Question 1

You sold one soybean future contract at $5.13 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

To calculate profit or loss on a futures contract, we need to use the formula:

Profit/Loss = (Futures price at initiation - Futures price at maturity) x Contract size

Here, the contract size is 5,000 bushels, and we sold one contract at $5.13 per bushel, so our initial position was:

5,000 bushels x $5.13 = $25,650

If the spot price at maturity is $5.26 per bushel, then our profit/loss would be:

Profit/Loss = ($5.13 - $5.26) x 5,000 = -$650

Since we sold the contract, a negative profit/loss means a loss of $650. Therefore, the answer is C.

Question 2

On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550.If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

Accepted Answer

Profit/Loss = (Futures Price at Selling - Futures Price at Buying) * Multiplier
Multiplier for S&P 500 Index futures contract is $250 per index point.
Profit/Loss = (1612 - 1550) * 250 = $15,500 profit.

Question 3

On April 1, you sold one S&P 500 Index futures contract at a futures price of 1,550.If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

Accepted Answer

To calculate profit or loss, we need to find the difference between the selling price and the buying price (which is the price at which we close the position). Here, we sold one futures contract at 1,550 and if we close the position on June 15 at 1,612, we would incur a loss of (1,612 - 1,550) x $50 = $3,100 per contract. Since we sold one contract, our total loss would be $3,100. Therefore, the correct answer is B.

Question 4

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

Accepted Answer

If the trader fails to meet the obligations of the futures contract, the clearinghouse will be responsible for ensuring that the contract is fulfilled. The clearinghouse will be hurt if the trader fails to fulfill their obligations, as they will be responsible for finding another party to fulfill the contract or incurring any losses if they cannot find another party. The offsetting short trader and corn farmer would not necessarily be hurt by the trader's failure to meet obligations, as they could potentially find another trader to fulfill the contract or sell their corn at a different price. The broker is also not the party that is directly hurt by the failure to meet obligations.

Question 5

Contango

Accepted Answer

Contango holds that the natural hedgers are the purchasers of a commodity, not the suppliers and is a hypothesis polar to backwardation.

Question 6

The expectations hypothesis of futures pricing

Accepted Answer

The expectations hypothesis of futures pricing states that the futures price equals the expected value of the future spot price of the asset, which is believed to be the simplest theory of futures pricing. Therefore, option D is the correct answer. Option A is incorrect as it only states the simplicity of the theory without mentioning its key principle. Option B is partially correct but does not state that this is the expectations hypothesis. Option C is false as futures trading is a zero-sum game where gains by one party are balanced by losses by the other party.

Question 7

On January 1, you bought one April S&P 500 index futures contract at a futures price of 1,420.If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

Accepted Answer

The profit (or loss) in futures trading is calculated as the difference between the futures price at purchase and the futures price at closing multiplied by the contract value. In this case, the contract value of one S&P 500 index futures contract is $250 times the index value.

On January 1, you bought one contract at 1,420, and on February 1, the price increased to 1,430. So, your profit is:

($1,430 - $1,420) x $250 = $2,500

Therefore, the correct answer is C, $2,500 profit.

Question 8

Normal backwardation

Accepted Answer

Normal backwardation theory maintains that there are natural hedgers who desire to shed risk and that speculators will enter the long side of the contract only if the futures price is below the expected spot price. It also assumes that risk premiums in the futures markets are based on systematic risk.

Question 9

The process of marking to market

Accepted Answer

The process of marking to market posts gains or losses to each account daily and may result in margin calls. It applies to both long and short positions.

Question 10

Given a stock index with a value of $1,000, an anticipated dividend of $30, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

Accepted Answer

The value of a futures contract on a stock index can be calculated using the formula: Futures Price = (Spot Price - Dividend) * e^(Risk-free rate * Time). Assuming the time to maturity is 1 year (as not specified otherwise), the calculation would be: (1000 - 30) * e^(0.06*1) = 970 * e^0.06 ≈ $1,030. Therefore, the value of one futures contract on the index should be approximately $1,030.

Question 11

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,420.If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

Accepted Answer

The profit or loss from futures trading is calculated by the difference in the futures contract price from the time of sale to the time of covering the position, multiplied by the contract multiplier. For S&P 500 Index futures, the contract multiplier is typically $250 per index point. Selling at 1,420 and then closing the position at 1,430 results in a 10 point increase, leading to a loss because the position was a short sale. The loss is 10 points * $250 = $2,500.

Question 12

Speculators may use futures markets rather than spot markets because

Accepted Answer

Speculators may prefer futures markets over spot markets because they offer both lower transaction costs and leverage. This combination can be advantageous for speculators looking to make a large return on a small investment. Additionally, futures markets are often more liquid than spot markets, providing greater flexibility for traders.

Question 13

Given a stock index with a value of $1,125, an anticipated dividend of $33, and a risk-free rate of 4%, what should be the value of one futures contract on the index?

Accepted Answer

The value of a futures contract on a stock index can be calculated using the formula: Futures Price = Spot Price * e^(r - q)T, where r is the risk-free rate, q is the dividend yield, and T is the time to maturity. However, since we are not given T (time to maturity) and the dividend is a dollar amount rather than a yield, we simplify the calculation by adjusting the spot price for the dividend and then applying the risk-free rate. The adjusted spot price is $1,125 - $33 = $1,092. The future value of this adjusted spot price at the risk-free rate of 4% (assuming T = 1 for simplicity or any time period since it's not specified) is approximately $1,092 * (1 + 0.04) = $1,137. Therefore, the value of one futures contract on the index should be approximately $1,137.00.

Question 14

Taxation of futures trading gains and losses

Accepted Answer

Futures trading gains and losses are taxed based on cumulative year-end profits or losses, as they are marked to market at the end of the year.

Question 15

You bought one soybean future contract at $5.13 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

To calculate the profit/loss, we need to use the formula:
Profit/Loss = (Spot price at maturity - Purchase price) x Contract size
Here, Purchase price = $5.13 per bushel
Spot price at maturity = $5.26 per bushel
Contract size = 5,000 bushels

Profit/Loss = (5.26 - 5.13) x 5,000
Profit/Loss = $0.13 x 5,000
Profit/Loss = $650

Since the spot price at maturity is higher than the purchase price, the profit is positive. Therefore, the correct answer is B) $650 profit.

Question 16

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?

Accepted Answer

The value of a futures contract on the index can be calculated using the formula: Futures Price = Spot Price - Present Value of Dividends + (Risk-Free Rate * Spot Price * Time to Maturity). Assuming a 1-year maturity for simplicity, the calculation would be: $1,500 - $62/(1 + 0.0575) + ($1,500 * 0.0575) = $1,500 - $58.75 + $86.25 = $1,527.50. However, given the options provided, the closest and correct answer is $1,524.25, indicating a possible rounding difference or a simplification in the calculation process.

Question 17

The establishment of a futures market in a commodity should not have a major impact on spot prices because

Accepted Answer

Futures are a zero-sum game, meaning that for every winner, there is a loser. This characteristic does not inherently affect the underlying spot prices of the commodity, as it is more about the redistribution of wealth between parties in the futures market rather than a direct impact on the commodity's supply and demand dynamics.

Question 18

Open interest includes

Accepted Answer

The answer of Open interest includes
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Question 19

Futures contracts are regulated by

Accepted Answer

The Commodities Futures Trading Corporation (should be Commodities Futures Trading Commission, CFTC) is the correct regulatory body for futures contracts in the United States.

Question 20

Delivery of stock index futures

Accepted Answer

Delivery of stock index futures is typically made by a cash settlement based on the index value. This means that the difference between the contract price and the index value at expiration is settled in cash, rather than physical delivery of the underlying stocks.

Quiz 22: Futures Markets