)hourly
B)daily
C)twice-weekly
D)weekly
E)monthly