Deck 26: Financial Futures Markets

Question 1

The exchange uses the settlement price to ________ the investor's position, so that any gain or loss from the position is quickly reflected in the investor's equity account.

A) settle to market
B) mark to settle
C) mark to market
D) mark to sale

Answer 1

C

Question 2

The basic economic function of futures markets is to provide a chance for market participants ________.

A) to leverage their portfolios to take advantage of known opportunities.
B) to diversify their investment portfolios.
C) to hedge against the risk of adverse price movements.
D) to speculate on price movements so as to realize high returns.

Answer 2

C

Question 3

Most financial futures contracts have settlement dates in the months of ________.

A) January, April, July, October
B) March, June, September, or December.
C) February, May, August, November
D) All of these

Answer 3

B

Question 4

Without financial futures, investors would have only one trading location to alter portfolio positions when they get new information that is expected to influence the value of assets and that is the ________.

A) commodity market.
B) derivatives market.
C) noncash market.
D) cash market.

Question 5

In regards to a futures contract, which of the below statements is FALSE?

A) The buyer of a futures contract will realize a profit if the futures price decreases; the seller of a futures contract will realize a profit if the futures price increases.
B) When an investor takes a position in the market by buying a futures contract (or agreeing to buy at the future date), the investor is said to be in a long position or to be long futures.
C) The "something" that the parties agree to exchange is called the underlying.
D) None of these

Question 6

Which of the below statements is FALSE?

A) While the degree of leverage available in the futures market varies from contract to contract, as the initial margin requirement varies, the leverage attainable is considerably greater than in the cash market.
B) Futures markets can be used to reduce price risk.
C) The exchange does not have the right to impose a limit on the daily price movement of a futures contract from the previous day's closing price.
D) The rationale offered for the imposition of daily price limits is that they provide stability to the market at times when new information may cause the futures price to exhibit extreme fluctuations.

Question 7

________ is an agreement between a buyer and a seller, in which the ________ agrees to take delivery of something at a specified price at the end of a designated period of time, and the ________ agrees to make delivery of something at a specified price at the end of a designated period of time.

A) An option contract; seller; buyer
B) An option contract; buyer; seller
C) A futures contract; seller; buyer
D) A futures contract; buyer; seller

Question 8

Which of the below statements is FALSE?

A) Maintenance margin is the minimum level (specified by the exchange) to which an investor's equity position may fall as a result of an unfavorable price movement before the investor is required to deposit additional margin.
B) Unlike initial margin, the variation margin must be in cash rather than interest-bearing instruments.
C) When securities are acquired on margin, the difference between the price of the security and the initial margin is loaned from the broker.
D) A party taking a position in a futures contract need not put up the entire amount of the investment.

Question 9

For many financial assets, it is in the ________ that it is easier and less costly to alter a portfolio position.

A) noncash market.
B) stock market.
C) cash market.
D) futures market

Question 10

Parties to a futures contract can ________ their position by taking an offsetting position in the same contract. For the ________ of a futures contract, this means selling the same number of identical futures contracts; for the ________ of a futures contract, this means buying the same number of identical futures contracts.

A) liquidate; seller; buyer
B) deliver; seller; buyer
C) liquidate; buyer; seller
D) deliver; buyer; seller

Question 11

One alternative in liquidating a futures contract position is to wait until the ________. At that time the party ________ a futures contract accepts delivery of the underlying; the party that ________ a futures contract liquidates the position by delivering the underlying at the agreed-upon price.

A) settlement date; purchasing; sells
B) liquidation date; purchasing; sells
C) settlement date; selling; purchases
D) liquidation date; selling; purchases

Question 12

To create a particular futures contract, ________ must obtain approval from the ________, a government regulatory agency.

A) an exchange; Commodity Futures Trading Commission
B) a stock offering; U.S. Securities and Exchange Commission
C) a broker; Commodity ForwardTrading Commission
D) a dealer; U.S. Exchange and Futures Commission

Question 13

________ are standardized agreements as to the delivery date (or month) and quality of the deliverable, and are traded on organized exchanges, while ________ is usually nonstandardized because the terms of each contract are negotiated individually between buyer and seller.

A) Futures contracts; a forward contract
B) Standardized contracts; a nonstandarized contract
C) Futures contracts; a nonstandarized contract
D) Standardized contracts; a futures contract

Question 14

________ are not intended to be settled by delivery. In fact, generally fewer than 2% of outstanding contracts are settled by delivery.

A) Delivery contracts
B) Settled contracts
C) Forward contracts
D) Futures contracts

Question 15

Which of the below does NOT involve a function of the clearinghouse?

A) One functions is to guarantee that the two parties to the transaction will perform.
B) When someone takes a position in the futures market, the clearinghouse takes the same position and agrees to satisfy the terms set forth in the contract.
C) The clearinghouse makes it simple for parties to a futures contract to unwind their positions prior to the settlement date.
D) The clearinghouse interposes itself as the buyer for every sale and the seller for every purchase.

Question 16

When a position is first taken in a futures contract, the investor must deposit a ________ dollar amount per contract as specified by the exchange. This amount, called ________, is required as a deposit for the contract.

A) maximum; maximum margin
B) minimum; minimum margin
C) maximum; initial margin
D) minimum; initial margin

Question 17

In regards to a futures contract, which of the below statements is FALSE?

A) When entering into a futures contract, the parties to the contract agree to buy or sell a specific amount of a specific item at a specified future date.
B) The price at which the parties agree to transact in the future is called the futures price.
C) The designated date at which the parties must transact is called the settlement date or delivery date.
D) When an investor takes a position in the market by buying a futures contract (or agreeing to buy at the future date), the investor is said to be in a short position or to be short futures.

Question 18

One classification for financial futures is ________.

A) bond index futures.
B) interest rate futures.
C) dollar futures.
D) commodity futures.

Question 19

Which of the below statements is TRUE?

A) Futures contracts are marked to market at the end of most trading days.
B) A forward contract may or may not be marked to market, depending on the wishes of the two parties.
C) For a forward contract that is not marked to market, there are interim cash flow effects because no additional margin is required.
D) The parties in a forward contract are not exposed to credit risk because either party may not default on the obligation.

Question 20

As the value of a futures contract is derived from the value of the underlying instrument, futures contracts are commonly called ________.

A) option instruments.
B) forward instruments.
C) index instruments.
D) derivative instruments.

Question 21

Which of the below statements is FALSE?

A) The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset.
B) A futures market will be the price discovery market when market participants prefer to use this market rather than the cash market to change their risk exposure to an asset.
C) The futures market and the cash market for an asset are drawn apart by an arbitrage process.
D) The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is not an undesirable attribute of a financial market.

Question 22

There is a public belief that commercial banks are creating OTC derivative products ________.

A) that put them in a position that could result in favorable financial problems.
B) that could have a rippling effect on the U.S. financial system.
C) that have the proper risk-management systems in place to effectively monitor their risk exposure.
D) All of these

Question 23

In regards to the Treasury notes futures contract, which of the below statements is FALSE?

A) There are three Treasury note futures contracts: 10-year, five-year, and two-year.
B) For the Treasury notes futures contract, the delivery options granted to the short position and the minimum price fluctuation are different from the Treasury bond futures contract.
C) For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: an original maturity of not more than five years and three months.
D) For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: a remaining maturity no greater than five years and three months.

Question 24

The futures price for the S&P 500 is 1000 and the multiple is $150. What is the dollar value of the stock index futures contract?

A) $125,000
B) $150,000
C) $175,000
D) None of these

Question 25

________ of only actively traded New York Stock Exchange and Nasdaq stocks are traded. The contracts are for 100 share of the ________ stock. At the settlement date, ________ of the stock is required.

A) Multiple stock futures; original; multiple delivery
B) Single stock futures; underlying; single delivery
C) Single stock futures; original; physical delivery
D) Single stock futures; underlying; physical delivery

Question 26

In regards to interest rate futures contracts, which of the below statements is FALSE?

A) Interest rate futures contracts can be classified by the maturity of their underlying security.
B) Short-term interest rate futures contracts have an underlying security that matures in less than one year.
C) The maturity of the underlying security of long-term futures contracts exceeds one year.
D) A few of the major financial markets outside the United States have similar futures contracts in which the underlying security is a fixed-income security issued by the central government.

Question 27

In regards to single stock futures contracts, which of the below statements is FALSE?

A) Single stock futures are equity futures in which the underlying is the stock of an individual company.
B) Single stock futures are traded on two exchanges: OneChicago and Nasdaq Liffe Markets (NQLX).
C) Single stock futures of only actively traded New York Stock Exchange and Nasdaq stocks are traded.
D) Futures exchanges have found that there are investors who want to take long and short positions in the futures market for a group of stocks and do so by paying for several trades.

Question 28

The futures price for the S&P 500 is 2000 and the multiple is $100. What is the dollar value of the stock index futures contract?

A) $200
B) $20,000
C) $120,000
D) None of these

Question 29

Some derivative products are created by commercial banks and investment banking firms are called over-the-counter or OTC derivatives. An example of an OTC derivative is ________.

A) a forward contract.
B) a swap.
C) an OTC option.
D) All of these

Question 30

Dollar value of a stock index futures contract equals ________.

A) Spot price × Multiple.
B) Futures price / Multiple.
C) Futures price × Multiple.
D) Spot price / Multiple.

Question 31

A futures contract is an agreement between a buyer and a seller in which the buyer agrees to take delivery of something at the futures price at the settlement date and the seller agrees to make delivery.

Question 32

Suppose an investor buys (takes a long position in) an S&P 500 futures contract at 1000 and sells it at 1100. What profit does this investor realize if the multiple is $200?

A) $20,000
B) $15,000
C) $10,000
D) $5,000

Question 33

In regards to the Treasury bill futures contract, which of the below statements is FALSE?

A) The Treasury bill futures contract, which is traded on the IMM, is based on a 25-week (six-month) Treasury bill with a face value of $1,000.
B) The seller of a Treasury bill futures contract agrees to deliver to the buyer at the settlement date a Treasury bill that can be newly issued or seasoned.
C) Treasury bills are quoted in the cash market in terms of the annualized yield on a bank discount basis.
D) The Treasury bill futures contract is not quoted directly in terms of yield but is quoted on an index basis that is related to the yield on a bank discount basis as follows: Index price = 100 - (Yield on a bank discount basis × 100).

Question 34

In regards to the Treasury bond futures contract, which of the below statements is FALSE?

A) The underlying for a Treasury bond futures contract is $100,000 par value of a hypothetical 20-year, 6% coupon bond.
B) To make delivery equitable to both parties, and to tie cash prices to futures prices, the CBOT has introduced conversion factors for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury bond futures contract.
C) In selecting the issue to be delivered, the short will select from all the deliverable issues the bond that is the most expensive to deliver.
D) The invoice price paid by the buyer of the Treasury bonds which the seller delivers is determined using the formula: Invoice price = Contract size × Future contract settlement price × Conversion factor.

Question 35

A party to a futures contract cannot liquidate a position prior to the settlement date by taking an offsetting position in the same contract.

Question 36

In May 1994, the General Accounting Office (GAO) prepared a report on Financial Derivatives: Actions Needed to Protect the Financial System. The GAO study concluded that ________.

A) boards of directors and senior management have secondary responsibility for managing derivative risks .
B) financial reporting requirements for derivative instruments are adequate and the Financial Accounting Standards Board should implement comprehensive accounting rules for derivative products.
C) improving regulations for derivatives in the United States without coordinating with foreign regulators will reduce the effectiveness of the regulations.
D) policymakers and regulators should block the use of derivatives.

Question 37

Parties to a futures contract must satisfy margin requirements (initial, maintenance, and variation), and futures contracts are marked to market at the beginning of each trading day.

Question 38

Associated with most futures exchange is a clearinghouse, which provides a guarantee function.

Question 39

The futures price and the cash market price are tied together by the ________.

A) expense of bearing.
B) cost of conveying.
C) cost of carry.
D) expense of bearing

Question 40

In the United States, the exchange that offers the most popular stock index futures contracts is the ________.

A) Philadelphia Mercantile Exchange.
B) Kansas City Board of Trade.
C) New York Futures Exchange.
D) Chicago Mercantile Exchange.

Question 41

Credit risk is maximal in the case of futures contracts because the clearinghouse associated with the exchange does not guarantee the other side of any transaction.

Question 42

Why would investors consider a futures market as more efficient for their investment objective? Explain.

Question 43

Little of what we say about futures contracts applies equally to forward contracts.

Question 44

Equity futures contracts listed in the United States include stock index futures contract, single stock futures contracts, and narrow-based stock index futures contract.

Question 45

An exchange has the right to impose a limit on the daily price movement of a futures contract from the previous day's closing price.Explain why such a right might be needed.

Question 46

A forward contract is usually nonstandardized because the terms of each contract are negotiated individually between buyer and seller.

Question 47

The futures market and the cash market for an asset are tied together by an equilibrium process.

Question 48

The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is an undesirable attribute of a financial market.

Question 49

The General Accounting Office (GAO) study addresses the concerns of Congress and regulators regarding derivative products.

Question 50

A stock index futures contract is one whose underlying asset is a fixed-income instrument or an interest rate.

Question 51

Inadequate accounting disclosure and the lack of coordination with foreign regulators were not concerns highlighted by the General Accounting Office (GAO) study.

Question 52

The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset.

Question 53

What is the maintenance margin? What is the variation margin and how does it differ from the maintenance margin?

Question 54

Futures contracts are leveraged instruments that can be used to control risk.

Question 55

The Treasury bond and note futures contracts are unique in that the short is granted options as to which issue to deliver and during the delivery month when to deliver.

Question 56

What is a forward contract? How does it differ from a futures contract?

Question 57

A futures market will be the price discovery market when market participants do not prefer to use this market rather than the cash market to change their risk exposure to an asset.

Question 58

For interest rate futures contracts are cash settlement contracts whose underlying is a common stock index and the dollar value of a stock index futures contract is the product of the futures price and the contract's multiple.

Question 59

The General Accounting Office (GAO) study pointed out the concern that major banks and end-users have adequate risk-management systems in place.

Question 60

The listed interest rate futures contracts traded in the United States are the Eurodollar futures contract, the Treasury bill futures contract, the 30-day federal funds futures contract, and the Treasury bond and note futures contracts.

Question 61

Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.

Question 62

Congress, federal regulators, and some members of the industry are concerned about the derivative products and the risk they may pose to the financial system, individual firms, investors, and U.S. taxpayers. These concerns have been heightened by recent reports of substantial losses by some derivative end-users. The GAO study was undertaken because of these concerns. Name three of the five objectives that the GAO report strived to determine?