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.
A)$65 profit
B)$650 profit
C)$650 loss
D)$65 loss

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)
A)$2,500 loss
B)$10 loss
C)$2,500 profit
D)$10 profit

Accepted Answer

$1,430 - $1,420 = $10 × 250 = $2,500.

Question 3

Normal backwardation
A)maintains that for most commodities, there are natural hedgers who desire to shed risk.
B)maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
C)assumes that risk premiums in the futures markets are based on systematic risk.
D)maintains that, for most commodities, there are natural hedgers who desire to shed risk and that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
E)maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk.

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
A)the offsetting short trader.
B)the corn farmer.
C)the clearinghouse.
D)the broker.
E)the commodities dealer.

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
A)is the simplest theory of futures pricing.
B)states that the futures price equals the expected value of the future spot price of the asset.
C)is not a zero-sum game.
D)is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset.
E)is the simplest theory of futures pricing and is not a zero-sum game.

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
A)$1,343.40
B)$62.00
C)$1,418.44
D)$1,524.25

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
A)$1137.00
B)$1070.00
C)$993.40
D)$995.09
E)$1000.00

Accepted Answer

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

Question 8

Futures contracts are regulated by
A)the Commodities Futures Trading Corporation.
B)the Chicago Board of Trade.
C)the Chicago Mercantile Exchange.
D)the Federal Reserve.
E)the Securities and Exchange Commission.

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)
A)$1,550 loss
B)$15,550 loss
C)$15,550 profit
D)$1,550 profit

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)
A)$2,500 loss
B)$10 loss
C)$2,500 profit
D)$10 profit

Accepted Answer

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

Question 11

Contango A)holds that the natural hedgers are the purchasers of a commodity, not the suppliers. B)is a hypothesis polar to backwardation. C)holds that F_O must be less than (P_T). D)holds that the natural hedgers are the purchasers of a commodity, not the suppliers and holds that F_O must be less than (P_T). E)holds that the natural hedgers are the purchasers of a commodity, not the suppliers and is a hypothesis polar to backwardation.

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
A)is never made.
B)is made by a cash settlement based on the index value.
C)requires delivery of 1 share of each stock in the index.
D)is made by delivering 100 shares of each stock in the index.
E)is made by delivering a value-weighted basket of stocks.

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
A)transactions costs are lower in futures markets.
B)futures markets provide leverage.
C)spot markets are less efficient.
D)futures markets are less efficient.
E)transactions costs are lower in futures markets and futures markets provide leverage.

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.
A)$65 profit
B)$650 profit
C)$650 loss
D)$65 loss

Accepted Answer

$5.26 - $5.13 = $0.13 × 5,000 = $650.

Question 15

Taxation of futures trading gains and losses
A)is based on cumulative year-end profits or losses.
B)occurs based on the date contracts are sold or closed.
C)can be timed to offset stock portfolio gains and losses.
D)is based on the contract holding period.
E)None of the options

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
A)only contracts with a specified delivery date.
B)the sum of short and long positions.
C)the sum of short, long, and clearinghouse positions.
D)the sum of long or short positions and clearinghouse positions.
E)only long or short positions but not both.

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
A)posts gains or losses to each account daily.
B)may result in margin calls.
C)impacts only long positions.
D)All of the options
E)posts gains or losses to each account daily and may result in margin calls.

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
A)the futures market is small relative to the spot market.
B)the futures market is illiquid.
C)futures are a zero-sum game.
D)the futures market is large relative to the spot market.
E)most futures contracts do not take delivery.

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)
A)$1,550 loss
B)$15,550 loss
C)$15,550 profit
D)$1,550 profit

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
A)$943.40
B)$970.00
C)$1,030.00
D)$915.09
E)$1,000.00

Accepted Answer

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

Quiz 22: Futures Markets

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.

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)

Normal backwardation

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

The expectations hypothesis of futures pricing

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

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

Futures contracts are regulated by

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)

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)

Contango

Delivery of stock index futures

Speculators may use futures markets rather than spot markets because

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.

Taxation of futures trading gains and losses

Open interest includes

The process of marking-to-market

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

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)

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