Question 1

One of the biggest differences between a futures option and a futures contract is that

Accepted Answer

An option limits the loss exposure to the price of the option premium paid, whereas a futures contract can result in larger losses depending on market movements.

Question 2

The margin deposit associated with the purchase of a futures contract

Accepted Answer

The margin deposit for a futures contract is primarily used to cover potential losses due to adverse price movements, ensuring the financial integrity of the market.

Question 3

The seller of a futures contract

Accepted Answer

The seller of a futures contract is legally obligated to deliver the specified commodity or financial instrument on the specified date, as per the terms of the contract.

Question 4

Assume an investor thinks the share market is about to undergo a sharp retreat. Under these conditions, the investor's best course of action would be to

Accepted Answer

Short selling share-index futures contracts allows the investor to profit from a decline in the market, aligning with their expectation of a market retreat.

Question 5

Hedging in the commodities market is a strategy primarily used by

Accepted Answer

Hedging in the commodities market is primarily used by producers and processors of commodities to protect against price fluctuations and secure stable revenues.

Question 6

The value of a futures option is defined as

Accepted Answer

The value of a futures option is determined by the difference between the option's strike price and the market price of the underlying futures contract, which is known as the intrinsic value.

Question 7

The amount paid at the time a futures contract is sold

Accepted Answer

The amount paid at the time a futures contract is sold is a margin, which acts as a refundable security deposit to ensure the fulfillment of the contract.

Question 8

The basic reason why investors use spreading strategies when speculating in commodities is to

Accepted Answer

Spreading strategies are used to reduce risk by offsetting positions in different but related commodities, thus minimizing the impact of adverse price movements.

Question 9

You short sell contract A at 428 and buy contract B at 333. After one month, you close contract A at 435 and contract B at 339. What is you net profit in points?

Accepted Answer

The answer of You short sell contract A at 428...

Question 10

The purchaser of a futures contract

Accepted Answer

Futures contracts are marked to market daily, meaning the purchaser's account is adjusted to reflect gains or losses based on the contract's daily price changes.

Question 11

Midge feels that the price of gold is going to fall because inflation is on the decline. To profit from her prediction, assuming she is correct, Midge should

Accepted Answer

Selling short a futures contract allows Midge to profit from a decline in the price of gold, as she can buy back the contract at a lower price in the future.

Question 12

In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account. This procedure is called

Accepted Answer

Mark-to-market is the process of adjusting the value of a futures contract to its current market price. This is done daily to ensure that traders are aware of their current gains or losses.

Question 13

To hedge a bond portfolio against rising interest rates, an investor should

Accepted Answer

Selling interest rate futures is a common strategy to hedge against rising interest rates, as it allows the investor to offset potential losses in the bond portfolio due to the inverse relationship between bond prices and interest rates.

Question 14

A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is

Accepted Answer

The answer of A wheat futures contract is quoted in...

Question 15

The value of an interest rate futures contract will go up when

Accepted Answer

Interest rate futures contracts increase in value when interest rates go down, as the underlying bond prices rise.

Question 16

George purchased a futures contract at 349. The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit. George sold the contract at 278. What is George's return on invested capital?

Accepted Answer

The answer of George purchased a futures contract at 349....

Question 17

What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.

Accepted Answer

The answer of What is the return on invested capital...

Question 18

Assume a portfolio manager created a short interest rate hedge for his/her portfolio. Given this hedge, the manager is

Accepted Answer

A short interest rate hedge typically involves using financial instruments to protect against adverse movements in interest rates, which can eliminate both downside risk and upside potential.

Question 19

Assume the initial margin on a Swiss franc futures contract is $2,000. If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?

Accepted Answer

The profit per franc is $0.02 ($0.80 - $0.78). For 125,000 francs, the total profit is $2,500 (125,000 * $0.02). The return on invested capital is the profit divided by the initial margin: $2,500 / $2,000 = 1.25 or 125%.

Question 20

Larry is a corn farmer. To attempt to maximise the value of his crop, Larry is most likely to benefit from

Accepted Answer

By selling a futures contract on corn for delivery at harvest time, Larry can lock in a price for his crop, reducing the risk of price fluctuations and potentially maximizing the value of his crop.

Quiz 15: Commodities and Financial Futures