Question 1

An increase in the basis will __________ a long hedger and __________ a short hedger.

Accepted Answer

An increase in the basis benefits a long hedger because it means the spot price has increased relative to the futures price, improving their position. Conversely, it hurts a short hedger because they are adversely affected by the increase in the spot price relative to the futures price.

Question 2

An investor with a long position in Treasury notes futures will profit if

Accepted Answer

When interest rates decline, the prices of Treasury notes futures increase, resulting in a profit for the investor with a long position. Therefore, option A is the correct answer.

Question 3

You purchased one corn future contract at $2.29 per bushel.What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

The profit (P) or loss (L) from a futures contract can be calculated using the following formula:
P/L = (F - S) x CS
where F is the futures price, S is the spot price, and CS is the contract size.

In this case, F = $2.29 per bushel, S = $2.10 per bushel, and CS = 5,000 bushels. Plugging these values into the formula, we get:
P/L = ($2.29 - $2.10) x 5,000 = $95 loss

Therefore, the correct choice is C, which represents a loss of $950.

Question 4

You purchased one silver future contract at $3 per ounce.What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Accepted Answer

Profit/Loss = (Spot price at maturity - Purchase price) x Contract size
= ($4.10 - $3) x 5,000
= $1.10 x 5,000
= $5,500 profit

Question 5

On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13.You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract.One month later, the listed spot price and futures prices were 94 and 94.09, respectively.If you were to liquidate your position, your profits would be a

Accepted Answer

The answer of On January 1, the listed spot and...

Question 6

Interest rate futures contracts are actively traded on the

Accepted Answer

Interest rate futures contracts are traded on multiple currencies, including eurodollars, euroyen, and sterling. Therefore, all options (A), (B), (C), and (D) are correct.

Question 7

You sold one silver future contract at $3 per ounce.What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Accepted Answer

The profit or loss on a futures contract can be calculated as the difference between the selling price and the buying price, multiplied by the contract size. 
Profit (loss) = (Selling price - Buying price) x Contract size
In this case, the selling price is $3 per ounce, while the spot price at maturity is $4.10 per ounce. Therefore, the loss per ounce is ($4.10 - $3) = $1.10. 
The total loss would be: 
Loss = Loss per ounce x Contract size = $1.10 x 5,000 = $5,500. 
Therefore, the correct answer is D, $5,500 loss.

Question 8

You sold one corn future contract at $2.29 per bushel.What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

By selling a corn future contract at $2.29 per bushel and the spot price at maturity being $2.10 per bushel, you would profit from the decrease in price. The difference is $0.19 per bushel. For a contract size of 5,000 bushels, the total profit is 5,000 bushels * $0.19/bushel = $950.

Question 9

You sold one wheat future contract at $3.04 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

Selling a futures contract at a higher price than the spot price at maturity results in a profit. The difference per bushel is $3.04 - $2.98 = $0.06. For 5,000 bushels, the total profit is 0.06 * 5,000 = $300.

Question 10

Which one of the following statements regarding "basis" is true?

Accepted Answer

The statement that is true regarding "basis" is that it is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price. The other options are incorrect. Option A incorrectly states that basis is the difference between the futures price and the spot price, while option D is incorrect because the basis decreases when the futures price increases by more than the spot price. Option B is incorrect because basis risk can be borne by either the hedger or speculator. Option C is incorrect because a short hedger benefits when the basis decreases, not suffers losses.

Question 11

You purchased one wheat future contract at $3.04 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

To calculate profit or loss in futures contract, we use the formula:
Profit (Loss) = (Futures Price at Contract Initiation - Futures Price at Contract Maturity) x Contract Size
Here, Futures Price at Contract Initiation = $3.04 per bushel
Futures Price at Contract Maturity = $2.98 per bushel
Contract Size = 5,000 bushels
Therefore, Profit (Loss) = ($3.04 - $2.98) x 5,000 = $300 loss

Question 12

Which one of the following statements regarding "basis" is not true?

Accepted Answer

A short hedger actually benefits when the basis decreases, as they are selling futures contracts and aiming to buy at a lower spot price later.

Question 13

Foreign currency futures contracts are actively traded on the

Accepted Answer

Foreign currency futures contracts are actively traded on both the euro and the British pound. Drachma is not commonly traded as Greece has adopted the euro as its official currency since 2001.

Question 14

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by

Accepted Answer

To exploit the overpricing of S&P 500 Index futures relative to the spot S&P 500 Index, one would sell the overpriced futures (to benefit from their expected decline to the fair value) and simultaneously buy the underlying stocks in the S&P 500 at the current lower spot price. This strategy locks in a risk-free profit as the futures price converges to the spot price.

Question 15

To hedge a long position in Treasury bonds, an investor would most likely

Accepted Answer

Selling interest rate futures would provide a hedge for a long position in Treasury bonds as there is an inverse relationship between bond prices and interest rates. By selling interest rate futures, the investor can offset potential losses from a decrease in bond prices (due to an increase in interest rates). Buying interest rate futures (choice A) would be a strategy for hedging a short position in Treasury bonds. Selling S&P futures (choice B) would not provide hedge for Treasury bonds, as it is a different asset class. Buying Treasury bonds in the spot market (Choice D) would increase the investor's exposure to Treasury bonds, not hedge it.

Question 16

Metals and energy currency futures contracts are actively traded on

Accepted Answer

The answer of Metals and energy currency futures contracts are...

Question 17

Metals and energy currency futures contracts are actively traded on

Accepted Answer

Metals such as gold and silver as well as energy such as propane are actively traded as futures contracts. Therefore, all the options are correct.

Question 18

Foreign currency futures contracts are actively traded on the

Accepted Answer

Foreign currency futures contracts are actively traded on all of the mentioned currencies and many more, making E the correct choice.

Question 19

To exploit an expected increase in interest rates, an investor would most likely

Accepted Answer

Selling Treasury bond futures is a strategy investors use when they expect interest rates to rise because bond prices and interest rates move inversely. As interest rates increase, the value of existing bonds (with lower interest rates) decreases, making selling futures a way to profit from this expectation.

Question 20

Agricultural futures contracts are actively traded on

Accepted Answer

Agricultural futures contracts are traded for various commodities including rice, sugar, and canola. Therefore, option E - all of the options are correct - is the best choice.

Quiz 22: Futures Markets

An increase in the basis will a long hedger and a short hedger.

An investor with a long position in Treasury notes futures will profit if

You purchased one corn future contract at $2.29 per bushel.What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

You purchased one silver future contract at $3 per ounce.What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

Interest rate futures contracts are actively traded on the

You sold one silver future contract at $3 per ounce.What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

You sold one corn future contract at $2.29 per bushel.What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

You sold one wheat future contract at $3.04 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Which one of the following statements regarding "basis" is true?

You purchased one wheat future contract at $3.04 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Which one of the following statements regarding "basis" is not true?

Foreign currency futures contracts are actively traded on the

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by

To hedge a long position in Treasury bonds, an investor would most likely

Metals and energy currency futures contracts are actively traded on

Metals and energy currency futures contracts are actively traded on

Foreign currency futures contracts are actively traded on the

To exploit an expected increase in interest rates, an investor would most likely

Agricultural futures contracts are actively traded on