Question 1

Marking-to-market refers to:

Accepted Answer

Marking-to-market is the daily adjustment of a futures trading account for gains and losses resulting from the day's trading activity. This adjustment ensures that the futures position has a zero value after the adjustment, meaning that the gains and losses have been realized and accounted for.

Question 2

Which of the following is NOT a valid way of ending a futures contract?

Accepted Answer

An exercise is a term associated with options, not futures contracts. Futures contracts are typically settled by a closing transaction, physical delivery, cash settlement, or an exchange for physicals (EFP), but not by exercise.

Question 3

The price of a September crude oil futures contract is $20 per barrel,while that of a September gasoline futures contract is $25 per barrel.You expect that in a month,the price difference will reduce to $3 per barrel.A profit generating trading strategy is to:

Accepted Answer

The strategy of going long on crude oil futures and short on gasoline futures profits from a decrease in the price difference between the two contracts. As the price difference reduces by $3, the profit would increase. Therefore, choice A is the best option.

Question 4

Which of the following statements is true about floor traders (or locals)in a futures exchange's trading floor?

Accepted Answer

Floor traders on a futures exchange's trading floor become counterparties to futures trades by buying or selling contracts directly with other traders on the floor, with no intermediary involved. This means they take on inventory risk by holding positions in the market. They usually do not earn a commission but instead profit from the price difference between the buy and sell orders they execute. They may also form associations to share information and insight on market conditions but do not typically handle complex orders for clients.

Question 5

The following contract is more likely to be closed by an exchange-for-physicals:

Accepted Answer

Exchange-for-physicals (EFP) is commonly used in commodities like oil, where the physical delivery of the commodity is feasible and often preferred by market participants.

Question 6

A forward price can differ from a futures price due to any one the following EXCEPT:

Accepted Answer

Forward and futures contracts on the same underlying asset have the same commodity price risk, as they both derive their value from the same underlying asset. The other options can cause differences between forward and futures prices.

Question 7

Suppose that a futures trader has an initial margin of $2,000 in her brokerage account.The maintenance margin is 75 percent.If the equity in her account falls by $1,200,the account holder has to come up with a variation margin of:

Accepted Answer

The answer of Suppose that a futures trader has an...

Question 8

Suppose that the July gold futures prices declined $5 by today's close.The holder of a short position in two contracts (contract size = 100 oz. ):

Accepted Answer

The holder of a short position benefits when prices decline. Since each contract is for 100 oz and the price declined by $5, the profit per contract is 100 oz * $5 = $500. With two contracts, the total profit is $500 * 2 = $1,000. This profit is added to the margin account, hence the correct answer is that the margin account will increase by $1,000 today.

Question 9

Futures contracts were traditionally traded:

Accepted Answer

Futures contracts were traditionally traded in pits by open-outcry trading, where traders physically gathered in a designated area and communicated orders through shouts and hand signals. This was the primary method of trading until the advent of electronic trading platforms in the late 1990s.

Question 10

Suppose that the July gold futures has increased $4 by today's close.The holder of a long position in three contracts (contract size = 100 oz. ):

Accepted Answer

The increase in price by $4 means a gain of $400 per contract (3 contracts = $1,200). As the holder of a long position, this gain is added to her margin account, meaning her margin account will increase by $1,200.

Question 11

The price of a September crude oil futures contract is $20 per barrel,while that of a September gasoline futures contract is $25 per barrel.You expect that in a month,the price difference will increase to $10 per barrel.A profit generating trading strategy is to:

Accepted Answer

Shorting (selling) September crude oil futures and buying (going long) September gasoline futures will result in a profit if the expected price difference of $10 per barrel is realized. This is because the price of crude oil is expected to decrease relative to gasoline, while the price of gasoline is expected to increase relative to crude oil. Therefore, selling crude oil futures at $20 per barrel and buying gasoline futures at $25 per barrel allows for a $5 per barrel profit if the difference increases to $10 per barrel.

Question 12

The difference between two different maturity futures prices on the same commodity is known as:

Accepted Answer

The difference between two different maturity futures prices on the same commodity is known as the spread. The other choices do not accurately describe this concept. The basis refers to the difference between the cash price and the futures price, while the depth refers to the number of contracts traded at a particular price. Liquidity refers to the ease with which a contract can be bought or sold without affecting the market price, and the strike is the price at which an option can be exercised.

Question 13

Suppose that a futures trader has deposited the initial margin of $2,000 in her brokerage account.The maintenance margin is 75 percent.The value of the account falls to $1,100.The account holder has to come up with a variation margin of:

Accepted Answer

The answer of Suppose that a futures trader has deposited...

Question 14

An out-trade in a futures market refers to which of the following?

Accepted Answer

An out-trade in a futures market occurs when the buyer and seller have submitted orders, but those orders do not match, creating a discrepancy or error in the trade. This can lead to disputes and the need for resolution mechanisms. Options A, C, and D do not accurately describe an out-trade.

Quiz 9: Futures Trading