Question 1

Where did the U.S.futures market originate?

Accepted Answer

D) Chicago
Chicago became the central hub for futures trading in the United States with the establishment of the Chicago Board of Trade (CBOT) in 1848, where commodity futures contracts were standardized and traded. This made it easier for farmers and merchants to hedge against the risk of price fluctuations in agricultural products.

Question 2

Which of the following duties is not performed by the clearinghouse?

Accepted Answer

The clearinghouse does not lend money to meet margin requirements. This responsibility lies with the broker-dealer or other financial institutions. The other duties listed, such as holding margin deposits, guaranteeing performance, and maintaining records, are responsibilities of the clearinghouse.

Question 3

A limit move is when a futures price reaches its all time high or low price.

Accepted Answer

A limit move is when the price of a futures contract reaches its daily maximum or minimum price limit set by the exchange, not necessarily its all time high or low.

Question 4

Position limits are restrictions on the number of transactions an investor can execute on a given day.

Accepted Answer

Position limits are restrictions on the maximum number of contracts or shares an investor can hold in a particular security or commodity. It is not related to the number of transactions executed on a given day.

Question 5

An out-of-the-money call option has an exercise price less than the stock price.

Accepted Answer

An out-of-the-money call option has an exercise price higher than the current stock price.

Question 6

Credit risk is handled in forward markets by daily marking-to-market.

Accepted Answer

Credit risk in forward markets is not typically handled by daily marking-to-market; this is a characteristic of futures markets. In forward markets, the contract terms are privately negotiated and do not usually involve daily settlements, which leaves more credit risk compared to futures markets.

Question 7

A put option increases in value when the stock price decreases.

Accepted Answer

A put option gives the owner the right, but not the obligation, to sell a stock at a certain price (strike price) within a certain time frame. When the stock price decreases, the option becomes more valuable because the owner can sell the stock at the higher strike price and make a profit. Therefore, the value of the put option increases when the stock price decreases.

Question 8

Exercise limits are restrictions on the number of options that can be exercised by an investor in a given day or series of days.

Accepted Answer

Exercise limits are put in place to prevent unusual market circumstances or delays in reporting from resulting in manipulation of the market. These limits may apply to individual investors or to the market as a whole, and may vary depending on the type of option and the exchange on which it is traded.

Question 9

When futures accounts are marked-to-market,an account balance below the maintenance margin must be brought up to the initial margin.

Accepted Answer

When futures accounts are marked-to-market, any decrease in the account balance below the maintenance margin requires the trader to replenish the account back to the initial margin level to maintain the required margin. This process is known as a margin call.

Question 10

The exercise price is also called the striking price.

Accepted Answer

This statement is true. The exercise price and striking price are interchangeable terms used in options trading to refer to the price at which an underlying asset can be bought or sold.

Question 11

The Put and Call Brokers and Dealers Association created the first organized options exchange.

Accepted Answer

The answer of The Put and Call Brokers and Dealers...

Question 12

What are circuit breakers?

Accepted Answer

Circuit breakers are systems that automatically shut down the exchange computer during periods of abnormal trading activity or market volatility to prevent excessive losses or errors. They are designed to serve as a safety net for the market and protect investors from extreme market movements. Options A, C, and D do not accurately describe circuit breakers.

Question 13

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound.If the initial margin is $2,525 and the maintenance margin is $1,000,at what price would there be a margin call?

Accepted Answer

The correct answer is A because the margin call would occur when the futures price falls to $31.29, which is $0.31 below the initial margin of $2,525 divided by 5,000 pounds.

Question 14

Individuals engaging in this type of trading strategy are characterized by their attempt to profit from guessing the direction of the market

Accepted Answer

Speculators are individuals who attempt to make profits by guessing the direction of the market. They do not have any interest in hedging or spreading risks, nor do they engage in arbitrage.

Question 15

One of the advantages of forward markets is

Accepted Answer

Forward markets offer the advantage of contracts that are tailored to the needs of the parties involved. Unlike standardized exchange-traded derivatives, forward contracts are private agreements between two parties to buy or sell an asset at a specified price on a future date. This customization allows for specific quantities, quality standards, delivery times, and other terms to be negotiated to suit the unique requirements of the counterparties. This flexibility is one of the key benefits of forward markets.

Question 16

Futures contracts are similar to forward contracts because they both represent a

Accepted Answer

Futures contracts and forward contracts are both agreements to buy or sell an asset at a predetermined price on a specified date in the future. However, futures contracts are standardized and traded on exchanges while forward contracts are customized and traded over-the-counter.

Question 17

The over-the-counter options market is much larger than the exchange-listed options market.

Accepted Answer

The over-the-counter options market is decentralized and comprises various financial institutions and market makers, leading to a larger market size than the exchange-listed options market, which is centralized and governed by exchange rules and regulations.

Question 18

Despite the fact that forward contracts carry more credit risk than futures contracts,forward contracts offer what primary advantage over futures contracts?

Accepted Answer

The primary advantage of forward contracts over futures contracts is that the terms and conditions of the contract can be tailored to meet the specific needs of the two parties involved. This allows for greater flexibility in the contract, as opposed to the standardized terms and conditions of futures contracts.

Question 19

A market maker is an options trader who buys and sells options off of the exchange floor.

Accepted Answer

A market maker is a firm or individual who actively quotes two-sided markets, providing bids and offers along with the market size of each. They stand ready to buy or sell stocks (or options) on the exchange they are registered with, not off of it, to facilitate liquidity.

Question 20

Variation margin is which of the following?

Accepted Answer

Variation margin is the margin deposited as a result of marking-to-market. This means that if the market value of a futures contract changes, the party with the loss will need to deposit additional margin to cover the increase in the potential loss. The party with the gain will be able to withdraw margin. The process of marking-to-market occurs daily to ensure that there is enough margin to cover potential losses.

Quiz 2: Structure of Options Markets