Question 1

Stock index futures cannot be closed out before the settlement date

Accepted Answer

Stock index futures can be closed out before the settlement date through offsetting trades.

Question 2

Clarke Company plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next threemonths. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declines to 97-20, Clarke would make a ____ of $____ from closing out the futures position.

Accepted Answer

The correct answer is D. Clarke would make a profit of $70,000 from closing out the futures position.

Question 3

An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices.

Accepted Answer

An unexpected increase in the consumer price index (CPI) suggests rising inflation, which often leads to expectations of higher interest rates to combat inflation. Higher interest rates, in turn, typically result in lower prices for existing bonds, including Treasury bond futures, hence the downward pressure on their prices.

Question 4

The value of a stock index futures contract has little correlation with the value of the underlying stock index.

Accepted Answer

The value of a stock index futures contract is highly correlated with the value of the underlying stock index. This is because the price of the futures contract is based on the expected future value of the underlying index. However, there may be short-term fluctuations in the correlation due to factors such as supply and demand, interest rates, and geopolitical events.

Question 5

The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices.

Accepted Answer

Stock index futures allow investors to bet on the future direction of the market and to hedge their existing investments. They are generally considered to be more responsive to breaking news and investor sentiment than individual stocks, which may take longer to reflect the overall market trend.

Question 6

Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stockindexes.

Accepted Answer

Participants in stock index futures do monitor indicators such as earnings reports, economic data releases, and political events, but ultimately the prices are highly correlated to movements in the underlying stock indexes.

Question 7

Which of the following statements is incorrect regarding single stock futures?

Accepted Answer

The statement itself is not provided, so it cannot be determined if it is incorrect.

Question 8

Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time.

Accepted Answer

Purchasers of currency futures contracts are not required to hold the contract until the settlement date and accept delivery of the foreign currency. They can close out the position before the settlement date by either selling the futures contract or entering into an offsetting futures contract.

Question 9

A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date.

Accepted Answer

A bond index futures contract allows for both buying and selling of a bond index for a specified price at a specified date.

Question 10

___________ 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 buying or selling stock index futures while also taking an opposite position in the stocks that make up the index, in order to profit from any difference in prices between the futures and the underlying stocks. This is a common strategy used by institutional investors to take advantage of minor price discrepancies and improve overall portfolio returns.

Question 11

Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.

Accepted Answer

Selling S&P 500 index futures allows market participants to profit if the stock market performs poorly before the settlement date.

Question 12

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

Accepted Answer

Postpayment risk is not a type of risk associated with futures contracts. Basis risk, liquidity risk, and market risk are commonly associated with futures contracts.

Question 13

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

Question 14

The futures price is mainly a function of the prevailing price of the underlying security plus an expected adjustment in that price by the settlement date.

Accepted Answer

The futures price is based on the current spot price of the underlying asset plus an expected adjustment for carrying costs, interest rates, dividends, and other factors that may affect the price by the settlement date. Therefore, the statement is true.

Question 15

Purchasers of financial futures contracts usually know who the sellers are, and vice versa.

Accepted Answer

Purchasers and sellers of financial futures contracts typically interact in public markets where information about each other's trades is publicly available, allowing buyers and sellers to know each other's identities.

Question 16

Stock index futures are priced ____ than the stock index itself.

Accepted Answer

Stock index futures can be priced higher or lower than the stock index itself depending on various factors like market sentiment, demand and supply, news events, etc. So, the price of futures can fluctuate above or below the current price of the underlying index. Therefore, choice C is the best answer.

Question 17

Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities.

Accepted Answer

Financial futures contracts on U.S. securities are indeed commonly traded by non-U.S. financial institutions that hold U.S. securities. The contracts provide a way for these institutions to manage risk and potentially profit from fluctuations in the U.S. securities market.

Question 18

A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge.

Accepted Answer

By hedging with interest rate futures, a financial institution can protect itself from interest rate fluctuations, which can be caused by economic events such as changes in inflation or monetary policy. This reduces the institution's sensitivity to such events and provides a level of stability in its financial position.

Question 19

Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position.Atthat time, the futures contract specifies 103-15. What is Baher's nominal profit? The par value of the futures contract is $100,000.

Accepted Answer

To calculate Baher's profit or loss, we need to determine the price difference between the purchase price and the selling price of the futures contract.

Purchase price = 102-12 = 102.375% of par value = $102,375
Selling price = 103-15 = 103.469% of par value = $103,469

Profit = Selling price - Purchase price = $103,469 - $102,375 = $1,093.75

Since Baher made a profit, we can eliminate choices B and D. Additionally, since Baher's nominal profit is greater than $1,000, we can eliminate choice A. Therefore, the correct answer is C, $1,093.75 profit.

Question 20

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

Accepted Answer

The answer of A financial institution that wishes to reduce...

Quiz 13: Financial Futures Markets