Deck 25: Futures

Question 1

In the futures markets, the firm that carries out orders involving futures is known as the

A) regional brokerage b. futures commission merchant
C) arbitrageur
D) speculator

Answer 1

B

Question 2

The process of adjusting the equity in an investor's account in order to reflect the change in the daily settlement price of the futures contract is known as

A) normal contango
B) the triple witching hour
C) marking to market
D) hedging long

Answer 2

C

Question 3

The term "futures" is short for futures

A) option.
B) stock.
C) credit.
D) contract.

Answer 3

D

Question 4

A fried chicken restaurant buys chicken futures. It is a

A) long hedger.
B) mixed investor.
C) long speculator.
D) short speculator.

Question 5

When the settlement price rises, the mark to market system makes

A) long position profits more than short position losses.
B) long position losses greater than short position profits.
C) long position losses equal to short position profits.
D) long position profits equal to short position losses.

Question 6

Each futures exchange has an associated ____ that becomes the "seller's buyer" and the "buyer's seller" as soon as a trade is concluded

A) clearinghouse
B) specialist
C) short hedger
D) long hedger

Question 7

If the investor's account balance does not meet the maintenance margin of roughly 65% of the amount deposited as initial margin, they will

A) be forced to sell the futures contract
B) receive a margin call from the broker
C) convert the contract to risk free securities
D) banned from future trading on the exchange

Question 8

____ buy and sell futures contracts to offset an otherwise risky position in the spot market.

A) Speculators b. Floor brokers
C) Market makers
D) Hedgers

Question 9

Unlike an options contract, futures contracts ____ that both parties involved do something at the end of the life of the contract.

A) require
B) do not require
C) remain unclear
D) suggest

Question 10

The term open interest refers to the amount that those with short positions are currently obligated to

A) deliver
B) forfeit
C) sell
D) roll over

Question 11

Other types of futures include currency futures contracts traded on the ___ at the Chicago Mercantile Exchange.

A) NASDAQ
B) International Monetary Market
C) Commodity Futures Trading Commission
D) Board of Trade

Question 12

A CBT futures contract does not specify

A) month of delivery.
B) the price of the contract.
C) approved delivery sites.
D) amount of commodity to be delivered.

Question 13

To protect itself, the futures clearinghouse requires

A) margin from the seller only.
B) 100% of the value from the seller.
C) margin from both the buyer and seller.
D) margin from the buyer only.

Question 14

A person who buys and sells future to reduce risk is called a

A) plunger.
B) spiker.
C) investor.
D) hedger.

Question 15

The initial margin that is required at the time the investor opens a futures account with a brokerage firm is also known as the ____ margin.

A) maintenance
B) variation
C) marked-to-market
D) performance

Question 16

A CBT futures contract specifies the

A) week of delivery.
B) year of delivery.
C) month of delivery.
D) quarter of delivery.

Question 17

The difference between the current spot price of an asset and the corresponding futures price is known as the ___ for the futures.

A) spread
B) cost of carry
C) basis
D) index arbitrage

Question 18

Futures contracts are standardized in terms of ____ as well as the type of asset that is permissible for delivery.

A) liability b. location
C) delivery
D) markets

Question 19

The Commodity Futures Trading Commission (CFTC) places dollar limits on the extent to which _____ are allowed to vary from day to day.
A) borrowed funds

A) commission limits
C) variation margins
D) futures prices

Question 20

At the CBT, futures contracts are traded by

A) secret ballot.
B) computer matching.
C) market makers.
D) open outcry.

Question 21

If this lower than the riskfree rate in a foreign country, a foreign currency future will

A) have a price equal to the current spot price.
B) be priced at less than the current spot price.
C) not be traded in the U.S.
D) have a positive carry cost.

Question 22

______________ of futures markets.

A) Hedging is a use
B) Hedging and speculation are both uses
C) Speculation is a use
D) Margin buying of futures contracts is a use

Question 23

The open interest in wheat futures is the

A) amount of short positions to be delivered.
B) the number of created but not purchased wheat contracts.
C) total annual wheat production in the U.S.
D) amount short positions are obligated to accept in delivery.

Question 24

A broker-dealer may go short on S&P 500 index futures to minimize

A) market risk.
B) interest rate risk.
C) exchange rate risk.
D) unsystematic risk.

Question 25

People who speculate among price differences in different futures markets are called

A) hedgers.
B) spreaders.
C) basis riskers.
D) bungee jumpers.

Question 26

A study from 1950-1976 relating commodity to common stock returns found

A) a negative correlation between their returns.
B) a portfolio of 100% futures maximized the return/risk.
C) a lower average annual risk for futures.
D) futures provide no hedge against inflation.

Question 27

For a Treasury bill future, the cost of carry is

A) small if the riskfree rate is large.
B) increased by the value of benefits of ownership.
C) increased by the costs of ownership.
D) foregone interest.

Question 28

The percentage of futures contracts that results in delivery averages:

A) 18%.
B) 49%.
C) 3%.
D) 74%.

Question 29

In order to insure stability, organized futures exchanges have standardized all of the following EXCEPT

A) market price
B) time of delivery
C) initial margins
D) contract size

Question 30

Financial futures have been traded on organized exchanges since the

A) 1950's.
B) 1920's.
C) 1970's.
D) 1940's.

Question 31

With respect to futures markets, _______ of the total futures contracts involve actual delivery of the commodity.

A) all
B) almost all
C) a majority
D) very few

Question 32

One of the safeguards placed on trading in organized futures exchanges is the price limit which is based on the assumption that futures prices

A) are heavily influenced by trader collusion on pricing
B) are heavily dependent on the cash market prices
C) are historically volatile and prone to overreact to new information
D) do not behave according to the laws of supply and demand

Question 33

____________ states that the futures price should _________ during its life.

A) Normal backwardation, be expected to fall
B) Normal contango, be expected to fall
C) Expectations hypothesis, equal the spot price
D) Expectations hypothesis, never equal the spot price

Question 34

Investors who take short positions in futures contracts 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) take, make
C) make, take
D) take, take

Question 35

Profits or losses for a hedger in the normal business activity are

A) not taxable or deductible for tax purposes.
B) treated as operating gains or losses for taxes.
C) tax free.
D) taxed at a higher rate than regular federal taxes.

Question 36

As a futures contract approaches the delivery month,

A) most contracts are delivered early.
B) open interest rises.
C) reversing transactions decrease.
D) open interest declines.

Question 37

Which one of the following is an example of a long hedger?

A) an oil refinery buying crude at spot oil prices
B) a farmer who grows wheat and sells futures contracts short
C) a trader who transacts in futures for the sole purpose of making profits
D) a cereal producer who purchases wheat futures contracts

Question 38

At the end of the life of the contract,

A) a future may expire with no action taking place.
B) an option may expire with no action by the buyer or seller.
C) the life of the future may be extended.
D) both the buyer and seller of an option must transfer the stock.

Question 39

The quarterly expiration of options on individual stocks, futures on market indices and options on market index futures is called

A) doomsday.
B) triple truth or dare.
C) May Day.
D) triple witching hour.

Question 40

An example of a derivative asset is

A) a common stock.
B) a municipal bond.
C) an index future.
D) a preferred stock.

Question 41

The basis for a futures contract is

A) current spot price/futures price.
B) futures price X current spot price.
C) current spot price - futures price.
D) futures price/current spot price.

Question 42

The current spot rate of exchange for a French franc is $.24. The riskfree rate is 6% in the U.S. and 9% in France. The price of a one-year future should be

A) $.27.
B) $.23.
C) $.21.
D) $.24.

Question 43

Buying a call futures option will

A) maximize returns if the commodity price rises.
B) require that a future on the commodity be sold.
C) limit losses if the commodity price falls. to expiration.
D) eliminate transaction costs.

Question 44

The theory of normal backwardation states that with a fixed spot price

A) the spot price will be less than the futures price.
B) hedgers should be long in futures.
C) the price of a futures contract will rise over time.
D) speculators should be short in futures.

Question 45

The basis for a 5000 bushel wheat future is $.50, and the current spot price increases by $.15. A person who owns the asset and is short in the futures market will

A) neither gain nor lose.
B) gain $750.
C) gain $3250.
D) lose $3250.

Question 46

A person who is short in the spot market, is long in the futures market, and has a negative basis would like

A) spot price to increase.
B) no change in future or spot price.
C) future price to increase.
D) spot price to decrease and future price to increase.

Question 47

What is the underlying asset in a futures options contract?

A) a combination of an call and a put
B) a specific commodity
C) a specific common stock
E) a specific futures contract

Question 48

What organized exchange mechanism reassures the futures buyer and seller that the obligations of the other party will be fulfilled?

A) the clearinghouse
B) the initial margin
C) marking to market
D) the maintenance margin

Question 49

A strategy for preserving capital in a declining stock market would include

A) selling stock index futures
B) buying stock index futures
C) buying call options
D) selling call options

Question 50

The hypothesis that hedgers will want to be long in futures is called

A) normal contango.
B) normal backwardation.
C) Keynesian theory.
D) bilateral partisan.

Question 51

If funds rise above the initial margin requirement as a result of marking to market, they may be

A) automatically rolled over to purchase more of the same futures contracts
B) withdrawn by the clearinghouse and placed in an interest-bearing account
C) used to satisfy undermargined positions in other contracts
D) withdrawn by the investor

Question 52

Futures contracts differ from forward contracts in that ________.

A) futures contracts are standardized and performance of each party is guaranteed by the clearinghouse
B) futures contracts are standardized and require a daily settling of any gains or losses
C) futures contracts are standardized, performance of each party is guaranteed by a clearing house, and they require a daily settling of any gains or losses
D) performance is guaranteed by a process known as marking to market

Question 53

On the maturity date, stock index futures such as the S&P500 contract require delivery of ____________.

A) common stock
B) cash
C) treasury bills
D) common stock and accumulated dividends