Question 1

One reason that commodities appeal to investors is because they

Accepted Answer

Commodities often act as hedges against inflation because their prices tend to rise when consumer prices increase, preserving purchasing power.

Question 2

If the purchaser of a futures contract fails to meet a margin call,

Accepted Answer

If a purchaser of a futures contract fails to meet a margin call, their position will typically be liquidated or sold at the current market price to cover the margin deficiency.

Question 3

Fred purchased a futures contract on live cattle through Broker A. After purchasing the contract, Fred moved his investments to Broker B. During the transition, the contract on the cattle was forgotten. When the delivery date for the futures contract arrived,

Accepted Answer

Futures contracts are binding agreements, and unless Fred closed the position before the delivery date, he would be obligated to take delivery of the cattle.

Question 4

Speculators are especially interested in financial futures because price volatility can lead to potentially highly profitable outcomes.

Accepted Answer

Speculators thrive on volatility and uncertainty, which can create opportunities for large profits in financial futures.

Question 5

The November 12, 2009 online edition of the Wall Street Journal listed the following information on oat futures. (Hint: each contract represents 5000 bushels)  Based on this information, which one of the following statements is correct?

Accepted Answer

The answer of The November 12, 2009 online edition of...

Question 6

The return on a futures contract is calculated as

Accepted Answer

The answer of The return on a futures contract is...

Question 7

The Chicago Mercantile Exchange recently merged with

Accepted Answer

The Chicago Mercantile Exchange (CME) merged with the Chicago Board of Trade (CBOT) in 2007 to form the CME Group, which is one of the largest derivatives marketplaces in the world.

Question 8

The return on a futures contract

Accepted Answer

Futures contracts have low margin requirements, which can lead to high leverage and thus a high potential return.

Question 9

Interest rate futures are traded on all the following EXCEPT

Accepted Answer

Savings bonds are not typically traded in futures markets as they are non-marketable securities.

Question 10

One of the advantages of speculating with share- index futures is that they eliminate the need to predict the future course of the share market.

Accepted Answer

Speculating with share-index futures still requires predicting the future direction of the market to make profitable trades.

Question 11

Failure to meet a margin call will cause an investor's futures contract to be sold.

Accepted Answer

If an investor fails to meet a margin call, their futures contract may be sold to cover their losses. This is known as a forced liquidation.

Question 12

Investors can trade futures on electricity and natural gas.

Accepted Answer

Investors can trade futures on electricity and natural gas through exchanges such as the New York Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE).

Question 13

The use of futures contracts for commodities is a key method of controlling risk.

Accepted Answer

Futures contracts allow investors to lock in a price for a commodity in advance, which can help mitigate the risk of price fluctuations in the future. This can be especially important for businesses that rely on a steady supply of a particular commodity, as it allows them to plan ahead and budget more effectively.

Question 14

There is no limit to the amount of loss than can occur with a futures contract.

Accepted Answer

Futures contracts have unlimited loss potential, as the market can move against a trader with no predetermined limit. It is important for traders to manage risk and use protective strategies such as stop-loss orders.

Question 15

Every commodity contract specifies all the following EXCEPT

Accepted Answer

Commodity contracts specify the delivery month, product, and unit size, but not the settlement price, which is determined by market conditions.

Question 16

To hedge a bond portfolio, an investor should use

Accepted Answer

An interest rate future is used to hedge against changes in interest rates, which directly affect bond prices.

Question 17

In commodities trading, open interest at the end of a trading day is equal to

Accepted Answer

Open interest refers to the total number of outstanding derivative contracts, such as futures and options, that have not been settled. It is a measure of the total number of contracts that are still active and have not been closed or delivered.

Question 18

Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss. This practice is called

Accepted Answer

Spreading involves taking offsetting positions in different futures contracts to limit risk and potentially earn a modest profit.

Question 19

The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.

Accepted Answer

The answer of The owner of a futures contract has...

Question 20

With futures contracts, the price at which the commodity must be delivered is

Accepted Answer

The price at which the commodity must be delivered in a futures contract is set when the contract is sold, known as the futures price.

Quiz 15: Commodities and Financial Futures