Deck 9: Futures Trading

Question 1

Marking-to-market refers to:

A) adjusting a futures trading account for the day's trading gains and losses so that the futures position has a zero value after the adjustment
B) issuing a bond with a coupon rate equivalent to the market interest rate
C) adjusting a forward's price so that the forward contract has zero value
D) issuing an option with a strike price that is the same as the underlying asset's market price
E) None of these answers are correct.

Answer 1

A

Question 2

Which of the following is NOT a valid way of ending a futures contract?

A) a closing transaction
B) physical delivery
C) cash settlement
D) an exchange for physicals
E) an exercise

Answer 2

E

Question 3

The price of a September crude oil futures contract is $20 per barrel,while that of a September gasoline futures contract is $25 per barrel.You expect that in a month,the price difference will reduce to $3 per barrel.A profit generating trading strategy is to:

A) long September crude oil futures and short September gasoline futures
B) short September crude oil futures and long September gasoline futures
C) long September crude oil futures and long September gasoline futures
D) short September crude oil futures and short September gasoline futures
E) None of these answers are correct.

Answer 3

A

Question 4

Which of the following statements is true about floor traders (or locals)in a futures exchange's trading floor?

A) They stand on an exchange floor in trading pits to execute clients' trades.
B) They often band together to form associations to better handle large and complex orders.
C) They earn commissions for their service.
D) They become counterparties to futures trades.
E) They never have inventory risk.

Question 5

The following contract is more likely to be closed by an exchange-for-physicals:

A) a Treasury bonds futures
B) an oil futures
C) a gold futures
D) an index futures
E) a Eurodollar futures

Question 6

A forward price can differ from a futures price due to any one the following EXCEPT:

A) the two contracts have different commodity price risks
B) the two contracts have different credit risks
C) the two contracts have different legal risks
D) the two contracts have different interest rate risks in the reinvestment of cash flows
E) the contracts are structured as different entities-a forward has a terminal cash flow,while futures have daily cash flows

Question 7

Suppose that a futures trader has an initial margin of $2,000 in her brokerage account.The maintenance margin is 75 percent.If the equity in her account falls by $1,200,the account holder has to come up with a variation margin of:

A) $300 in cash,or a letter of credit,or short-term Treasury securities
B) $300 in cash
C) $800 in cash,or a letter of credit,or short-term Treasury securities
D) $800 in cash
E) None of these answers are correct.

Question 8

Suppose that the July gold futures prices declined $5 by today's close.The holder of a short position in two contracts (contract size = 100 oz. ):

A) will have her margin account increase by $500 today
B) will have her margin account increase by $1,000 today
C) will have her margin account decrease by $500 today
D) will have her margin account decrease by $1,000 today
E) None of these answers are correct.

Question 9

Futures contracts were traditionally traded:

A) in pits by open-outcry trading
B) on exchange floors in front of a specialist's trading post
C) on exchange floors where accumulated orders were cleared using a market-clearing auction price
D) in an over-the-counter market
E) on exchange floors via a continuous auction mechanism

Question 10

Suppose that the July gold futures has increased $4 by today's close.The holder of a long position in three contracts (contract size = 100 oz. ):

A) will have her margin account increase by $400 today
B) will have her margin account decrease by $1,200 today
C) will have her margin account increase by $1,200 today
D) nothing will happen now,but she will be rewarded in July
E) None of these answers are correct.

Question 11

The price of a September crude oil futures contract is $20 per barrel,while that of a September gasoline futures contract is $25 per barrel.You expect that in a month,the price difference will increase to $10 per barrel.A profit generating trading strategy is to:

A) long September crude oil futures and short September gasoline futures
B) short September crude oil futures and long September gasoline futures
C) long September crude oil futures and long September gasoline futures
D) short September crude oil futures and short September gasoline futures
E) None of these answers are correct.

Question 12

The difference between two different maturity futures prices on the same commodity is known as:

A) the basis
B) the depth
C) liquidity
D) the strike
E) the spread

Question 13

Suppose that a futures trader has deposited the initial margin of $2,000 in her brokerage account.The maintenance margin is 75 percent.The value of the account falls to $1,100.The account holder has to come up with a variation margin of:

A) $300
B) $400
C) $500
D) $900
E) $1,100

Question 14

An out-trade in a futures market refers to which of the following?

A) a trade executed outside the regular trading hours
B) a trade in which the buyer and the seller orders do not match
C) a trade that circumvents the competitive process required for a valid transaction
D) a transaction that is conducted at a location away from the contract's stipulated delivery terms
E) None of these answers are correct.