Question 1

_________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions.

Accepted Answer

Hedgers use futures to protect against adverse movements in prices or interest rates, while speculators take on risk, hoping to profit from future price movements.

Question 2

Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges.

Accepted Answer

Specialized futures contracts, often tailored to the specific needs of the parties, are typically sold over the counter (OTC), allowing for customization. In contrast, standardized financial futures contracts, which have set terms and are more generic, are traded on exchanges to provide liquidity and transparency.

Question 3

Credit risk exists for futures contracts traded on exchanges, but it is normally not a concern for over-the-counter futures transactions.

Accepted Answer

Credit risk is typically a concern for over-the-counter (OTC) futures transactions because they are privately negotiated and do not have the centralized clearinghouse that exchange-traded futures have to mitigate such risk.

Question 4

Settlement of stock index futures contracts occurs through delivery of the underlying securities.

Accepted Answer

Settlement of stock index futures contracts typically occurs through cash settlement, not by delivery of the underlying securities, because they are based on an index rather than physical stocks.

Question 5

A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use

Accepted Answer

A long hedge involves buying futures contracts to protect against the risk of declining interest rates, which can increase the value of fixed-income securities.

Question 6

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.

Accepted Answer

Index arbitrage involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises, aiming to profit from the price differences between the futures contract and the underlying stocks.

Question 7

Which of the following is  NOT a type of risk associated with futures contracts?

Accepted Answer

Postpayment risk is not a recognized type of risk associated with futures contracts. Futures contracts typically involve basis risk, liquidity risk, and market risk. Basis risk involves the risk that the price of the futures contract and the underlying asset diverge. Liquidity risk is the risk of not being able to quickly buy or sell a contract without significantly affecting its price. Market risk involves the risk of losses due to factors that affect the entire market. Postpayment risk, which might imply a risk associated with payments after a transaction has been completed, is not a standard term in the context of futures trading.

Quiz 13: Financial Futures Markets

_ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; commonly take the opposite position and thus serve as counterparties on many transactions.

Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges.

Credit risk exists for futures contracts traded on exchanges, but it is normally not a concern for over-the-counter futures transactions.

Settlement of stock index futures contracts occurs through delivery of the underlying securities.

A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.

Which of the following is NOT a type of risk associated with futures contracts?