Question 1

Futures contracts were first traded on
A) stock indexes.
B) foreign currencies.
C) commodities.
D) government bonds.

Accepted Answer

While various forms of futures trading existed throughout history, modern futures contracts as we know them today were first traded on commodities such as wheat, corn, and cotton in the mid-19th century.

Question 2

An investor with a bond portfolio wishes to protect the value of his position by using futures contracts. This investor should use a
A) long hedge.
B) short hedge.
C) time spread.
D) money spread.

Accepted Answer

B

Question 3

Which of the following variables is not established on a futures contract?
A) contract size
B) price
C) delivery date
D) specified grade

Accepted Answer

B

Question 4

The cumulative number of futures contracts that are not offset at any point in time is called:
A) margin.
B) open interest.
C) hedged position.
D) marked to the market position.

Accepted Answer

Open interest refers to the total number of futures contracts that have not yet been offset or fulfilled by delivery. It can give an indication of the level of trading activity in a particular futures market. Margin refers to the amount of funds that must be deposited by a futures trader as collateral to cover potential losses. A hedged position refers to a position taken to reduce the risk of price fluctuations in an underlying asset. Marked to the market position refers to the value of a futures position at the current market price.

Question 5

The difference between the cash price and the futures price on the same asset or commodity is known as the
A) basis.
B) spread.
C) yield spread.
D) premium.

Accepted Answer

The answer of The difference between the cash price and...

Question 6

In the case of a futures contract, buyers can settle a contract
A) only by taking delivery.
B) only by arranging an offsetting contract.
C) either by delivery or offset.
D) by a combination of delivery and offset.

Accepted Answer

Buyers of futures contracts have the choice to settle the contract either by taking delivery of the underlying asset or by arranging an offsetting contract. This flexibility allows futures traders to manage their positions in a more efficient manner, as they can avoid the physical delivery process if it is not desirable or feasible in their situation. However, depending on the terms of the specific futures contract and market conditions, a combination of both delivery and offset may also be an option for settling the contract.

Question 7

When trading futures, margin
A) is seldom used.
B) indicates that credit is being extended.
C) is a down payment.
D) in effect, is a performance bond.

Accepted Answer

The answer of When trading futures, margin
A) is seldom used.
B)...

Question 8

The initial margin required for futures trading
A) is only put up by the seller.
B) is only put up by the buyer.
C) can be put up by either party, whoever initiates the transaction.
D) must be put up by both the buyer and the seller.

Accepted Answer

The initial margin required for futures trading must be put up by both the buyer and the seller. This margin serves as a good faith deposit and helps to ensure that both parties fulfill their obligations under the contract. The margin requirement is typically set by the exchange where the futures contract is traded and can vary depending on the underlying asset and other factors.

Question 9

To protect the value of a bond portfolio against a rise in interest rates using futures, the portfolio owner could execute a ____________ hedge.
A) long
B) duration
C) short
D) maturity

Accepted Answer

The answer of To protect the value of a bond...

Question 10

A forward contract differs from a futures contract in that:
A) a forward contract is for a shorter period of time.
B) a forward contract does not specify the selling price.
C) a forward contract does specify the selling price.
D) a forward contract is non-binding.

Accepted Answer

A forward contract does specify the selling price, whereas a futures contract specifies the selling price and delivery date. Additionally, a forward contract is typically customized to the specific needs of the buyer and seller, whereas a futures contract is standardized.

Question 11

On the other side of every futures transaction is:
A) the dealer.
B) the futures exchange.
C) the commodity producer.
D) the clearinghouse.

Accepted Answer

The clearinghouse acts as an intermediary between the buyer and seller of a futures contract, ensuring that both parties meet their obligations and that the trade is settled. Therefore, the correct answer is D. The dealer, futures exchange, and commodity producer may all be involved in the transaction, but they are not the counterparty to the trade.

Question 12

Futures exchange members:
A) trade strictly for their own accounts.
B) trade strictly for others.
C) can trade for their own accounts or for others.
D) are all controlled by commodity firms.

Accepted Answer

Futures exchange members have the option to trade for their own accounts or on behalf of others, such as clients or firms. Therefore, option C is the best choice. Option A suggests that members only trade for their own accounts, which may not be true, and option B implies that members only trade for others, which is also not necessarily true. Option D is not accurate, as members may work independently or for various types of firms, not just commodity firms.

Question 13

Spot markets are for immediate delivery. Forward prices are:
A) The price agreed upon today for an asset for deferred delivery in the future.
B) The price in the future for an asset delivered in the future.
C) The price today for a forward price in the future.
D) Based on current spot market prices.

Accepted Answer

Forward prices are prices that are agreed upon today for delivery in the future. They are not based on current spot market prices, and they are not prices for immediate delivery. Therefore, choice A is the correct answer.

Question 14

Which of the following exchanges claims that its 3,600 members trade 50 different futures and options products by open auction and electronically?:
A) Chicago Board Options Exchange.
B) Chicago Board of Trade.
C) Chicago Mercantile Exchange.
D) Globex.

Accepted Answer

The answer of Which of the following exchanges claims that...

Question 15

Approximately what percentage of futures contracts is closed by offset before the contract expires:
A) 25.
B) 50
C) 95.
D) 75.

Accepted Answer

The majority of futures contracts are closed by offset before the contract expires, typically around 95%. This allows traders to avoid the delivery or physical settlement of the underlying asset and instead settle the contract in cash. Therefore, the best choice is C.

Question 16

Futures contracts are regulated by the:
A) Securities Exchange Commission.
B) National Association of Security Dealers.
C) National Association of Commodity Dealers.
D) Commodity Futures Trading Commission.

Accepted Answer

Futures contracts are regulated by the Commodity Futures Trading Commission (CFTC). The CFTC is an independent agency that regulates the commodity futures and options markets in the US.

Question 17

Of the following statements about futures trading, which one is INCORRECT?
A) There are no specialists on futures exchanges.
B) All futures contracts are eligible for margin trading.
C) Trading is halted for the day if the prices reach the daily limit.
D) The uptick rule applies to the shorting of futures contracts.

Accepted Answer

The uptick rule applies to shorting of stocks, not futures contracts.

Question 18

How often are futures contracts marked to market?
A) daily
B) weekly
C) monthly
D) quarterly

Accepted Answer

The answer of How often are futures contracts marked to...

Question 19

A futures contract is
A) a nonnegotiable, nonmarketable instrument.
B) a security, like stocks and bonds.
C) a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity.
D) not a legal contract, and therefore its terms can be changed .

Accepted Answer

A futures contract is a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity. It is a type of derivative that allows investors to hedge against price fluctuations in commodities, currencies, stock indices, and more. The contracts are traded on exchanges, and their terms are set by the exchange. Therefore, they are negotiable, marketable instruments. They are legal contracts, and their terms cannot be changed without the agreement of both parties.

Question 20

Which of the following is a characteristic of futures contracts? They
A) are marked to the market daily.
B) can be sold short only on an uptick.
C) are handled by specialists on futures exchanges.
D) have no daily price limits.

Accepted Answer

Futures contracts are marked to the market daily, meaning that the gains or losses are settled daily based on the current market price. This enables parties to track their profits or losses and reduces the risk of default. The other options are not necessarily true for all futures contracts, as short selling rules and daily price limits can vary depending on the exchange and the specific contract.

Quiz 20: Understanding Derivative Securities: Futures

Futures contracts were first traded on

An investor with a bond portfolio wishes to protect the value of his position by using futures contracts. This investor should use a

Which of the following variables is not established on a futures contract?

The cumulative number of futures contracts that are not offset at any point in time is called:

The difference between the cash price and the futures price on the same asset or commodity is known as the

In the case of a futures contract, buyers can settle a contract

When trading futures, margin

The initial margin required for futures trading

To protect the value of a bond portfolio against a rise in interest rates using futures, the portfolio owner could execute a ____________ hedge.

A forward contract differs from a futures contract in that:

On the other side of every futures transaction is:

Futures exchange members:

Spot markets are for immediate delivery. Forward prices are:

Which of the following exchanges claims that its 3,600 members trade 50 different futures and options products by open auction and electronically?:

Approximately what percentage of futures contracts is closed by offset before the contract expires:

Futures contracts are regulated by the:

Of the following statements about futures trading, which one is INCORRECT?

How often are futures contracts marked to market?

A futures contract is

Which of the following is a characteristic of futures contracts? They