Deck 20: Futures

Question 1

The initial margin required for futures trading:

A)is only put up by the seller.
B)is only put up by the buyer.
C)is put up by the party initiating the transaction,either the buyer or the seller.
D)must be put up by both the buyer and the seller.

Answer 1

D

Question 2

An investor planning to buy bonds in the future and wishing to lock in the current price using bond contracts should enter a:

A)long hedge.
B)short hedge.
C)basis hedge.
D)margin hedge.

Answer 2

A

Question 3

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 not allowed to trade on the exchange where they are members.

Answer 3

C

Question 4

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 is not standardized.
D)a forward contract is non-binding.

Question 5

As an economic function of futures markets,what does "price discovery" mean?

A)The futures price and spot price converge over time.
B)The spot price is a discounted value of the futures price.
C)The futures price provides information about the expected future spot price.
D)In equilibrium,the spot price and futures price are equal.

Question 6

When trading futures,margin:

A)is seldom used.
B)indicates that credit is being extended.
C)serves as a down payment.
D)in effect,is a performance bond.

Question 7

To protect the value of a bond portfolio against a rise in interest rates using bond futures contracts,the portfolio owner should execute a:

A)long hedge.
B)duration hedge.
C)short hedge.
D)maturity hedge.

Question 8

Which of the following statements about futures trading 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 price reaches the daily limit.
D)The uptick rule applies to the shorting of futures contracts.

Question 9

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

A)Contract size
B)Contract premium
C)Delivery date
D)Specified grade

Question 10

The number of unliquidated futures contracts at any point in time is called:

A)margin.
B)open interest.
C)hedged position.
D)marked to market position.

Question 11

The underlying asset type that futures contracts were first traded on were:

A)stock indexes.
B)foreign currencies.
C)commodities.
D)government bonds.

Question 12

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.

Question 13

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.

Question 14

How often are futures contracts marked to market?

A)Daily
B)Weekly
C)Monthly
D)Quarterly

Question 15

Approximately what percentage of futures contracts are offset prior to delivery?

A)25
B)50
C)75
D)95

Question 16

A futures contract is:

A)a negotiable,nonmarketable instrument.
B)a security,like a stock or bond.
C)a standardized,transferable agreement providing for deferred delivery of an asset.
D)not a legal contract,and therefore its terms can be changed.

Question 17

Who assumes the other side of every futures transaction?

A)The dealer
B)The futures exchange
C)The commodity producer
D)The clearinghouse

Question 18

The forward price is:

A)the price agreed upon today for deferred delivery of an asset.
B)the spot price of an asset at the time it is delivered in the future.
C)the future value of the spot price of an asset.
D)a multiple of the current spot market price.

Question 19

Which of the following is a characteristic of futures contracts?

A)They are marked to market daily.
B)They can be sold short but only on an uptick.
C)They are handled by specialists on futures exchanges.
D)They have no daily price limits.

Question 20

Futures trade on the:

A)spot market.
B)over-the-counter market.
C)forward exchanges.
D)futures exchanges.

Question 21

Interest rate futures are not currently available on which of the following securities?

A)Corporate bonds
B)Treasury notes
C)One-month LIBOR rate
D)Eurodollars

Question 22

Futures contracts are handled by specialists on futures exchanges.

Question 23

An attempt to exploit differences between the prices of a stock index futures contract and the prices of the underlying stocks is known as:

A)index programming.
B)arbitrage speculation.
C)index arbitrage.
D)program speculation.

Question 24

An investor who sells a T-bond futures contract is expecting to profit from:

A)an increase in the price of the T-bond.
B)an increase in the level of interest rates.
C)interest rates remaining unchanged.
D)the coupon payments from the T-bond.

Question 25

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.

Question 26

The basis is equal to the:

A)cash price.
B)futures price.
C)cash price + futures price.
D)cash price - futures price.

Question 27

Which of the following is not a potential advantage of speculating in futures?

A)Leverage
B)Ease of transacting
C)Low transactions costs
D)High and narrow probability distribution of expected returns

Question 28

Speculators in the futures market:

A)make the market more volatile.
B)contribute liquidity to the market.
C)engage mainly in short positions.
D)serve no real economic function.

Question 29

Which of the following represents the most popular stock-index futures position that is used to benefit from a stock market decline?

A)A short position in the S&P 500 contract
B)A long position in the S&P 500 contract
C)A short position in the DJIA contract
D)A long position in the DJIA contract

Question 30

In a margin account,if the account balance falls below the maintenance margin,a margin call is triggered.

Question 31

Which of the following statements about the basis risk on futures is correct?

A)Basis risk is often completely eliminated by hedging.
B)Although the basis fluctuates over time,it can be precisely predicted.
C)The basis is approximately zero on the maturity date of the contract.
D)A hedge will reduce risk as long as the basis does not fluctuate.

Question 32

Futures are essentially standardized forward contracts.

Question 33

Stock-index futures can be used to hedge against which of the following types of risks?

A)Diversifiable risk
B)Systematic risk
C)Unsystematic risk
D)Company specific risk

Question 34

Investors can speculate on interest rate declines by purchasing interest rate futures.

Question 35

The National Futures Association is the federal agency which regulates the futures markets.

Question 36

One difference between a hedger and a speculator is that the hedger:

A)may experience either a profit or a loss.
B)may not close out his position by taking an opposite position.
C)does not have to put up margin.
D)faces a risk without the futures contract.

Question 37

Japan,which banned financial futures in 1985,is now very active in developing futures exchanges.

Question 38

Which of the following statements about derivatives is correct?

A)Both futures and options represent zero-sum games.
B)Futures represent a zero-sum game,but options do not.
C)Options represent a zero-sum game,but futures do not.
D)Neither options nor futures represents a zero-sum game.

Question 39

Investors in futures can take either a long,short,or neutral position.

Question 40

Most futures contracts are settled by delivery.

Question 41

An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.

Question 42

The initial margin requirement on an SSF contract is 50 percent.

Question 43

With futures,hedging requires one to simply take an opposite position.

Question 44

Explain the difference between a forward contract and a futures contract.

Question 45

What is meant by the term "marked to market"?

Question 46

Index arbitrage attempts to exploit the differences between the prices on two different stock indices.

Question 47

What is the difference between hedgers and speculators in the futures markets?

Question 48

U.S.futures trading is regulated primarily by the CFTC.

Question 49

The intermarket spread is also known as a quality spread,involving two different markets,such as buying an NYSE contract and selling an S&P contract for the same month.

Question 50

What are the methods of settling a futures contract?

Question 51

Program trading generally involves positions in both stocks and stock-index futures.

Question 52

Explain a long position and a short position in futures trading.

Question 53

?Stock-index futures may be settled either by cash or by delivery of securities.

Question 54

What is the role of the clearinghouse in futures trading?

Question 55

A pension fund holds $10 million in T-bonds.In order to protect against a rise in interest rate,the pension fund should use a short hedge in T-bond futures.

Question 56

The DJIA is the most popular stock-index futures contract.

Question 57

Compare the obligation entered into in a futures contract to the obligation in an options contract.

Question 58

Futures exchanges standardize nonstandard forward contracts,establishing such features as contract size,delivery dates,and grades that can be delivered.Only the price and number of contracts are left for futures traders to negotiate.

Question 59

Briefly discuss the concept of margin in futures trading.

Question 60

The calendar or time spread is also known as the intramarket spread,and involves contracts for two different settlement months,such as buying a March contract and selling a June contract.

Question 61

Do options on futures serve any economic purpose,or are they just sophisticated
games?

Question 62

What is the focus of speculators who spread stock-index futures?

Question 63

What economic functions are fulfilled by futures?

Question 64

Are futures - commodity,interest-rate,stock-index,or currency - appropriate for
most individual investors?