Question 1

Explain a long position and a short position in futures trading.

Accepted Answer

The answer of Explain a long position and a short...

Question 2

The DJIA is the most popular stock-index futures contract.

Accepted Answer

The DJIA (Dow Jones Industrial Average) is a stock market index, but the S&P 500 futures are generally considered more popular and widely traded than DJIA futures.

Question 3

U.S. futures trading is regulated primarily by the CFTC.

Accepted Answer

The Commodity Futures Trading Commission (CFTC) is the primary regulatory body overseeing futures trading in the United States.

Question 4

The initial margin requirement on an SSF contract is 50 percent.

Accepted Answer

The initial margin requirement for a single stock futures (SSF) contract is typically set by the exchange and can vary, but it is often around 20-25%, not 50%.

Question 5

Futures exchanges standardize nonstandard forward contracts, establishing such features as contract size, delivery dates, and grades that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Accepted Answer

Futures exchanges standardize the terms of futures contracts, including contract size, delivery dates, and quality specifications, leaving only the price and number of contracts to be negotiated by traders.

Question 6

With an anticipatory hedge an investor anticipates a falling market and liquidates his position.

Accepted Answer

An anticipatory hedge involves taking a position in the futures market to protect against potential adverse price movements in the cash market, not liquidating a position.

Question 7

Compare the obligation entered into in a futures contract to the obligation in an options contract.

Accepted Answer

The answer of Compare the obligation entered into in a...

Question 8

Explain the difference between a forward contract and a futures contract.

Accepted Answer

The answer of Explain the difference between a forward contract...

Question 9

Program trading generally involves positions in both stocks and stock-index futures.

Accepted Answer

Program trading often involves the simultaneous buying or selling of a basket of stocks and the corresponding stock-index futures to capitalize on price discrepancies or to hedge positions.

Question 10

What is the role of the clearinghouse in futures trading?

Accepted Answer

The answer of What is the role of the clearinghouse...

Question 11

A pension fund holds $10 million in T-bonds. In order to protect against a rise in interest rate, the pension fund should use a short hedge in T-bond futures.

Accepted Answer

A short hedge involves selling futures contracts to protect against a potential decline in the value of an asset, such as T-bonds, due to rising interest rates.

Question 12

The intermarket spread is also known as a quality spread, involving two different markets, such as buying an NYSE contract and selling an S&P contract for the same month.

Accepted Answer

The intermarket spread involves buying and selling contracts in different markets, such as the NYSE and S&P, for the same month.

Question 13

Stock-index futures may be settled either by cash or by delivery of securities.

Accepted Answer

Stock-index futures are typically settled in cash, not by delivery of securities, as they are based on an index rather than physical assets.

Question 14

What is meant by the term "marked to market"?

Accepted Answer

The answer of What is meant by the term "marked...

Question 15

Briefly discuss the concept of margin in futures trading.

Accepted Answer

The answer of Briefly discuss the concept of margin in...

Question 16

With futures, hedging requires one to simply take an opposite position.

Accepted Answer

Hedging with futures involves taking an opposite position in the futures market to offset potential losses in the spot market.

Question 17

Short selling is not allowed in single stock futures (SSFs).

Accepted Answer

Short selling is allowed in single stock futures (SSFs) as they are derivatives that allow traders to take both long and short positions.

Question 18

What are the methods of settling a futures contract?

Accepted Answer

The answer of What are the methods of settling a...

Question 19

Index arbitrage attempts to exploit price differences between two different stock indices.

Accepted Answer

Index arbitrage exploits price differences between a stock index and its corresponding futures or options, not between two different stock indices.

Question 20

The calendar or time spread is also known as the intramarket spread, and involves contracts for two different settlement months, such as buying a March contract and selling a June contract.

Accepted Answer

A calendar or time spread involves taking positions in contracts of the same commodity but with different delivery months, hence it is also known as an intramarket spread.

Quiz 20: Futures Contracts