Question 1

If someone enters into a contract with the intention of taking delivery of a commodity set out in the contract for a price that was determined before delivery,they are likely to be:
A)a broker.
B)a speculator.
C)a hedger.
D)a speculator or hedger.

Accepted Answer

The person who enters into a contract with the intention of taking delivery of a commodity for a predetermined price is likely a hedger. Hedging is a risk management technique used in the financial markets to reduce or eliminate risk. In this case, the person is using a futures contract to hedge against price fluctuations in the commodity they will be taking delivery of.

Question 2

A futures contract can be defined as:
A)a contract which provides something to be sold at a future date at a price decided today.
B)a contract which provides something to be sold at a future date at a price decided upon expiry of the contract.
C)a right given to a buyer to sell something at a price determined in advance.
D)a contract that expires when the object of the transaction changes hands.

Accepted Answer

A futures contract is a legal agreement between two parties to buy or sell an asset at a predetermined price at a specific time in the future. The price is agreed upon at the time of the contract, and the transaction itself takes place on the expiration date of the contract. Therefore, a futures contract provides something to be sold at a future date at a price decided today.

Question 3

Which concept is similar to a spread but refers to positions in futures contracts on different commodities rather than on the same commodity for different months?
A)Short spread.
B)Long spread.
C)Straddling.
D)Scalping.

Accepted Answer

Straddling is a concept similar to a spread but refers to positions in futures contracts on different commodities rather than on the same commodity for different months. In a straddle, the trader buys a futures contract on one commodity and sells a futures contract on another commodity with the same expiration date. The aim of the straddle is to profit from the price difference between the two commodities.

Question 4

The process of adjusting traders account balances to reflect changes in market prices is known as:
A)margin call.
B)marking to call.
C)marking to market.
D)spread.

Accepted Answer

Marking to market is the process of adjusting traders' account balances to reflect changes in market prices. This is done on a daily basis to ensure that traders have enough funds to cover potential losses. Margins are evaluated and adjusted accordingly based on current market prices, which helps to mitigate risk. Margin calls are an alert to traders that they need to add more funds to the account due to losses exceeding the margin requirement. Marking to call and spread are not related to the process of adjusting account balances to market prices.

Question 5

The time period during which a scalper holds a futures contract is usually measured in:
A)hours.
B)minutes.
C)seconds.
D)minutes or seconds.

Accepted Answer

Scalping is a short-term trading strategy in which traders aim to make quick profits by entering and closing out trades within a very short time frame. The time period during which a scalper holds a futures contract can be in minutes, or even seconds. Therefore, the best choice is D.

Question 6

The spot price of a commodity is:
A)the cost of holding a commodity for a specified period of time.
B)the price that a commodity was traded for on the previous trading day.
C)the agreed price that a commodity will be traded for at some point in time in the future.
D)the price of the commodity when the buyer pays immediately and the seller delivers immediately.

Accepted Answer

The spot price of a commodity is the price at which the commodity can be purchased or sold for immediate delivery or settlement. It represents the current market value of the commodity based on supply and demand factors, without factoring in any future expectations or contracts. Therefore, the correct choice is D, which describes the price of the commodity when the buyer pays immediately and the seller delivers immediately.

Question 7

Consider a bond with exactly three years to maturity,a face value of $100 and a coupon interest rate of 6.6% p.a. ,payable half yearly.If the required yield is 7.2% p.a. ,what is the price of the bond?
A)$98.40
B)$98.04
C)$98.00
D)Cannot be calculated as not enough information is provided.

Accepted Answer

The price of the bond can be calculated using the following formula:Bond Price = (C / r) * (1 - 1 / (1 + r)^n) + FV / (1 + r)^nwhere:C = coupon paymentr = required yieldn = number of years to maturityFV = face valueIn this case, we have:C = $100 * 6.6% / 2 = $3.30r = 7.2% / 2 = 3.6%n = 3FV = $100Plugging these values into the formula, we get:Bond Price = (3.30 / 0.036) * (1 - 1 / (1 + 0.036)^3) + 100 / (1 + 0.036)^3= $98.04Therefore, the price of the bond is $98.04.

Question 8

The first futures contract in Australia was on:
A)cotton.
B)wheat.
C)wool.
D)greasy wool.

Accepted Answer

The first futures contract in Australia was on greasy wool, which was introduced in the 1960s.

Question 9

Which of the following is not a major function of the clearing house:
A)establish and collect deposits.
B)determine the price of all futures contracts.
C)call in margins as required.
D)apportion the gains and losses.

Accepted Answer

While the clearing house plays a role in determining margin requirements and overseeing the transfer of funds between parties, it does not determine the price of all futures contracts. Prices are determined by market supply and demand dynamics, and clearing houses ensure trades are cleared and settled in a timely and efficient manner.

Question 10

If two parties enter into the same futures contract,one as a buyer and the other as a seller,how many contracts are formed?
A)One,between the two parties.
B)Two,one between the buyer and seller and the other with the exchange.
C)Two,each with the clearinghouse of the exchange.
D)Three,two between each party and the clearinghouse and one between each party.

Accepted Answer

In futures markets, each party enters into a contract with the clearinghouse, not directly with each other. Thus, two contracts are formed, one between the buyer and the clearinghouse and another between the seller and the clearinghouse.

Question 11

A personalised contract between two parties whereby one party agrees to sell a bale of wool to another party in the future at a price determined today is an example of a:
A)futures contract.
B)forward contract.
C)wool option.
D)spot contract.

Accepted Answer

A forward contract is a personalised agreement between two parties where one party agrees to sell an asset (in this case, a bale of wool) to the other party at a predetermined price on a future date. The price is determined at the time of entering into the contract, making it different from a futures contract where the price is determined by the market. Wool options and spot contracts are not applicable in this scenario.

Question 12

A futures contract can be differentiated from a forward contract in that a futures contract:
A)is organised through an exchange.
B)can be 'closed out' or 'reversed' at any time.
C)is exactly the same as a forward contract.
D)is organised through an exchange and can be 'closed out' or 'reversed' at any time.

Accepted Answer

A futures contract is organised through an exchange and can be 'closed out' or 'reversed' at any time. These are key differences that set futures contracts apart from forward contracts, which are over-the-counter agreements between two parties and cannot be traded on an exchange.

Question 13

A hedger can be described as someone who enters into a futures contract:
A)with the purpose of making a profit.
B)with the purpose of minimising risk.
C)as a seller with the purpose of minimising risk.
D)with the purpose of buying or selling a commodity defined in the futures contract.

Accepted Answer

A hedger enters into a futures contract to protect themselves from the risk of price volatility in the underlying asset. By doing so, they are not trying to make a profit directly from the futures contract, but rather to minimize the risk associated with their business operations. This is achieved by securing a price for the asset in the future, typically at a price that is more favorable than the market price at that time, thereby reducing the possibility of loss due to price fluctuations.

Question 14

To prevent arbitrage,the futures price must be:
A)less than (or equal to)the current spot price plus the carrying price.
B)greater than (or equal to)the current spot price plus the carrying price.
C)less than the present value of all carrying costs.
D)greater than the present value of all carrying costs.

Accepted Answer

The futures price must be less than or equal to the current spot price plus the carrying price to prevent arbitrage. This is because if the futures price were higher than the spot price plus carrying costs, then an arbitrageur could buy the spot commodity, store it, and sell it at the higher futures price, making a risk-free profit.

Question 15

A speculator can be described as someone who enters into a futures contract:
A)with the purpose of making a profit.
B)with the purpose of minimising risk.
C)as a seller with the purpose of minimising risk.
D)with the purpose of buying or selling a commodity defined in the futures contract.

Accepted Answer

A speculator enters into a futures contract with the primary intention of making a profit. Their goal is to profit from the change in price of the underlying asset, rather than using the contract as a hedging tool to manage risk.

Question 16

Individuals and companies who enter into contracts in order to reduce risk are known as:
A)speculators.
B)hedgers.
C)dealers.
D)scalpers.

Accepted Answer

Hedgers enter into contracts to reduce risk by locking in prices or rates for assets, liabilities or commodities that they own or plan to own in the future. Speculators, alternatively, enter into contracts to take on risk in order to profit from price or rate changes. Dealers facilitate trades in financial markets by buying and selling securities for their own accounts or on behalf of their clients. Scalpers attempt to profit from short-term price fluctuations in the market.

Question 17

The cost of holding a commodity from one period to another is known as:
A)carrying cost.
B)commodity cost.
C)holding cost.
D)exercise cost.

Accepted Answer

Carrying cost refers to the expenses incurred in holding a commodity from one period to another, which may include storage, insurance, and financing costs. The other options, commodity cost, holding cost, and exercise cost, do not accurately reflect the specific cost incurred in holding a commodity.

Question 18

The Sydney Futures Exchange opened for trading in:
A)1957.
B)1958.
C)1960.
D)1962.

Accepted Answer

The Sydney Futures Exchange opened for trading in 1960.

Question 19

Individuals and companies who enter into contracts in order to profit from correctly anticipating price movements are known as:
A)speculators.
B)hedgers.
C)dealers.
D)scalpers.

Accepted Answer

Speculators are individuals or companies who enter into contracts to profit by correctly anticipating future price movements. They may not have an underlying interest in the commodity being traded, but they are willing to take on risk in order to make a profit. Hedgers, on the other hand, enter into contracts to manage their exposure to price risk, and dealers are intermediaries who facilitate trades between buyers and sellers. Scalpers are traders who attempt to make small profits through frequent trades.

Question 20

A demand for extra funds to be deposited into a trader's account is called a:
A)call option.
B)deposit demand.
C)margin call.
D)short selling.

Accepted Answer

A margin call is a demand for extra funds to be deposited into a trader's account to meet the margin requirements on open trades. A call option is a contract that gives the holder the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) a specific underlying asset at a predetermined price within a specified time period. Deposit demand is not a financial term, and short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed.

Quiz 17: Futures Contracts

If someone enters into a contract with the intention of taking delivery of a commodity set out in the contract for a price that was determined before delivery,they are likely to be:

A futures contract can be defined as:

Which concept is similar to a spread but refers to positions in futures contracts on different commodities rather than on the same commodity for different months?

The process of adjusting traders account balances to reflect changes in market prices is known as:

The time period during which a scalper holds a futures contract is usually measured in:

The spot price of a commodity is:

Consider a bond with exactly three years to maturity,a face value of $100 and a coupon interest rate of 6.6% p.a. ,payable half yearly.If the required yield is 7.2% p.a. ,what is the price of the bond?

The first futures contract in Australia was on:

Which of the following is not a major function of the clearing house:

If two parties enter into the same futures contract,one as a buyer and the other as a seller,how many contracts are formed?

A personalised contract between two parties whereby one party agrees to sell a bale of wool to another party in the future at a price determined today is an example of a:

A futures contract can be differentiated from a forward contract in that a futures contract:

A hedger can be described as someone who enters into a futures contract:

To prevent arbitrage,the futures price must be:

A speculator can be described as someone who enters into a futures contract:

Individuals and companies who enter into contracts in order to reduce risk are known as:

The cost of holding a commodity from one period to another is known as:

The Sydney Futures Exchange opened for trading in:

Individuals and companies who enter into contracts in order to profit from correctly anticipating price movements are known as:

A demand for extra funds to be deposited into a trader's account is called a: