Deck 20: Futures

Question 1

Spot markets are used by investors:

A) to lock in a price against delivery in the future.
B) for immediate delivery.
C) solely to provide protection against downward movements.
D) who are interested solely in speculation.

Answer 1

for immediate delivery.

Question 2

Which of the following is not a characteristic of forward contracts?

A) Forward markets are for deferred delivery.
B) The price at delivery is determined at the beginning of the contract.
C) Forward contracts do not have standardized terms.
D) The initial cash flow at the beginning of the forward contract consists of margin.

Answer 2

The initial cash flow at the beginning of the forward contract consists of margin.

Question 3

In Canada financial futures trade on the:

A) Toronto Stock Exchange (TSX).
B) ICE Futures Canada (formerly the Winnipeg Commodity Exchange).
C) Montréal Exchange (ME).
D) the TSX Venture Exchange.

Answer 3

Montréal Exchange (ME).

Question 4

The vast majority of futures contracts are:

A) settled by delivery of the commodity.
B) cash settled at delivery with no exchange of the commodity.
C) offset prior to delivery.
D) equally settled in cash or delivery of the commodity.

Question 5

In the futures market margin is:

A) a down payment where money is borrowed from the broker to finance the total cost.
B) is subject to weekly resettlement based on marked to market.
C) is a good faith deposit made by both long and short positions to ensure the completion of the contract.
D) is currently set at 75% of market value.

Question 6

Which of the following characteristics is unique about futures trading?

A) Long positions are undertaken by hedgers to make delivery.
B) Margin is not allowed.
C) Positions can remain open indefinitely.
D) There are no specialists on futures exchanges.

Question 7

The financial futures trading on the Montreal Exchange that has the largest trading volume is:

A) S&P Canada 60 Index Futures
B) 3-month Canadian BAs
C) 10-year Government of Canada Bonds
D) Sector Index Funds

Question 8

Which of the following is not a characteristic of futures trading?

A) Open outcry involves offers to buy or sell and are communicated verbally and/or with hand signals to all traders in the pit.
B) Open interest indicates all unliquidated contracts for a commodity at any time on a cumulative basis.
C) The specialist is the primary trader in the futures markets.
D) Trading follows an auction market process in which every bid and offer competes without priority as to time and size.

Question 9

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.

Question 10

Hedging in the futures markets is accomplished by:

A) taking a position opposite to the one already held.
B) taking a position identical to the one already held.
C) taking a position in order to increase the profit potential.
D) taking a position to increase the distribution of returns.

Question 11

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

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

Question 12

Which essential function do speculators bring to the futures markets?

A) They take liquidity out of the market.
B) They absorb any excess supply or demand generated by hedgers.
C) They create more variability in prices over time.
D) They provide loans and the margin requirements for hedgers.

Question 13

An investor who has accumulated a significant bond portfolio wishes to protect its value through the use of futures contracts. This investor should use a:

A) long hedge.
B) short hedge.
C) time spread.
D) money spread.

Question 14

Which of the following statements about basis risk is incorrect?

A) The basis must be zero on the maturity date of the contract.
B) The basis fluctuates in predictable patterns.
C) The basis is calculated as the cash price minus the futures price.
D) Due to basis risk, perfect hedging is very difficult.

Question 15

A major brewing company wants to ensure supply for its wheat beer at a favourable price. The company should use a:

A) long hedge.
B) short hedge.
C) calendar spread.
D) vertical spread.

Question 16

Which of the following features is not similar between stock and futures trading?

A) Buying and selling mechanics.
B) Existence of highly organized exchanges.
C) The charging of interest on margin trades.
D) The ability of only members to trade on the floor.

Question 17

Which of the following does not apply to a speculator in the futures markets?

A) In contrast to hedgers, speculators buy or sell futures contracts in an attempt to earn a return.
B) Speculators are willing to assume the risk of price fluctuations hoping to profit from them.
C) Speculators transact in the commodity underlying the futures contract.
D) Speculators contribute to the liquidity of the market and reduce the variability in prices over time.

Question 18

An investor who buys a treasury bond futures contract is expecting to profit from:

A) an decrease in the price of the treasury bond.
B) a decrease in the underlying level of interest rates.
C) interest rates remaining unchanged.
D) an increase in the underlying level of interest rates.

Question 19

If an investor strongly believes that the stock market is going to have a sharp increase shortly, he or she could maximize profit by:

A) shorting stock-index futures contracts.
B) hedging current long positions.
C) buying treasury bond futures contracts.
D) buying stock-index futures contracts.

Question 20

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

A) Leverage
B) Ease of transacting
C) Low transaction costs
D) All of the above are advantages to speculating in futures.

Question 21

An investor who purchases a futures contract as an alternative to buying the security now and then later purchases the security and sells the futures contract is undertaking:

A) a long hedge.
B) a short hedge.
C) an anticipatory hedge.
D) a synthetic hedge.

Question 22

Which of the following does not have an options on futures not offered on it?

A) Options on foreign exchange futures
B) Options on interest rate futures
C) Options on individual equities futures
D) Options on commodities

Question 23

The key elements of an option on a particular futures are the:

A) price of the underlying commodity and the exercise price.
B) expiration date and the exercise price.
C) price of the underlying commodity and the premium.
D) exercise price and the premium.

Question 24

Which of the following statements about portfolio insurance is true?

A) Only one method is available to insure a portfolio.
B) It seeks to provide a maximum return offering the opportunity to participate in rising prices.
C) Futures are used to hedge stock portfolios.
D) Portfolio insurance opens up the potential of unlimited losses.

Question 25

On average, premiums paid for futures contracts are greater than for options contracts.

Question 26

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

Question 27

Investors can speculate on interest rate increases by selling interest rate futures.

Question 28

The anticipatory hedge is the most common type of futures contract.

Question 29

One strategy for an investor bearish about interest rates is to write a put in the futures options market.

Question 30

Most futures contracts are offset prior to expiration.

Question 31

The advantage of futures contracts over forward contracts is that futures contracts are not standardized and are tailored to the needs of the individual investor.

Question 32

With futures, hedging is an automatic process requiring one to simply take an opposite position.

Question 33

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

Question 34

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

Question 35

When stock-index futures prices rise greatly above the current value of the stock index itself, large institutional investors often buy the futures and short the underlying stocks.

Question 36

Stock-index futures are settled by the delivery of the underlying securities.

Question 37

One of the major differences between forward contracts and futures contracts is that forward contracts are standardized contracts that trade on organized exchanges.

Question 38

List two differences between interest rate swaps and currency swaps.

Question 39

Determine the dollar price of a futures contract on Treasury bonds quoted at 82-2 and another at 90-30.

Question 40

What is the total gain or loss (in dollars) on Treasury bond futures contracts ($100,000 per contract) for each of the following transactions? Assume that the holding period in each case is for 3 months.
(a) Sell 20 T-bond contracts at a price of 93-20 and buy back at 85-12.
(b) Buy 10 T-bond contracts at 84-10 and sell them off at 87-01.