Deck 13: Financial Futures Markets

Question 1

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

A) increased; more
B) decreased; less
C) remains the same; more
D) increased; less

Answer 1

D

Question 2

Interest rate futures are not available on

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

Answer 2

D

Question 3

In cross-hedging, if the value of the futures contract is more volatile than the portfolio's value, the amount of principal represented by the futures contracts will be ____ the market valueofthe portfolio to be hedged.

A) smaller than
B) greater than
C) equal to
D) B and C are both possible

Answer 3

A

Question 4

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.

Question 5

According to the text, using a futures contract on one financial instrument to hedge a position in a different financial instrument is known as

A) cross-hedging.
B) ratio hedging.
C) basis hedging.
D) liquid hedging.

Question 6

____ 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 the above

Question 7

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 8

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 9

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

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

Question 10

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 11

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 theposition in futures contracts will result in a ____.

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

Question 12

The use of financial leverage

A) magnifies the positive returns of futures contracts.
B) magnifies losses of futures contracts.
C) both A and B
D) none of the above

Question 13

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 differencebetween the selling and purchase price of the futures contract?

A) $.50
B) $50
C) $500
D) $5,000
E) none of the above

Question 14

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 15

__________ 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 firmdesires.

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

Question 16

____ 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 17

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

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

Question 18

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 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

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 21

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 the above

Question 22

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 23

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

Question 24

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 25

Which of the following statements is incorrect with respect to cross-hedging?

A) Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value.
B) If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts.
C) The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
D) If the price of the underlying security of the futures contract moves closely in tandem with the security being hedged, the futures contract can provide an effective hedge.
E) All of the above are correct with respect to cross-hedging.

Question 26

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

Question 27

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 28

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

A) liquidates its stocks 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 the above

Question 29

Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura's position in theS&P500 futures contract is ____ percent.

A) -20
B) -10
C) 25
D) 20
E) 0

Question 30

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 the above

Question 31

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 the above

Question 32

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 33

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 34

The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is 1619 when the position isclosed out, the gain is

A) $700.
B) $7,000.
C) $3,190.
D) $3,120.
E) $3,500.

Question 35

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

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

Question 36

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 37

Which of the following is incorrect regarding organized exchanges trading financial futures contracts?

A) Organized exchanges establish and enforce rules for the trading of financial futures contracts.
B) Organized exchanges ensure that the seller of the futures contract always delivers the securities covered by the contract, whether the contract was settled prior to the settlement date or not.
C) Organized exchanges clear, settle, and guarantee all transactions that occur on their exchanges.
D) The operations of financial futures exchanges are regulated by the Commodity Futures Trading Commission (CFTC).
E) All of the above are correct.

Question 38

Financial futures contracts are rarely sold over the counter.

Question 39

____ 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 the above

Question 40

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 41

Stock index futures cannot be closed out before the settlement date

Question 42

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 threemonths. 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 the above

Question 43

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 44

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

Question 45

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

Question 46

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 stockindexes.

Question 47

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

Question 48

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 49

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 50

___________ 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 51

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

Question 52

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

Question 53

_________ 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 54

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 55

Purchasers of financial futures contracts usually know who the sellers are, and vice versa.

Question 56

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

A) higher
B) lower
C) either higher or lower
D) none of the above

Question 57

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

Question 58

A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge.

Question 59

Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position.Atthat time, the futures contract specifies 103-15. What is Baher'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 the above

Question 60

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.