Deck 13: Financial Futures Markets

Question 1

A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____, and the position in futures contracts will result in a ____.

A)increase; gain
B)increase; loss
C)decrease; gain
D)decrease; loss

Answer 1

C

Question 2

According to the text, when a financial institution sells futures contracts on debt securities in order to hedge against an increase in interest rates, this is referred to as

A)a long hedge.
B)a short hedge.
C)a closed out position.
D)basis trading.

Answer 2

B

Question 3

The use of financial leverage

A)reduces gains on futures contracts.
B)reduces losses on futures contracts.
C)magnifies both gains and losses on futures contracts.
D)magnifies losses on futures contracts but has no effect on gains.

Answer 3

C

Question 4

The main role of a futures exchange is to initiate buy positions on any futures contracts that it believes will increase in value over time.

Question 5

If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.

A)increase; selling
B)increase; buying
C)decrease, selling
D)decrease; purchasing a call option on

Question 6

__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires.

A)Credit risk
B)Control risk
C)Operational risk
D)Management risk

Question 7

Assume that a bank obtains most of its funds from large CDs with a five-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affected if interest rates decline. To partially hedge its position, it could ____ interest rate futures contracts.

A)adversely; purchase
B)favorably; sell
C)favorably; purchase
D)adversely; sell

Question 8

____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.

A)Hedgers
B)Day traders
C)Position traders
D)None of these are correct.

Question 9

A bank has $500 million in long-term assets and $400 million in long-term fixed-rate liabilities. If interest rates rise, the bank's net exposure  will be ________, assuming that the long-term assets and liabilities are similarly affected. Therefore the bank should focus on hedging the net exposure amount by creating a ______.

A)$100 million; short hedge
B)$100 million; long hedge
C)$900 million; short hedge
D)$900 million; long hedge

Question 10

Systemic risk reflects the risk that a particular event could

A)cause losses at a firm due to inadequate management control.
B)spread adverse effects among several firms or among financial markets.
C)cause a loss in value due to market conditions.
D)have a larger effect on the futures position than on the position being hedged.

Question 11

Interest rate futures are not available on

A)Treasury bonds.
B)Treasury notes.
C)Eurodollar CDs.
D)the S&P 500 index.

Question 12

The initial margin of a futures contract is typically between ____ percent of a futures contract's full value.

A)0 and 2
B)5 and 18
C)25 and 40
D)45 and 60

Question 13

According to the text, using a futures contract on one financial instrument to hedge securities not identical to the instrument represented by the futures contract is known as _______ hedging.

A)cross
B)ratio
C)beta
D)liquid

Question 14

Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transaction costs?

A)$1,180,000
B)$118
C)$11,800
D)$15,625
E)$1,562.50

Question 15

Cross-hedging with Treasury bond futures is primarily intended to protect against credit (default)risk of securities.

Question 16

Financial futures contracts on U.S. securities are ____ by non-U.S. financial institutions.

A)not allowed to be traded
B)rarely desired
C)commonly traded
D)only allowed to be traded

Question 17

Assume that speculators purchased a futures contract at the beginning of the year. If the price of the security represented by the futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for.

A)increases; more
B)decreases; less
C)remains the same; more
D)increases; less

Question 18

Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract?

A)$.50
B)$50
C)$500
D)$5,000
E)None of these are correct.

Question 19

As applied to the futures markets, the basis is the

A)difference between the price of a security and the price of a futures contract on the security.
B)gain or loss from hedging with futures contracts.
C)difference between a futures contract price and the initial deposit required.
D)price paid for a futures contract after accounting for transaction costs.
E)price paid for an option contract.

Question 20

A(n)____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date.

A)option contract
B)brokerage contract
C)financial futures contract
D)margin call

Question 21

Companies with international trade can hedge ____ by ____ currency futures.

A)payables; selling
B)receivables; buying
C)payables; buying
D)payables; selling AND receivables; buying
E)receivables; buying AND payables; buying

Question 22

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

A)Market
B)Liquidity
C)Credit
D)Basis
E)None of these are correct.

Question 23

Speculators who normally close out their futures positions on the same day that the positions were initiated are referred to as

A)day traders.
B)hedgers.
C)closed-end traders.
D)position traders.

Question 24

An S&P 500 index futures contract is valued at $250 times its index level. Laura sells an S&P 500 futures contract with a September settlement date when the index is 2550. By the settlement date, the S&P 500 index falls to 2450. The profit (or loss)on Laura's position in the S&P 500 futures contract is

A)$15,000.
B)- $15,000.
C)$25,000.
D)−$25,000.
E)0

Question 25

The value of an S&P 500 futures contract is $250 times the index. Assume the futures price on the S&P 500 index is 2400 at the time of purchase. If the index price is 2560 when the position is closed out, the gain is

A)$40,000.
B)$20,000.
C)$33,190.
D)$25,000.
E)$35,500.

Question 26

Which of the following is NOT true regarding the futures exchanges?

A)They provide an organized marketplace where standardized futures contracts can be traded.
B)They facilitate the trading of specialized futures contracts that are tailored to the preferences of the parties involved.
C)They facilitate the trading process by clearing, settling, and guaranteeing all transactions.
D)They are regulated by the Commodity Futures Trading Commission (CFTC).
E)All of these are correct.

Question 27

Trading restrictions imposed on specific stocks or stock indexes are referred to as

A)index busters.
B)index options.
C)circuit breakers.
D)protective covenants.

Question 28

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be

A)equal to the prevailing stock prices.
B)below the prevailing stock prices.
C)above the prevailing stock prices.
D)negative.

Question 29

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

A)liquidates all of its stock holdings whenever it expects a market downturn.
B)maintains a constant buy position in stock index futures.
C)maintains a constant sell position in stock index futures.
D)None of these are correct.

Question 30

The values of stock index futures contracts are insulated from market risk.

Question 31

The cost of carry, or net financing cost, to the purchaser of stock index futures refers to the brokerage commissions paid to the broker as a result of the purchase.

Question 32

The net gain or loss on a futures contract for a stock index that is not closed out is the difference between the futures price when the initial position was created and the futures price at

A)the settlement date.
B)the date at which the futures price reaches its maximum.
C)the date at which the futures price reaches its minimum.
D)the date three months beyond the date when the initial position was taken.

Question 33

Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the credit (default)risk. A short position in Treasury bill futures ____ an effective hedge against the credit (default)risk.

A)would be; would be
B)would be; would not be
C)would not be; would not be
D)would not be; would be

Question 34

The prices of stock index futures

A)are always the same as the prices of the stocks representing the index.
B)are always a little above the prices of the stocks representing the index.
C)are always a little below the prices of the stocks representing the index.
D)None of these are correct.

Question 35

Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar.

A)receivables; appreciation
B)receivables; depreciation
C)payables; depreciation
D)payables; appreciation

Question 36

If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.

A)more; decrease
B)more; rise
C)fewer; rise
D)None of these are correct.

Question 37

Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates will decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____.

A)sell; loss
B)purchase; gain
C)purchase; loss
D)sell; gain
E)None of these are correct.

Question 38

If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.

A)purchasing; Treasury bonds
B)purchasing; the S&P 500 Index
C)purchasing; the Municipal Bond Index
D)selling; the Municipal Bond Index

Question 39

Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations.

Question 40

Speculators in futures contracts that normally maintain their futures positions for extended periods of time (such as weeks or months)are referred to as

A)day traders.
B)hedgers.
C)closed-end traders.
D)position traders.

Question 41

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

A)Investors who expect a particular stock's price to decline over time can sell futures contracts on that stock, or they can sell the stock short.
B)Single stock futures are available only on stocks of companies that are in the S&P 500 index.
C)Single stock futures are traded in the United States at OneChicago.
D)Single stock futures are regulated by the Commodity Futures Trading Commission (CFTC)and the Securities and Exchange Commission.
E)All of these are correct.

Question 42

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

Question 43

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.

Question 44

The earnings of a financial institution that hedges with interest rate futures are less sensitive to economic events than the earnings of an institution that does not hedge.

Question 45

Brokers commonly require margin deposits from their customers above those required by the exchanges.

Question 46

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

A)increase; higher; downward
B)increase; lower; downward
C)increase; higher; upward
D)decrease; higher; downward
E)none of the above

Question 47

Purchasers of financial futures contracts traded on an exchange know who the sellers are, and send a check directly to the seller at the time of the purchase.

Question 48

Stock index futures cannot be closed out before the settlement date.

Question 49

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 three months. 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.

A)40; profit; $76,800
B)40; loss; $76,800
C)50; profit; $70,000
D)40; profit; $70,000
E)None of these are correct.

Question 50

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.

Question 51

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

Question 52

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.

Question 53

Which of the following statements is incorrect?

A)Circuit breakers are trading restrictions imposed on specific stocks or stock indexes.
B)Circuit breakers guarantee that prices will turn upward.
C)Circuit breakers may be able to prevent large declines in prices that would be attributed to panic selling rather than to fundamental forces.
D)Circuit breakers may allow investors to determine whether circulating rumors are true.

Question 54

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

Question 55

Financial futures contracts are normally sold on a futures exchange, not over the counter.

Question 56

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

Question 57

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

A)higher
B)lower
C)either higher or lower
D)None of these are correct.

Question 58

Financial futures contracts on stock indexes are referred to as interest rate futures.

Question 59

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

A)$1,030.00; profit
B)$1,030.00; loss
C)$1,093.75; profit
D)$1,093.75; loss
E)None of these are correct.

Question 60

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 stock indexes.

Question 61

  _________ 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.

A)Speculators; hedgers
B)Hedgers; speculators
C)Arbitrageurs; speculators
D)Hedgers; arbitrageurs

Question 62

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

Question 63

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

Question 64

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

Question 65

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

A)a long hedge.
B)a short hedge.
C)a day hedge.
D)index arbitrage.

Question 66

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

A)Dynamic asset allocation
B)Cross-hedging
C)Index arbitrage
D)Net hedging

Question 67

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

A)basis risk
B)liquidity risk
C)market risk
D)postpayment risk