Financial futures have become an increasingly attractive investment alternative because the Chicago Board of Trade (CBOT) began trading them in 1977, and their hedging function partly accounts for the growth in trading. Which of the following statements concerning financial futures is true?
A) Financial futures protect the investment portfolio against inflation in the economy.
B) Investors seek protection against the increasing volatility of interest rates.
C) Unlike commodity futures, factors that influence price shifts are not supply and demand of the commodity but buyer psychology.
D) A reason for their popularity is that trading is restricted to government obligations, which reduces risks.
E) A reason for their popularity is that trading is tax-free.

Question

Quizplus · Accepted Answer

According to the passage, investors are attracted to financial futures because they seek protection against the increasing volatility of interest rates. Option A is incorrect because financial futures do not explicitly protect against inflation in the economy - this may be a secondary effect. Option C is incorrect because financial futures are subject to supply and demand factors just like any other commodity or financial instrument. Option D is incorrect because financial futures are not restricted to government obligations - there are a variety of underlying assets that can be used, including stock indices and foreign currencies. Option E is incorrect because trading financial futures is not tax-free.

Financial Futures Have Become an Increasingly Attractive Investment Alternative Because