Deck 16: Futures Contracts

Question 1

_________ is the process where gains and losses on outstanding futures position are recognized on a daily basis.

A) Market updating
B) Marking-to-market
C) Margin
D) Daily pricing
E) Account activity

Answer 1

B

Question 2

A futures trader who bets on the future direction of prices by taking either a long or a short position is called a _________.

A) Dealer
B) Speculator
C) market maker
D) Hedger
E) Specialist

Answer 2

B

Question 3

An agreement between a buyer and seller to commit a transaction in a future date at a price negotiated today is a(n) _________ contract.

A) Open
B) Forward
C) Long
D) Option
E) Exchange

Answer 3

B

Question 4

In the _________ market, commodities or financial instruments are traded for delivery today.

A) arbitrage
B) futures
C) current
D) cash
E) basis

Question 5

A trader who wants to transfer price risk by taking a futures position to the existing position in a commodity is a _________.

A) Dealer
B) Speculator
C) market maker
D) Hedger
E) Specialist

Question 6

An investor who shifts risk is referred to as which one of the following?

A) Hedger
B) Speculator
C) Broker
D) Dealer
E) Specialist

Question 7

The _________ price is the price of a commodity or financial instrument for delivery today.

A) arbitrage
B) cash
C) immediate
D) futures
E) outcry

Question 8

Price risk is defined as: _________

A) The risk associated with the volatility in price of the goods a firms sells.
B) The risk that the price of the goods it sells will decline before the goods get to market.
C) The risk that the price of the goods it sells will grow before the goods get to market.
D) The risk that the price of the input commodities used in the production of the good they make will fluctuate.
E) The risk a firm will not be able to sell its goods at a price sufficiently higher than the acquisition cost.

Question 9

The amount of money required to be deposited when either a short or a long futures position is first established is called the _________ margin.

A) initial
B) equity position
C) market deposit
D) maintenance
E) account deposit

Question 10

A(n) _______ call is a notification to a futures position holder to increase the balance when the dollar amount in an account drops below the minimum required level.

A) refunding
B) broker's
C) funding
D) account
E) margin

Question 11

The seller of a futures contract is said to hold a:

A) Long position
B) Long position if the position is producing a net loss
C) Short position
D) Short position if the position is producing a net loss
E) Market position

Question 12

A _________ hedge involves the sale of a futures contract to offset potential losses from _________ prices.

A) Long; falling
B) Open; rising
C) Market; stable
D) Short; falling
E) Speculative; stable

Question 13

The purchase of a futures contract to offset potential losses from rising prices is a(n) ________ hedge.

A) long
B) open
C) market
D) short
E) speculative

Question 14

A futures contract is similar to a forward contract except that

A) It calls for the price to determined at a later date
B) It calls for delivery of the commodity today
C) It sets a future date for delivery as compared to today's delivery under a forward contract
D) It can be arranged by any two parties on an informal basis
E) It is managed through an organized futures exchange

Question 15

A purchaser of a futures contract holds a _________ position.

A) long
B) hedged
C) short
D) speculative
E) market

Question 16

Funds deposited in a futures trading account to cover potential losses from current futures positions is a futures _________.

A) Margin
B) equity
C) Deposit
D) maintenance
E) Spread

Question 17

The minimum cash that must be held in a futures trading account at all times is called the _________.

A) initial margin
B) equity position
C) market deposit
D) maintenance margin
E) account deposit

Question 18

The price established today that will be paid when a commodity is delivered at a later date is called the _________ price.

A) futures
B) long
C) speculative
D) term
E) option

Question 19

The taking of a position opposite to that of a current outstanding position is known as a(n) _________ trade.

A) program
B) reverse
C) open
D) optimal
E) market

Question 20

Which one of the following is another name for the cash market?

A) futures market
B) forward market
C) arbitrage market
D) current basis market
E) spot market

Question 21

Suppose you wish to hedge a stock portfolio with an index futures contract. An increase in the quoted futures price of the index will _________ the number of futures needed for the hedge.

A) increase
B) decrease
C) Not change
D) increase only if the beta of the portfolio is greater than one
E) decrease only if the beta of the portfolio is greater than one

Question 22

Assuming spot-futures parity holds, an increase in the dividend rate will ________ the futures price.

A) increase
B) decrease
C) not change
D) increase or decrease
E) Insufficient information.

Question 23

Benefiting from differences between the futures price of a stock index and the level of the underlying index is known as index _________.

A) Inversion
B) Trading
C) Hedging
D) Arbitrage
E) Speculating

Question 24

Suppose you wish to hedge a bond portfolio with a Treasury bond futures contract. If the duration of your portfolio increases, the number of contracts needed to hedge your portfolio will:

A) increase.
B) decrease.
C) not change.
D) increase only if the duration of the portfolio is greater than the duration of the futures.
E) decrease only if the duration of the portfolio is greater than duration of the futures.

Question 25

A(n) _________ market occurs when a positive basis is observed.

A) Parity
B) Inverted
C) Basis
D) Arbitrage
E) Carrying-charge

Question 26

Using computers to monitor prices and also to submit trading orders in response to arbitrage opportunities is known as ________ trading.

A) Cross
B) Index
C) Internet
D) Program
E) Dealer

Question 27

________ is the strategy for earning risk-free profits by taking advantage of any unusual differences between spot and futures price.

A) Program trading
B) Arbitrage
C) Inverted trading
D) A basis sale
E) Hedging

Question 28

By establishing a short position in a futures contract, a speculator __________

A) accepts risk associated with a price decrease in the underlying asset.
B) accepts risk associated with a price increase in the underlying asset.
C) is using their position to hedge against a price increase of the underlying asset.
D) is using their position to hedge against price risk.
E) agreeing to buy the underlying asset in the future a price set out in the futures contract.

Question 29

A business commentator reports that the "spot price of gold is $1,820.54 per ounce". This means:

A) Investors wishing to purchase gold futures will have to pay $1,820.54 per contract.
B) The difference between local and international gold contracts is $1,820.54.
C) The future price for an ounce of gold is $1,820.54 per ounce.
D) The current price for an ounce of gold is $1,820.54.
E) The average price in all international markets for an ounce of gold is $1,820.54.

Question 30

The seller's the ability to have a selection of securities from which to choose one for delivery is called the ________ option.

A) Carrying
B) Cheapest-to-deliver
C) Call
D) Put
E) Bond

Question 31

A(n) _________ market occurs when a negative basis is observed.

A) Parity
B) Inverted
C) Basis
D) Arbitrage
E) Carrying-charge

Question 32

An advantage of a forward contract over a futures contract is that:

A) The forward contract can be used to hedge against future price volatility.
B) The size of the forwards contract is not fixed.
C) Forward contracts can be easily traded on an exchange.
D) Parties to a forward contract can more easily change the agreed upon future price of the underlying asset.
E) None as forward contracts are simply an OTC futures contract.

Question 33

When does the holder of a short position realize a profit?

A) when prices rise
B) when prices either remain constant or rise
C) when prices remain constant
D) when prices either remain constant or decline
E) when prices decline

Question 34

The spot price minus the futures price of a commodity is the _______.

A) spot-futures range
B) arbitrage range
C) Yield
D) carrying charge
E) Basis

Question 35

An interest-rate futures contract calls for the delivery of:

A) A cash payment
B) Gold
C) Either gold, silver or platinum
D) A fixed-income securities
E) Interest-sensitive stock

Question 36

Hedging a spot position with a futures contract on a similar, but not identical, commodity is a ________ hedge.

A) Cross
B) Open
C) Commodity
D) Market
E) Program

Question 37

Which one of the following is a trade that will close out a previously established futures position?

A) maintenance call
B) margin call
C) reverse trade
D) position reversal
E) margin closeout

Question 38

The futures is less than the cash price in a(n) _________ market.

A) parity
B) inverted
C) basis
D) arbitrage
E) carrying-charge

Question 39

Spot-futures parity defines the market situation that exists when

A) No arbitrage opportunities exist.
B) Futures prices equal spot prices.
C) Cash prices are higher than futures prices.
D) The number of potential buyers equals the number of potential sellers.
E) No marginal calls are required during a trading day.

Question 40

The largest volume of futures trading in the United States occurs on the _____________

A) New York Mercantile Exchange.
B) NASDAQ Futures Exchange.
C) U.S. Commodities Futures Exchange.
D) Chicago Board of Trade.
E) Chicago Mercantile Exchange.

Question 41

Which of the following futures contracts is settled differently than the rest?

A) Corn futures.
B) Soybean futures.
C) Single stock futures.
D) S&P Canada 60 index futures.
E) Gold futures.

Question 42

The initial margin for a futures contract varies, but generally ranges between _________ of the contract value on ________.

A) 2-10%; long position only
B) 5-10%; long position only
C) 5-15%; short position only
D) 2-5%; both long and short position
E) 1-15%, both long and short position

Question 43

Which of the following is incorrect about futures margin?

A) In a futures margin account, the initial margin is always higher than the maintenance margin.
B) The margin on a futures account is verified daily to ensure minimum margin requirements are met.
C) The initial margin for a futures transaction is the same for a long and a short position.
D) All margin initially deposited in a futures purchase must always remain until the position is closed or the contract expires.
E) The initial margin requirements for futures contracts differ for each different contract.

Question 44

All else the same, a decrease in the dividend yield of a stock index will _________ the price of a futures contract in the index.

A) increase
B) decrease
C) not change
D) Void the contract. This materially changes the underlying index.
E) None of the above.

Question 45

In the futures market, ________ transfer price risk, and _________ absorb price risk.

A) hedgers; hedgers
B) hedgers; speculators
C) speculators; speculators
D) speculators; hedgers
E) hedgers and speculators do both.

Question 46

Assuming a futures contract is correctly price, according to the spot-futures parity relationship, an increase in the risk-free rate of interest will:

A) increase the futures price.
B) decrease the futures price.
C) not change any futures price.
D) increase commodity futures prices but not financial futures prices.
E) increase financial futures prices but not commodity futures prices.

Question 47

The two key considerations when determining the delivery mechanism for a futures contract are:

A) Location to buyer and day of delivery.
B) Location to seller and convenience.
C) Location to seller and day of delivery.
D) Day of delivery and low cost.
E) Low cost and convenience.

Question 48

Suppose the cheapest-to-deliver bond deliverable against the Treasury bond futures contract changes. The new bond has a shorter duration than the previous bond. This will __________ the number of contracts needed to hedge a bond portfolio.

A) increase
B) decrease
C) not change
D) The price of the Treasury bonds is needed to answer the question.
E) The maturity of the Treasury bonds is needed to answer the question.

Question 49

The required initial margin of a futures trading account can be viewed as

A) A down payment on the contract
B) A commission to the broker
C) A maintenance fee
D) A performance guarantee
E) None of the above

Question 50

A speculator expecting interest rates to rise will

A) Take a hedged position in Treasury bond futures.
B) Take a long position in Treasury bond futures.
C) Take a short position in Treasury bond futures.
D) Take a long spot position and a short position in Treasury bond futures simultaneously.
E) Do nothing.

Question 51

Which of the following is false regarding futures and forward contracts?

A) Futures are only traded on an exchange.
B) Both forward and futures contracts are marked-to-market.
C) Forward contracts are more flexible than futures contracts.
D) Futures contracts have margin requirements while forward contracts do not.
E) Forward contracts and futures contracts both specify the price for future delivery.

Question 52

The primary difference between a forward contract and a futures contract is

A) The time of delivery
B) The time at which the price is determined
C) The use of an organized exchange for futures contracts
D) The type of commodity being exchanged
E) The form of payment for delivery

Question 53

In Canada, who is responsible for standardizing a financial futures contract?

A) Winnipeg Commodity Exchange.
B) Toronto Stock Exchange.
C) Vancouver Exchange.
D) Montreal Exchange.
E) All of the above.

Question 54

A futures contract _________ a zero sum game. A forward contract __________ a zero sum game.

A) is; is
B) is; is not
C) is not; is not
D) is not; is
E) Cannot be determined from the information given.

Question 55

A futures contracts I) is standardized when traded on an exchange
II) is a zero-sum game
III) has a net value of zero
IV) is a derivative security

A) I, II, and III
B) II, III, and IV
C) I, III, and IV
D) I, II, and IV
E) All of the above.

Question 56

You have decided to close out your futures position. To do this, you need to instruct your broker to:

A) Place a sell order.
B) Enter a reserve trade
C) Close your margin account
D) Mark your account
E) Spot your account

Question 57

The motivation of hedgers in the futures market is to:

A) Seek trading profits
B) Speculate on changes in basis
C) Eliminate price risk
D) Secure the supply source
E) All of the above

Question 58

All else the same, an increase in the risk of a portfolio as measured by beta will _________ the number of futures contracts needed to hedge the portfolio.

A) increase
B) decrease
C) not change
D) increase or decrease
E) Insufficient information.

Question 59

Which of the following is false regarding futures and forward contracts?

A) A futures contract is less likely to default since it is marked-to-market daily.
B) A futures contract is more liquid than a forward contract.
C) It is more difficult to reverse a forward contract.
D) Futures contracts are more flexible as to terms and conditions.
E) It is easier to find a counterparty for a futures contract.

Question 60

Futures margin is defined as the deposit of funds into a futures trading account for which one of the following purposes?

A) purchase additional futures contracts
B) take a hedge position in the future
C) cover potential losses from outstanding positions
D) cover the trading costs and commissions
E) cover the future costs of reversing the position

Question 61

All else the same, as the price of a S&P 500 futures used to hedge an equity portfolio increases, the number of contracts needed to hedge the portfolio will:

A) increase.
B) decrease.
C) not change.
D) increase if the beta of the portfolio is greater than one.
E) decrease if the beta of the portfolio is greater than one.

Question 62

The biggest benefit of a futures exchange is to

A) guarantee trading volume
B) give free legal advices
C) eliminate risk exposure for customers
D) protect traders from government intervention
E) provide clearing services

Question 63

You can withdraw funds from your futures margin accounts only if

A) You have no outstanding short position
B) Your remaining account balance is at least equal to the initial margin requirement
C) You have no outstanding long position
D) Your remaining account balance is at least equal to the minimum margin amount
E) You remaining account balance is at least equal to the value of all outstanding futures positions

Question 64

In a carrying charge market,

A) The basis is negative
B) The basis is zero
C) The cash price will equal the futures price
D) The cash price will exceed the futures price
E) None of the above

Question 65

Financial futures may be used by banks to manage

A) default risk
B) liquidity risk
C) interest rate risk
D) operation risk
E) sovereign country risk

Question 66

You are a candy maker and need to purchase a large amount of cocoa three months from now in preparation for the busy season. Your concern is that the price of coca will rise before you make your purchase. You should take a _________ position in the _________ market today.

A) Long; spot
B) Long; futures
C) Short; both spot and futures
D) Short; futures
E) Short; spot

Question 67

All else the same, as the duration of a bond portfolio decreases, the number of bond futures contracts needed to hedge the portfolio will:

A) increase.
B) decrease.
C) not change.
D) increase only if the duration of the bond portfolio is less than the duration of the bond underlying the futures contract.
E) increase only if the duration of the bond portfolio is greater than the duration of the bond underlying the futures contract.

Question 68

The multiplier for S&P Canada 60 index futures contracts (SFX) is:

A) $1.
B) $100.
C) $200.
D) $500.
E) $100,000.

Question 69

What are needed to find the number of stock index futures for cross-hedging a stock portfolio?
I) Standard deviation of the stock portfolio
II) Beta of the stock portfolio
III) Value of the index futures contract
IV) Value of the stock portfolio

A) I and III
B) II and IV
C) II, III and IV
D) I, II and III
E) I, II, III and IV

Question 70

Suppose your company is holding oil for delivery in three months and decides to hedge its position using futures. The purpose of this hedge is to offset a(n) _________ in the price of the oil by a(n) _________ in the value of the futures contract.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) Insufficient information.

Question 71

If the spot-futures parity exists on a financial future, then the future price must equal the

A) Future value of the spot price at the market rate
B) Future value of the spot price at the risk-free rate
C) Spot price
D) Present value of the spot price at the risk-free rate
E) Present value of the spot price at the market rate

Question 72

The basic spot-futures parity condition is:

A) S = FT(1 + r)
B) F = S(1 + r)T
C) ST = F(1 + r)T
D) S = FT(1 + r)T
E) F = ST(1 + r)

Question 73

Assume you find that the price of a futures contract is below the price given by spot-futures parity. Assuming there are no carrying charges, to make an arbitrage profit, traders will _________ in the cash market and _________ in the futures market.

A) buy; buy
B) buy; sell
C) sell; sell
D) sell; buy
E) Insufficient information.

Question 74

If you take a futures position in a stock index futures to offset the risk of a market decline that affects your investment portfolio, you are

A) Doing am arbitrage trade
B) Doing a reserve trade
C) Creating a cross-hedge
D) Doing a close-out
E) Creating a "triple witch"

Question 75

Margin requirements on long and short positions are

A) higher on shorts
B) higher on longs
C) rarely the same
D) generally the same
E) influenced by the customer's net worth

Question 76

Which of the following is most likely to be a carrying-charge market?

A) US Treasury bond futures.
B) Canadian dollar futures.
C) One-month LIBOR futures.
D) Oat futures.
E) S&P 500 index futures.

Question 77

Futures trading

A) allows speculators to profit
B) calls for delivery under all circumstances
C) is only a gamble with no real economic value
D) is a non-zero-sum game
E) all of the above

Question 78

The delivery procedures for a futures contract are set by:

A) the exchange the futures is traded on.
B) the buyer.
C) the seller.
D) the Bank of Canada.
E) an agreement between buyers and sellers.

Question 79

The standard size for the 10-year Canadian government bond futures contract (CGB) is

A) $100.
B) $250.
C) $1,000.
D) $100,000.
E) $1,000,000.

Question 80

Each futures exchange has an associated clearing house that

A) becomes the seller's buyer
B) becomes the buyer's seller
C) is responsible to deliver on default contracts
D) will face a greater risk if there is no marking-to-market
E) all of the above