Question 1

The owner of a currency future has a claim on a specified amount of a specified foreign currency.

Accepted Answer

Currency futures are standardized contracts that trade on exchanges and specify the price in one currency at which another currency can be bought or sold at a future date, thus giving the owner a claim on a specified amount of the foreign currency.

Question 2

Benjamin bought a contract for future delivery of 5000 bushels of oats at $3.64 per bushel and sold a later contract at $3.92 a bushel. A month later, corn prices were rising and Joseph sold his long contract for $4.01 per bushel and covered his short by purchasing a contract for $3.99 per bushel. Ignoring trading costs, Joseph

Accepted Answer

Joseph made a profit on both the long and the short positions. For the long position, he bought at $3.64 and sold at $4.01, making a profit of $0.37 per bushel. For the short position, he sold at $3.92 and covered at $3.99, making a profit of $0.07 per bushel. The total profit is ($0.37 + $0.07) * 5000 = $2.20 * 5000 = $11,000. However, there was an error in the calculation of the short position profit; it should be a loss of $0.07 per bushel, not a profit. Correcting this, the total profit is ($0.37 - $0.07) * 5000 = $0.30 * 5000 = $1,500.

Question 3

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. This strategy helps them manage the risk of price changes in the commodities they produce or use.

Question 4

The purchasing manager of a jewelry manufacturer is worried that the rising price of gold will have a negative impact on profit margins on items it has promised to merchants in 3 months. She should

Accepted Answer

Buying a gold futures contract today allows the purchasing manager to lock in the current price of gold, thus hedging against the risk of rising gold prices in the future. This strategy ensures that the company can purchase gold at today's price when it needs to fulfill orders in 3 months, protecting its profit margins.

Question 5

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

Accepted Answer

Spreading strategies in commodities trading involve taking multiple positions that are expected to offset each other to some extent. This approach is primarily used to reduce risk by hedging against price movements in the market, rather than to increase leverage, profits, or decrease transaction costs directly.

Question 6

Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?

Accepted Answer

When a speculator short sells a commodity or financial futures contract, they are betting that the price of the contract will decline. If the price does decline, they can buy back the contract at a lower price, thus making a profit on the difference.

Question 7

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 8

The return on a futures contract

Accepted Answer

The return on a futures contract is highly related to the low margin requirement because futures are leveraged instruments, meaning that investors can control a large amount of the underlying asset with a relatively small amount of capital (the margin). This leverage amplifies both gains and losses, making the return on futures contracts highly sensitive to changes in the price of the underlying asset relative to the margin requirement.

Question 9

Which of the following statements concerning futures are correct?
I. Investors in financial futures can earn both dividend income from the underlying security as well as the potential capital gain from the futures contract.
II. The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit.
III. It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage.
IV. Conservative investors tend to purchase one futures contract as a means of increasing the return on their portfolio while maintaining minimal risk.

Accepted Answer

II and III are correct. The return on a futures contract is indeed calculated by the net difference between the sale and purchase price divided by the margin deposit, and the nature of futures contracts' leverage and volatility means investors can quickly lose their entire investment. Investors in financial futures do not receive dividend income from the underlying security, and purchasing futures contracts is generally not considered a minimal risk strategy for conservative investors.

Question 10

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

George's return on invested capital can be calculated by first determining the profit or loss from the transaction and then dividing that by the initial margin deposit. The initial purchase was at 349 cents per unit, and the contract was sold at 278 cents per unit. This results in a loss of 71 cents per unit (349 - 278 = 71). Since the contract is for 2500 units, the total loss is 71 cents * 2500 units = 177,500 cents or $1,775. The initial margin deposit required for the contract was 10% of the initial value, which is 10% of (349 cents * 2500 units) = $872.50. The return on invested capital is the loss divided by the initial margin deposit: ($1,775 / $872.50) * 100% = -203.4%.

Question 11

Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss. This practice is called

Accepted Answer

Spreading involves combining two or more different futures contracts to create a position that can potentially generate profits while limiting risk. This strategy is used to take advantage of price differences between related futures contracts rather than outright speculation on the direction of market prices.

Question 12

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

When short selling, profit is made if the asset's price decreases after selling it. For contract A, you short sell at 428 and buy back at 435, resulting in a loss of 7 points (435 - 428). For contract B, you buy at 333 and sell at 339, making a profit of 6 points (339 - 333). The net profit is the sum of these, which is -1 point (6 - 7).

Question 13

Which of the following are advantages of using options for futures speculation?
I. increased leverage
II. Potential losses are limited to the cost of the option.
III. Options are available on a broad range of commodity, index, and currency futures.
IV. Investors must always take delivery of the commodity.

Accepted Answer

Options for futures speculation offer increased leverage (I), limit potential losses to the cost of the option itself (II), and are available on a wide variety of underlying assets, including commodities, indexes, and currencies (III). Investors are not required to take delivery of the commodity, which makes statement IV incorrect.

Question 14

Lakshmi is confident that the price of gold is going to rise because the rate of inflation is increasing. To profit from her prediction, Lakshmi should

Accepted Answer

Buying a gold futures contract allows Lakshmi to lock in a price for gold today, with the expectation that the price will rise in the future. If the price of gold increases as she predicts, she can sell the gold at the higher market price, profiting from the difference.

Question 15

Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The initial deposit is $2,500. (Show all work.)

Accepted Answer

The answer of Calculate the return on invested capital on...

Question 16

One of the advantages of speculating with stock-index futures is that they eliminate the need to predict the future course of the stock market.

Accepted Answer

Speculating with stock-index futures does not eliminate the need to predict the future course of the stock market; it still requires market prediction to make profitable trades, as the value of these futures is directly linked to the performance of the market indices they represent.

Question 17

If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following?
I. Realize that making a profit is relatively easy.
II. Be mentally prepared for an enormous loss.
III. Be financially able to meet repeated margin calls.
IV. Spend all of their available cash on margin deposits.

Accepted Answer

Participating in the commodities market involves significant risk, including the potential for large losses and the necessity to meet margin calls, but it does not imply that making a profit is easy or that one should spend all available cash on margin deposits.

Question 18

One reason that commodities appeal to investors is because they

Accepted Answer

Commodities can act as hedges against inflation because their prices often increase when the cost of living rises, preserving the purchasing power of an investor's money.

Question 19

The return on a futures contract is calculated as

Accepted Answer

The answer of The return on a futures contract is...

Question 20

Briefly discuss futures options. What are they, and what advantage do they offer an investor?

Accepted Answer

The answer of Briefly discuss futures options. What are they,...

Quiz 15: Futures Markets and Securities