Question 1

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 ounces and there are no transactions costs.

Accepted Answer

$5.13 - $5.26 = -$0.13 × 5,000 = -$650.

Question 2

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

Accepted Answer

$1,430 - $1,420 = $10 × 250 = $2,500.

Question 3

Normal backwardation

Accepted Answer

Risk premiums in this theory are based on total variability.

Question 4

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 clearinghouse acts as a middle party to every transaction and bears any losses arising from failure to meet contractual obligations.

Question 5

The expectations hypothesis of futures pricing

Accepted Answer

The expectations hypothesis relies on the concept of risk neutrality; i.e., if all market participants are risk neutral, they should agree on a futures price that provides an expected profit of zero to all parties.

Question 6

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

F = 1,500 × (1 + .0575) - 62; F = 1,524.25.

Question 7

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

F = 1,125 × (1.04) - 33; F = 1,137.00.

Question 8

Futures contracts are regulated by

Accepted Answer

The CFTC, a federal agency, sets rules and requirements for futures trading.

Question 9

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 were 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)

Accepted Answer

$1,612 - $1,550 = $62 × 250 = $15,500.

Question 10

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

Accepted Answer

$1,420 - $1,430 = -$10 × 250 = -$2,500.

Question 11

Contango

Accepted Answer

Contango holds that the natural hedgers are the purchasers of a commodity, not the suppliers and is a hypothesis polar to backwardation.

Question 12

Delivery of stock index futures

Accepted Answer

Stock index futures are cash-settled, similar to the procedure used for index options.

Question 13

Speculators may use futures markets rather than spot markets because

Accepted Answer

Futures markets allow speculators to benefit from leverage and minimize transactions costs.Both markets should be equally price efficient.

Question 14

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 ounces and there are no transactions costs.

Accepted Answer

$5.26 - $5.13 = $0.13 × 5,000 = $650.

Question 15

Taxation of futures trading gains and losses

Accepted Answer

Futures profits and losses are taxed based on cumulative year-end value due to marking-to-market procedures.

Question 16

Open interest includes

Accepted Answer

Open interest is the number of contracts outstanding across all delivery dates for a given contract.Long and short positions are not counted separately, and the clearinghouse position is not counted because it nets to zero.

Question 17

The process of marking-to-market

Accepted Answer

Marking-to-market effectively puts futures contracts on a "pay as you go" basis.

Question 18

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

Accepted Answer

Losses and gains to futures contracts net to zero and thus should not impact spot prices.

Question 19

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 were 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)

Accepted Answer

$1550 - $1612 = -$62 × 250 = -$15,500.

Question 20

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

F = 1,000 × (1.06) - 30; F = 1,030.00.

Quiz 22: Futures Markets