Question 1

The futures market and the cash market for an asset are tied together by an equilibrium process.

Accepted Answer

A) True 
 B)False  True

Question 2

Dollar value of a stock index futures contract equals ________.

Accepted Answer

A)  Spot price × Multiple. 
B)  Futures price / Multiple. 
C)  Futures price × Multiple. 
D)  Spot price / Multiple. 
A)  Spot price × Multiple. 
B)  Futures price / Multiple. 
C)  Futures price × Multiple. 
D)  Spot price / Multiple. C

Question 3

Which of the below statements is TRUE?

Accepted Answer

A)  Futures contracts are marked to market at the end of most trading days. 
B)  A forward contract may or may not be marked to market, depending on the wishes of the two parties. 
C)  For a forward contract that is not marked to market, there are interim cash flow effects because no additional margin is required. 
D)  The parties in a forward contract are not exposed to credit risk because either party may not default on the obligation. 
A)  Futures contracts are marked to market at the end of most trading days. 
B)  A forward contract may or may not be marked to market, depending on the wishes of the two parties. 
C)  For a forward contract that is not marked to market, there are interim cash flow effects because no additional margin is required. 
D)  The parties in a forward contract are not exposed to credit risk because either party may not default on the obligation. B

Question 4

Which of the below does NOT involve a function of the clearinghouse?

Accepted Answer

A)  One functions is to guarantee that the two parties to the transaction will perform. 
B)  When someone takes a position in the futures market, the clearinghouse takes the same position and agrees to satisfy the terms set forth in the contract. 
C)  The clearinghouse makes it simple for parties to a futures contract to unwind their positions prior to the settlement date. 
D)  The clearinghouse interposes itself as the buyer for every sale and the seller for every purchase. 
A)  One functions is to guarantee that the two parties to the transaction will perform. 
B)  When someone takes a position in the futures market, the clearinghouse takes the same position and agrees to satisfy the terms set forth in the contract. 
C)  The clearinghouse makes it simple for parties to a futures contract to unwind their positions prior to the settlement date. 
D)  The clearinghouse interposes itself as the buyer for every sale and the seller for every purchase.

Question 5

A futures market will be the price discovery market when market participants do not prefer to use this market rather than the cash market to change their risk exposure to an asset.

Accepted Answer

A) True 
 B)False

Question 6

One classification for financial futures is ________.

Accepted Answer

A)  bond index futures. 
B)  interest rate futures. 
C)  dollar futures. 
D)  commodity futures. 
A)  bond index futures. 
B)  interest rate futures. 
C)  dollar futures. 
D)  commodity futures.

Question 7

________ are not intended to be settled by delivery. In fact, generally fewer than 2% of outstanding contracts are settled by delivery.

Accepted Answer

A)  Delivery contracts 
B)  Settled contracts 
C)  Forward contracts 
D)  Futures contracts 
A)  Delivery contracts 
B)  Settled contracts 
C)  Forward contracts 
D)  Futures contracts

Question 8

Congress, federal regulators, and some members of the industry are concerned about the derivative products and the risk they may pose to the financial system, individual firms, investors, and U.S. taxpayers. These concerns have been heightened by recent reports of substantial losses by some derivative end-users. The GAO study was undertaken because of these concerns. Name three of the five objectives that the GAO report strived to determine?

Accepted Answer

The cover letter to the GAO report state

Question 9

Credit risk is maximal in the case of futures contracts because the clearinghouse associated with the exchange does not guarantee the other side of any transaction.

Accepted Answer

A) True 
 B)False

Question 10

Some derivative products are created by commercial banks and investment banking firms are called over-the-counter or OTC derivatives. An example of an OTC derivative is ________.

Accepted Answer

A)  a forward contract. 
B)  a swap. 
C)  an OTC option. 
D)  All of these 
A)  a forward contract. 
B)  a swap. 
C)  an OTC option. 
D)  All of these

Question 11

Suppose an investor buys (takes a long position in) an S&P 500 futures contract at 1000 and sells it at 1100. What profit does this investor realize if the multiple is $200?

Accepted Answer

A)  $20,000 
B)  $15,000 
C)  $10,000 
D)  $5,000 
A)  $20,000 
B)  $15,000 
C)  $10,000 
D)  $5,000

Question 12

What is a forward contract? How does it differ from a futures contract?

Accepted Answer

A forward contract, just like a futures

Question 13

The General Accounting Office (GAO) study pointed out the concern that major banks and end-users have adequate risk-management systems in place.

Accepted Answer

A) True 
 B)False

Question 14

Inadequate accounting disclosure and the lack of coordination with foreign regulators were not concerns highlighted by the General Accounting Office (GAO) study.

Accepted Answer

A) True 
 B)False

Question 15

Why would investors consider a futures market as more efficient for their investment objective? Explain.

Accepted Answer

The market that investors consider more

Question 16

In regards to a futures contract, which of the below statements is FALSE?

Accepted Answer

A)  The buyer of a futures contract will realize a profit if the futures price decreases; the seller of a futures contract will realize a profit if the futures price increases. 
B)  When an investor takes a position in the market by buying a futures contract (or agreeing to buy at the future date), the investor is said to be in a long position or to be long futures. 
C)  The "something" that the parties agree to exchange is called the underlying. 
D)  None of these 
A)  The buyer of a futures contract will realize a profit if the futures price decreases; the seller of a futures contract will realize a profit if the futures price increases. 
B)  When an investor takes a position in the market by buying a futures contract (or agreeing to buy at the future date), the investor is said to be in a long position or to be long futures. 
C)  The "something" that the parties agree to exchange is called the underlying. 
D)  None of these

Question 17

The exchange uses the settlement price to ________ the investor's position, so that any gain or loss from the position is quickly reflected in the investor's equity account.

Accepted Answer

A)  settle to market 
B)  mark to settle 
C)  mark to market 
D)  mark to sale 
A)  settle to market 
B)  mark to settle 
C)  mark to market 
D)  mark to sale

Question 18

The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset.

Accepted Answer

A) True 
 B)False

Question 19

Most financial futures contracts have settlement dates in the months of ________.

Accepted Answer

A)  January, April, July, October 
B)  March, June, September, or December. 
C)  February, May, August, November 
D)  All of these 
A)  January, April, July, October 
B)  March, June, September, or December. 
C)  February, May, August, November 
D)  All of these

Question 20

Equity futures contracts listed in the United States include stock index futures contract, single stock futures contracts, and narrow-based stock index futures contract.

Accepted Answer

A) True 
 B)False

Exam 26: Financial Futures Markets

The futures market and the cash market for an asset are tied together by an equilibrium process.

Dollar value of a stock index futures contract equals ________.

Which of the below statements is TRUE?

Which of the below does NOT involve a function of the clearinghouse?

A futures market will be the price discovery market when market participants do not prefer to use this market rather than the cash market to change their risk exposure to an asset.

One classification for financial futures is ________.

________ are not intended to be settled by delivery. In fact, generally fewer than 2% of outstanding contracts are settled by delivery.

Credit risk is maximal in the case of futures contracts because the clearinghouse associated with the exchange does not guarantee the other side of any transaction.

Some derivative products are created by commercial banks and investment banking firms are called over-the-counter or OTC derivatives. An example of an OTC derivative is ________.

Suppose an investor buys (takes a long position in) an S&P 500 futures contract at 1000 and sells it at 1100. What profit does this investor realize if the multiple is $200?

What is a forward contract? How does it differ from a futures contract?

The General Accounting Office (GAO) study pointed out the concern that major banks and end-users have adequate risk-management systems in place.

Inadequate accounting disclosure and the lack of coordination with foreign regulators were not concerns highlighted by the General Accounting Office (GAO) study.

Why would investors consider a futures market as more efficient for their investment objective? Explain.

In regards to a futures contract, which of the below statements is FALSE?

The exchange uses the settlement price to ________ the investor's position, so that any gain or loss from the position is quickly reflected in the investor's equity account.

The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset.

Most financial futures contracts have settlement dates in the months of ________.

Equity futures contracts listed in the United States include stock index futures contract, single stock futures contracts, and narrow-based stock index futures contract.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters