Question 1

One of the advantages of speculating with stock-index futures is that they eliminate the need to predict the future course of the stock market.

Accepted Answer

Speculating with stock-index futures does not eliminate the need to predict the future course of the stock market; it still requires market prediction to make profitable trades, as the value of these futures is directly linked to the performance of the market indices they represent.

Question 2

The owner of a currency future has a claim on a specified amount of a specified foreign currency.

Accepted Answer

A currency future is a contract that obligates its owner to purchase or sell a specific currency at a predetermined price and date in the future. The owner of the currency future has a claim on a specified amount of a specified foreign currency, which they can exercise upon the maturity of the contract.

Question 3

George purchased a futures contract at 349.The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit.George sold the contract at 278.What is George's return on invested capital?

Accepted Answer

George's return on invested capital can be calculated by first determining the profit or loss from the transaction and then dividing that by the initial margin deposit. The initial purchase was at 349 cents per unit, and the contract was sold at 278 cents per unit. This results in a loss of 71 cents per unit (349 - 278 = 71). Since the contract is for 2500 units, the total loss is 71 cents * 2500 units = 177,500 cents or $1,775. The initial margin deposit required for the contract was 10% of the initial value, which is 10% of (349 cents * 2500 units) = $872.50. The return on invested capital is the loss divided by the initial margin deposit: ($1,775 / $872.50) * 100% = -203.4%.

Question 4

Briefly discuss futures options.What are they, and what advantage do they offer an investor?

Accepted Answer

The answer of Briefly discuss futures options.What are they, and...

Question 5

Which one of the following statements concerning financial futures is correct?

Accepted Answer

The answer of Which one of the following statements concerning...

Question 6

Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss.This practice is called

Accepted Answer

The practice described in the question is called spreading, which involves combining different futures contracts to limit potential losses while still allowing for profits to be made. Speculating and gambling involve taking on more risk with the potential for higher profits or losses, while market making involves buying and selling securities to provide liquidity to the market.

Question 7

Hedging in the commodities market is a strategy primarily used by

Accepted Answer

Hedging in the commodities market is primarily used by producers and processors of commodities to protect themselves against price fluctuations in the market. They use hedging to lock in prices for their products in order to ensure a steady revenue stream and avoid potential losses. Individual investors, institutional investors, and investors looking for short-term capital gains may also use hedging strategies in the commodities market, but it is not their primary reason for doing so.

Question 8

Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?

Accepted Answer

When a speculator short sells a commodity or financial futures contract, they are essentially betting that the price of the contract will decline, allowing them to buy it back at a lower price and profit from the difference. This is why choice A is the correct statement.

B is incorrect because short sellers actually have a limited profit potential since the highest profit they can earn is the amount they received for selling the contract, whereas the potential losses are unlimited if the price of the underlying asset rises instead of falls.

C is partially correct in that the speculator is trying to benefit from price volatility, but the second part of the statement is incorrect since the speculator is not limiting exposure to loss, but rather taking on more risk in the hopes of profiting from the decline in price.

D is partially correct in that the speculator may be hedging if they are using the short selling as a way to offset price risk in another part of their portfolio, but it is not necessarily a guarantee that this is the case.

Question 9

The seller of a stock-index future is obligated to deliver a specified number of shares of the underlying security.

Accepted Answer

Stock-index futures are contracts based on the future value of a stock index; they are settled in cash, not by delivering physical shares.

Question 10

If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following?
I.realize that making a profit is relatively easy
II.be mentally prepared for an enormous loss
III.be financially able to meet repeated margin calls
IV.spend all of their available cash on margin deposits

Accepted Answer

While it is not necessarily easy to make a profit in the commodities market, it is important for investors to be mentally prepared for potential losses. Additionally, investors must be financially able to meet margin calls, but it is not recommended to spend all available cash on margin deposits as this can increase risk and leave investors with insufficient funds for other investments or expenses. Therefore, II and III are the only necessary considerations for investors participating in the commodities market.

Question 11

Businesses that engage in international trade can hedge their exchange rate risk with futures contracts.

Accepted Answer

Futures contracts allow businesses to lock in a specific exchange rate for a future date, reducing the risk of currency fluctuations affecting their profits.

Question 12

Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce.The initial deposit is $2,500.(Show all work.)

Accepted Answer

The answer of Calculate the return on invested capital on...

Question 13

Which of the following are advantages of using options for futures speculation?
I.increased leverage
II.potential losses are limited to the cost of the option
III.options are available on a broad range of commodity, index, and currency futures
IV.investors avoid the possibility of having to take delivery of the commodity.

Accepted Answer

Options for futures speculation offer increased leverage, limit potential losses to the cost of the option, are available on a wide range of futures, and avoid the need to take delivery of the underlying commodity.

Question 14

Assume the initial margin on a Swiss franc futures contract is $2,000.If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?

Accepted Answer

The answer of Assume the initial margin on a Swiss...

Question 15

The basic reason why investors use spreading strategies when speculating in commodities is to

Accepted Answer

Spreading strategies involve diversifying one's portfolio by investing in multiple commodities or related markets, therefore reducing the risk of losing all of one's investment in a single commodity. This is particularly important in commodities trading, where prices are subject to significant fluctuations and unexpected events. By spreading investments, investors can mitigate the impact of market fluctuations on their overall portfolio, making it a useful risk management tool.

Question 16

Given that futures contracts on the Japanese yen are traded in units of 12.5 million yen and are quoted in cents per yen, it follows that a Japanese yen contract quoted at 01.171 would be worth $14,637,500.

Accepted Answer

The answer of Given that futures contracts on the Japanese...

Question 17

You short sell contract A at 428 and buy contract B at 333.After one month, you close contract A at 435 and contract B at 339.What is you net profit in points?

Accepted Answer

When short selling, profit is made if the asset's price decreases after selling it. For contract A, you short sell at 428 and buy back at 435, resulting in a loss of 7 points (435 - 428). For contract B, you buy at 333 and sell at 339, making a profit of 6 points (339 - 333). The net profit is the sum of these, which is -1 point (6 - 7).

Question 18

Midge feels that the price of gold is going to fall because inflation is on the decline.To profit from her prediction, assuming she is correct, Midge should

Accepted Answer

If Midge’s expectation is that the price of gold will fall, she should sell short gold futures contracts. This will give her the potential to profit from a decline in the gold price. Buying gold bullion and selling an equal amount of futures contracts would be a zero sum game and not create any profit. Buying a gold futures contract would be betting on an increase in gold prices, which is the opposite of what Midge is predicting. Option D involves taking both long and short positions in gold futures contracts, which would only create profit if the price of gold moved a certain amount in a certain direction, and is more complex than what is necessary for Midge's prediction.

Question 19

Joseph bought a contract for future delivery of 5000 bushels of corn at $2.80 per bushel and sold a later contract at $2.90 a bushel.A month later, corn prices were rising and Joseph sold his long contract for $3.10 per bushel and covered his short by purchasing the same contract for $3.25 per bushel.Ignoring trading costs, Joseph

Accepted Answer

Joseph initially bought a contract for future delivery of 5000 bushels of corn at $2.80 per bushel, which cost him 5000 x $2.80 = $14,000. He later sold a later contract at $2.90 a bushel, which gave him an additional profit of 5000 x ($2.90 - $2.80) = $500.

A month later, corn prices were rising and Joseph sold his long contract for $3.10 per bushel, which gave him a profit of 5000 x ($3.10 - $2.80) = $1,500. He also covered his short by purchasing the same contract for $3.25 per bushel, which cost him 5000 x $3.25 = $16,250.

Therefore, Joseph's total profit is $500 + $1,500 - ($16,250 - $14,000) = $750.

Question 20

Interest rate futures are traded on all the following EXCEPT

Accepted Answer

The answer of Interest rate futures are traded on all...

Quiz 15: Commodities and Financial Futures