Question 1

Plutonium is trading at a one-year futures price of $5,000 per gram.A futures contract comprises 100 grams.The initial margin is $100,000 and the maintenance margin is $80,000.You are short one futures contract.There is a margin call when the price per gram of plutonium changes to

Accepted Answer

When you are short a futures contract, a margin call occurs if the price of the underlying asset increases, causing the value of the contract to move against you. The initial margin is $100,000, and the maintenance margin is $80,000. If the price per gram of plutonium increases, you need to calculate at what price the loss on the contract reduces the margin in your account to the maintenance margin level or below. The contract comprises 100 grams, and the initial price is $5,000 per gram, making the initial value of the contract $500,000 (100 grams * $5,000/gram). If the price increases to $5,250 per gram, the new value of the contract is $525,000 (100 grams * $5,250/gram). The loss on the contract is $25,000 ($525,000 - $500,000), which would reduce the margin in the account to $75,000 ($100,000 initial margin - $25,000 loss), triggering a margin call since it falls below the maintenance margin of $80,000.

Question 2

You go short oil 10 futures contracts on NYMEX when the futures price of oil is $79 a barrel and close out your position three days later at a futures price of $83 a barrel.One futures contract is for 1,000 barrels.Ignoring interest on the margin account,the futures trading has resulted in a

Accepted Answer

Since you shorted 10 futures contracts, you sold 10,000 barrels of oil at $79 per barrel. Three days later, you bought back those 10,000 barrels at $83 per barrel. The profit/loss can be calculated as follows:
Profit/Loss = (Sell Price - Buy Price) x Number of Barrels
Profit/Loss = ($79 - $83) x 10,000
Profit/Loss = -$40,000
Therefore, you have made a loss of $40,000 from this futures trading. Option D is the only choice that indicates a loss of $40,000.

Question 3

The cheapest-to-deliver option

Accepted Answer

The cheapest-to-deliver option refers to the cheapest underlying asset that can be delivered to fulfill a futures contract. This option hurts the holder of the long position in the futures contract because they will receive the cheapest asset possible, even if it is of lower quality or value than they expected. This is why it is important for the long position holder to do their due diligence in selecting a futures contract with a favorable delivery option.

Question 4

An investor enters into a long position in 10 gold futures contracts at a futures price of $1000/oz and closes out the position at a price of $1020/oz.If one gold futures contract is for 50 ounces,what are the investor's gains or losses?

Accepted Answer

First, calculate the initial value of the position:

10 contracts x 50 oz/contract x $1000/oz = $5,000,000

Then, calculate the final value of the position:

10 contracts x 50 oz/contract x $1020/oz = $5,100,000

The investor's profit is the difference between the final value and the initial value:

$5,100,000 - $5,000,000 = $100,000

Therefore, the answer is D) $10,000.

Question 5

A calendar spread futures position comprises

Accepted Answer

A calendar spread futures position involves simultaneously taking a long position in a futures contract of one maturity and a short position in another futures contract of a different maturity. This strategy can be used to capture price differences between the two contracts and can be a way to manage risk in a futures trading portfolio.

Question 6

For a futures contract on an asset to be successful compared to the alternative of forward contracts,which of the following features would help?

Accepted Answer

Counterparty credit risk is high in forward contracts because they are private agreements between two parties. Futures contracts, traded on exchanges, mitigate this risk through daily settlements and the backing of the clearinghouse, making them more attractive in scenarios where counterparty credit risk is a concern.

Question 7

A price tick is

Accepted Answer

A price tick is the minimum increment by which the price of a security can move. It represents the smallest possible change in price, typically expressed as a fraction of a unit of currency. Therefore, option B, which states that a price tick is the minimum amount by which the price can move, is the correct choice.

Question 8

The level of margining in a futures contract takes as an important input

Accepted Answer

The level of margining in a futures contract takes into account the volatility of the asset underlying the futures contract. This is because the more volatile the asset, the greater the risk of losses incurred by the parties involved in the trade. Therefore, higher levels of margin are required to protect against this risk. The trading volume, credit quality of counterparties, and the difference between initial and maintenance margin may also be considered but are not as significant as the volatility of the underlying asset.

Question 9

When the futures-spot basis weakens

Accepted Answer

When the futures-spot basis weakens, it means that the difference between futures and spot prices is decreasing. Therefore, Choice A is the correct answer.

Question 10

Futures contracts are more likely to be cash-settled when

Accepted Answer

(Note that c is also sometimes specified as a possible reason,but is not always valid. )

Question 11

A "stack-and-roll" strategy makes profits from the "roll" part when

Accepted Answer

A "stack-and-roll" strategy profits from the "roll" part when the market is in backwardation because it involves selling futures contracts that are about to expire and buying longer-dated ones at a lower price, thus benefiting from the price difference.

Question 12

When a counterparty to a futures contract fails to perform under the contract,

Accepted Answer

The answer of When a counterparty to a futures contract...

Question 13

In the absence of arbitrage,the futures price at maturity should equal

Accepted Answer

In the absence of arbitrage, the futures price at maturity should equal the spot price of the underlying asset at that point. This is because the futures price represents the expected future spot price of the asset and any deviation from the actual spot price at maturity would create an arbitrage opportunity. Options A, C, and D may affect the pricing of the futures contract, but they do not determine the final futures price at maturity.

Question 14

Which of the following types of orders does not involve specifying a price limit or trigger price as part of the order?

Accepted Answer

A spread order involves specifying the purchase or sale of two or more securities simultaneously, but does not involve specifying a price limit or trigger price as part of the order. The other options all involve specifying a price limit or trigger price.

Question 15

September corn futures are currently trading at $3.80 a bushel while the spot price of corn is $3.65 a bushel,so the "basis" (the futures price minus the spot price)is $0.15 a bushel.If you expect the basis to weaken (i.e. ,to fall)significantly in the next few days,you can speculate on your view by

Accepted Answer

Going long spot corn and short September futures is the best choice if you expect the basis to weaken significantly in the next few days. This is because if the basis falls as anticipated, the spot price will decrease in relation to the futures price. By being long spot corn and short September futures, you would benefit from the decrease in the basis, as the spot price would decrease more than the futures price. This trade would allow you to profit from the expected decrease in the basis.

Question 16

March what futures are trading at $4.20 a bushel and May wheat futures are trading at $4.35 a bushel.You expect the spread between May and March futures prices to widen.To speculate on this view,you would

Accepted Answer

Going long on May futures means buying May wheat futures at the current price of $4.35 a bushel. Going short on March futures means selling March wheat futures at the current price of $4.20 a bushel. This strategy allows the trader to profit from a widening spread between the two contracts. As the spread widens, the price difference between May and March futures contracts will increase, resulting in a profit for the trader who is long on May futures and short on March futures. Choosing A, C or D all involve betting only on a single contract and do not take advantage of the expected spread widening between the two contracts.

Question 17

The most widely traded futures are of the following type:

Accepted Answer

Interest rate futures are among the most widely traded futures contracts globally, as they are used by investors to hedge against or speculate on changes in interest rates.

Question 18

Which of the following features distinguish futures markets from forwards markets?

Accepted Answer

Futures markets differ from forwards markets in that they feature standardization of contracts, the use of margin accounts to manage risk, and the ease in reversing positions. Forward markets, on the other hand, do not have these features and the terms of the contract are negotiated privately between the two parties involved.

Question 19

If the market is in backwardation

Accepted Answer

In backwardation, spot prices are higher than futures prices, so none of the given options correctly describe backwardation.

Question 20

Ignoring convenience yields,the theoretical futures price for a commodity with a positive cost of carry should typically exhibit

Accepted Answer

A positive cost of carry indicates that the futures price should be higher than the spot price to account for the costs of storage, financing, and other expenses. This results in a contango market, where futures prices increase with longer maturities.

Quiz 2: Futures Markets