Question 1

Which of the following best describes central clearing parties?
A) Help market participants to value derivative transactions
B) Must be used for all OTC derivative transactions
C) Are used for futures transactions
D) Perform a similar function to exchange clearing houses

Accepted Answer

Central clearing parties perform a similar function to exchange clearing houses, which is to ensure the fulfillment of obligations and manage counterparty credit risk in financial transactions. While they are mainly used for OTC derivative transactions, they may also be used for some futures transactions. They do not necessarily help market participants value derivative transactions and are not mandatory for all OTC derivative transactions.

Question 2

A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account?
A) $58
B) $62
C) $64
D) $66

Accepted Answer

To calculate the futures price that would allow $2,000 to be withdrawn from the margin account, we need to first calculate the amount of equity in the account that corresponds to the initial margin.

Equity = Account Value - Initial Margin 
Account Value = Initial Margin / Initial Margin % 
Account Value = $6,000 / 0.1 = $60,000

Now we can calculate the amount of equity required to maintain the position, which corresponds to the maintenance margin.

Maintenance Margin = Account Value x Maintenance Margin % 
$4,000 = $60,000 x Maintenance Margin % 
Maintenance Margin % = $4,000 / $60,000 = 0.0667

To find the futures price that would allow $2,000 to be withdrawn, we need to determine the account value that corresponds to the new equity after the withdrawal.

New Equity = Account Value - Withdrawal Amount 
New Equity = $60,000 - $2,000 = $58,000

Now we can solve for the futures price:

New Equity = Account Value x (1 - Futures Price - Commodity Price) 
$58,000 = $60,000 x (1 - Futures Price + $60) 
1 - Futures Price + $60 = $58,000 / $60,000 
1 - Futures Price + $60 = 0.9667 
Futures Price = $62

Question 3

Which entity in the United States takes primary responsibility for regulating futures market?
A) Federal Reserve Board
B) Commodities Futures Trading Commission (CFTC)
C) Security and Exchange Commission (SEC)
D) US Treasury

Accepted Answer

The Commodities Futures Trading Commission (CFTC) is the primary regulator of the futures market in the United States. The CFTC is an independent agency that regulates commodity futures and options markets in the US to ensure their integrity and protect market participants from fraudulent and manipulative practices. The Federal Reserve Board, Security and Exchange Commission (SEC), and US Treasury all have their own regulatory responsibilities, but do not take primary responsibility for regulating futures markets.

Question 4

A limit order
A) Is an order to trade up to a certain number of futures contracts at a certain price
B) Is an order that can be executed at a specified price or one more favorable to the investor
C) Is an order that must be executed within a specified period of time
D) None of the above

Accepted Answer

A limit order is an order to buy or sell a security at a specified price, or a more favorable price, and it will only be executed at that price or better. It is not limited by a specific number of contracts or a certain time period for execution. Thus, option B is the correct choice.

Question 5

You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012 per unit. What is the balance of your margin account at the end of the day?
A) $1,800
B) $3,300
C) $2,200
D) $3,700

Accepted Answer

The price has increased by $2.Because you have a short position you lose 2×100 or $200.The balance in the margin account therefore goes down from $2,000 to $1,800.

Question 6

The frequency with which margin accounts are adjusted for gains and losses is
A) Daily
B) Weekly
C) Monthly
D) Quarterly

Accepted Answer

Margin accounts are adjusted on a daily basis to reflect gains and losses. This is done to ensure that the account stays within the required margin maintenance levels.

Question 7

With bilateral clearing, the number of agreements between four dealers, who trade with each other, is
A) 12
B) 1
C) 6
D) 2

Accepted Answer

With bilateral clearing, each dealer has to sign a contract with every other dealer, which leads to six agreements (assuming the order doesn't matter). So, the correct answer is 6 (option C).

Question 8

One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest?
A) No change
B) Decrease by one
C) Decrease by two
D) Increase by one

Accepted Answer

The open interest goes down by one.There is one less long position and one less short position.

Question 9

Which of the following is NOT true?
A) Futures contracts nearly always last longer than forward contracts
B) Futures contracts are standardized; forward contracts are not
C) Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts
D) Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates

Accepted Answer

Forward contracts often last longer than futures contracts.B,C,and D are true

Question 10

Which of the following is true?
A) Both forward and futures contracts are traded on exchanges
B) Forward contracts are traded on exchanges, but futures contracts are not
C) Futures contracts are traded on exchanges, but forward contracts are not
D) Neither futures contracts nor forward contracts are traded on exchanges

Accepted Answer

Futures contracts are traded on exchanges, while forward contracts are not.

Question 11

Who initiates delivery in a corn futures contract?
A) The party with the long position
B) The party with the short position
C) Either party
D) The exchange

Accepted Answer

The party with the short position initiates delivery in a corn futures contract. This is because they have agreed to sell the underlying asset (corn) at a specific price and are obligated to deliver it to the party with the long position.

Question 12

A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000

Accepted Answer

Hedge accounting is used.The whole of the gain or loss on the futures is therefore recognized in 2013.None is recognized in 2012.In this case the gain is $4 per unit or $4,000 in total.

Question 13

Clearing houses are
A) Never used in futures markets and sometimes used in OTC markets
B) Used in OTC markets, but not in futures markets
C) Sometimes used in both futures markets and OTC markets
D) Always used in both futures markets and OTC markets

Accepted Answer

Clearing houses are used in both futures markets and OTC markets, although their usage may vary depending on the type of market and specific contract.

Question 14

Which of the following are cash settled?
A) All futures contracts
B) All option contracts
C) Futures on commodities
D) Futures on stock indices

Accepted Answer

Futures on stock indices are cash settled, meaning that the settlement is in cash rather than physical delivery of the underlying asset. Futures on commodities, on the other hand, can be settled through physical delivery, making them not purely cash settled. Option contracts can also be settled through physical delivery, therefore not all option contracts are cash settled.

Question 15

Margin accounts have the effect of
A) Reducing the risk of one party regretting the deal and backing out
B) Ensuring funds are available to pay traders when they make a profit
C) Reducing systemic risk due to collapse of futures markets
D) All of the above

Accepted Answer

Margin accounts help reduce the risk of one party backing out of a deal, ensure funds are available to pay traders when they make a profit, and also reduce systemic risk in the event of a collapse in the futures markets.

Question 16

A haircut of 20% means that
A) A bond with a market value of $100 is considered to be worth $80 when used to satisfy a collateral request
B) A bond with a face value of $100 is considered to be worth $80 when used to satisfy a collateral request
C) A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a collateral request
D) A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a collateral request

Accepted Answer

A haircut is the amount the market price of asset is reduced by for the purposes of determining its value for collateral purposes.A is therefore correct.

Question 17

For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the open interest for Sept 2012 contracts, is usually
A) Higher
B) Lower
C) The same
D) Equally likely to be higher or lower

Accepted Answer

Usually, as the delivery month gets closer, the open interest for that contract increases while the open interest for further out contracts decreases. Therefore, the open interest for a June 2012 contract in April 2012 is likely to be higher than the open interest for a Sept 2012 contract.

Question 18

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call?
A) 78 cents
B) 76 cents
C) 74 cents
D) 72 cents

Accepted Answer

To calculate the futures price per unit above which there will be a margin call, we need to use the following formula:

Margin Call Price = (Initial Margin - Maintenance Margin) / (Units x Contract Size)

In this case, the contract size is 1 (since we're talking about 50,000 units), so we can simplify the formula to:

Margin Call Price = (Initial Margin - Maintenance Margin) / Units

Substituting the given values, we get:

Margin Call Price = ($4,000 - $3,000) / 50,000 = $0.02 per unit

To get the futures price per unit, we need to add the margin call price to the contracted price:

Futures Price = Contracted Price + Margin Call Price

Futures Price = $0.70 + $0.02 = $0.72 per unit

Therefore, the correct answer is D, $0.72 per unit.

Question 19

In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true?
A) This flexibility tends increase the futures price
B) This flexibility tends decrease the futures price
C) This flexibility may increase and may decrease the futures price
D) This flexibility has no effect on the futures price

Accepted Answer

The party with the short position chooses between the alternatives.The alternatives therefore make the futures contract more attractive to the party with the short position.The lower the futures price the less attractive it is to the party with the short position.The benefit of the alternatives available to the party with the short position is therefore compensated for by the futures price being lower than it would otherwise be.

Question 20

A speculator takes a long position in a futures contract on a commodity on November 1, 2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000

Accepted Answer

The gain recognized in the accounting year is calculated as the difference between the selling price and the initial purchase price. In this case, the futures contract was bought at $60 and sold at $64, resulting in a gain of $4 per unit. Since each contract is on 1000 units of the commodity, the total gain is $4,000.

Quiz 2: Mechanics of Futures Markets

Which of the following best describes central clearing parties?

A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account?

Which entity in the United States takes primary responsibility for regulating futures market?

A limit order

The frequency with which margin accounts are adjusted for gains and losses is

With bilateral clearing, the number of agreements between four dealers, who trade with each other, is

One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest?

Which of the following is NOT true?

Which of the following is true?

Who initiates delivery in a corn futures contract?

Clearing houses are

Which of the following are cash settled?

Margin accounts have the effect of

A haircut of 20% means that

For a futures contract trading in April 2012, the open interest for a June 2012 contract, when compared to the open interest for Sept 2012 contracts, is usually

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call?

In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true?