Question 1

The expectations hypothesis of futures pricing

Accepted Answer

The expectations hypothesis of futures pricing indeed combines both the simplicity of the theory (it's considered the simplest theory of futures pricing) and the idea that the futures price is set equal to the expected future spot price of the asset. This hypothesis suggests that the futures market is an unbiased predictor of future spot prices.

Question 2

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. The CFTC is an independent agency of the US government created in 1974, that regulates the U.S. derivatives markets, which includes futures, swaps, and certain kinds of options.

Question 3

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 the index can be calculated using the formula: Futures Price = Spot Price - Present Value of Dividends + (Risk-Free Rate * Spot Price * Time). Assuming a 1-year period for simplicity, the calculation is $1,000 - $30 + ($1,000 * 6% * 1) = $1,000 - $30 + $60 = $1,030.

Question 4

Delivery of stock index futures

Accepted Answer

Stock index futures are typically settled in cash based on the value of the index at the time of settlement, rather than through the delivery of physical shares.

Question 5

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

The answer of If a trader holding a long position...

Question 6

Taxation of futures trading gains and losses

Accepted Answer

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

Question 7

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

Accepted Answer

The answer of The establishment of a futures market in...

Question 8

Speculators may use futures markets rather than spot markets because

Accepted Answer

Futures markets often have lower transaction costs compared to spot markets, and they provide the advantage of leverage, allowing traders to control large positions with a relatively small amount of capital.

Question 9

The process of marking to market

Accepted Answer

Marking to market involves adjusting the value of an account to reflect the current market values of the assets held, which can lead to daily posting of gains or losses and potentially trigger margin calls if the value falls below required levels. It affects both long and short positions, not just long positions.

Question 10

On January 1, you bought one April S&P 500 index futures contract at a futures price of 3,420. If, on February 1, the April futures price was 3,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

Accepted Answer

The profit from a futures contract is calculated by taking the difference between the selling price and the buying price, then multiplying by the contract multiplier. For S&P 500 index futures, the contract multiplier is typically $250. Since the futures price increased from 3,420 to 3,430, the profit is (3,430 - 3,420) * $250 = $2,500.

Question 11

Open interest includes

Accepted Answer

The answer of Open interest includes
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Question 12

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

The profit or loss from a futures contract is calculated by taking the difference between the selling price and the buying price, then multiplying by the contract multiplier (which is typically $250 for S&P 500 Index futures). In this case, the selling price was 1,550 and the buying (closing) price was 1,612, resulting in a loss of 62 points. Multiplying 62 by $250 gives a loss of $15,550.

Question 13

Normal backwardation

Accepted Answer

Normal backwardation theory, as proposed by John Maynard Keynes, suggests that futures prices tend to be below the expected future spot prices. This is because hedgers, who are typically producers or consumers of the commodity, are willing to pay a premium to offload their risk onto speculators. Thus, for most commodities, there are natural hedgers who wish to shed risk, and speculators will enter the long side of the futures contract only if they expect to profit from an increase in prices, i.e., if the futures price is below the expected spot price at contract maturity. This explanation combines elements from both A and B, making D the correct choice.

Question 14

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. Since no specific time to maturity is given, we'll assume it's one year for simplicity. The dividend yield (q) can be calculated as the dividend divided by the spot price, which is $33 / $1125 = 0.0293 or 2.93%. Using the formula with r = 4% or 0.04, q = 2.93% or 0.0293, and T = 1, we get: Futures Price = $1125 * e^(0.04 - 0.0293) = $1125 * e^(0.0107) ≈ $1125 * 1.01075 ≈ $1137.00.

Question 15

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

Since you sold the futures contract at $5.13 and the spot price at maturity is $5.26, the price increased by $0.13 per bushel. For a contract size of 5,000 bushels, the total loss is 0.13 * 5000 = $650.

Question 16

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

The profit from the futures contract is calculated by taking the difference between the selling price and the buying price, then multiplying by the contract multiplier (which is typically $250 for S&P 500 Index futures). Therefore, the profit is (1,612 - 1,550) * $250 = 62 * $250 = $15,550.

Question 17

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 a stock index can be calculated using the formula: Futures Price = (Spot Price - Dividend) * e^(r*t), where e is the base of the natural logarithm, r is the risk-free interest rate, and t is the time to maturity (assuming t=1 for simplicity). In this case, since no specific time to maturity is given, we simplify the calculation by adjusting the spot price for the dividend and then applying the risk-free rate over a one-year period. Therefore, the calculation is: (1500 - 62) * (1 + 0.0575) = 1438 * 1.0575 = $1,524.25.

Question 18

Given a stock index with a value of $1,100, an anticipated dividend of $27, and a risk-free rate of 3%, 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. In this case, since no specific time to maturity (T) is given and assuming it's for a period of one year for simplicity, the dividend yield (q) can be calculated as the dividend ($27) divided by the spot price ($1,100), which gives 0.0245 or 2.45%. Using the given risk-free rate of 3%, the formula simplifies to Futures Price = $1,100 * e^(0.03 - 0.0245)*1. Since the time period and the exact calculation for e^(0.03 - 0.0245) are not detailed, a direct calculation isn't provided, but the principle is that the futures price should be slightly above the spot price, adjusted for the net cost of carry (interest minus dividends). Therefore, the closest and most logical answer given the options is $1,106.00, reflecting a slight increase over the spot price to account for the net carrying cost over the period.

Question 19

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

The profit is calculated by taking the difference between the selling price and the buying price, then multiplying by the contract size. Here, ($5.26 - $5.13) * 5,000 = $0.13 * 5,000 = $650 profit.

Question 20

Contango

Accepted Answer

Contango is a situation where the futures price of a commodity is higher than the spot price, which is often considered the opposite of backwardation. In backwardation, the future price is below the spot price, typically because current demand is higher than the supply. The statement about natural hedgers being the purchasers rather than the suppliers does not directly relate to the definition of contango or backwardation; it's more about market participants' roles. Therefore, the correct answer is the one that correctly identifies contango as being opposite to backwardation.

Quiz 22: Futures Markets