Question 1

You sold one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

Accepted Answer

The answer of You sold one oil future contract at...

Question 2

If you determine that the DAX-30 Index futures is overpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

Accepted Answer

To exploit the overpricing of DAX-30 Index futures relative to the spot DAX-30 Index, one would sell the overpriced futures and simultaneously buy the undervalued stocks in the DAX-30 Index. This creates an arbitrage opportunity where the profit is locked in due to the price discrepancy between the futures and the spot market.

Question 3

What concept prevents investors from having control over the tax year in which they realize gains and losses?

Accepted Answer

Mark-to-market accounting requires investors to value their investments at their current market prices, thus realizing any gains or losses annually, which prevents them from choosing the tax year for these realizations.

Question 4

If you determine that the DAX-30 Index futures is underpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

Accepted Answer

If the futures are underpriced, you can buy the futures and sell the stocks in the index to lock in the arbitrage profit when the prices converge.

Question 5

Which of the following is a hedge strategy?

Accepted Answer

The answer of Which of the following is a hedge...

Question 6

VM Industries imports numerous parts from India for assembly in the USA. What category of futures contract will likely be used to hedge this transaction?

Accepted Answer

Foreign currency futures contracts would be used to hedge against the risk of currency value fluctuations between the US dollar and the Indian rupee, which can affect the cost of importing parts from India.

Question 7

Which of the following is a speculation strategy?

Accepted Answer

Speculation involves taking a position in the market with the expectation of profiting from fluctuations in the price of assets. A hedge fund shorting index futures is engaging in speculation, as it is betting on the decline of market indices to make a profit, without necessarily having a direct stake in the underlying assets for business operations.

Question 8

On January 1, the listed spot and futures prices of a Treasury bond were 95-4 and 95-6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and futures prices were 95 and 94-4, respectively. If you were to liquidate your position, your profits would be a

Accepted Answer

The profit or loss from the spot market transaction and the futures market transaction must be calculated separately and then combined to determine the overall profit or loss. The spot market transaction involves selling the Treasury bonds at the initial spot price and buying them back at the later spot price. The futures market transaction involves buying a futures contract at the initial futures price and selling it at the later futures price. The calculations for each market must consider the price changes in terms of 32nds of a dollar, as Treasury bond prices are quoted in this manner. The overall profit or loss is the sum of the profit or loss from each transaction. The provided choices do not accurately reflect the correct calculation based on the given price changes in the spot and futures markets.

Question 9

You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

Accepted Answer

The profit would be ($73.12 - $70) * 1,000 = $3,120, which is not an option listed.

Question 10

Which of the following is a hedge strategy?

Accepted Answer

A farmer going short corn futures is a hedge strategy because it allows the farmer to lock in a price for their crop, protecting against the risk of falling prices.

Quiz 22: Futures Markets

You sold one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

If you determine that the DAX-30 Index futures is overpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

What concept prevents investors from having control over the tax year in which they realize gains and losses?

If you determine that the DAX-30 Index futures is underpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by

Which of the following is a hedge strategy?

VM Industries imports numerous parts from India for assembly in the USA. What category of futures contract will likely be used to hedge this transaction?

Which of the following is a speculation strategy?

You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

Which of the following is a hedge strategy?