Exam 20: Understanding Derivative Securities: Futures

The initial margin required for futures trading

On the other side of every futures transaction is:

U.S. Futures trading occurs in futures exchanges' trading pits.

An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.

Which of the following is NOT a potential advantage of speculating in futures?

An organized futures exchange standardizes nonstandard forward contracts, establishing such features as contract size, delivery dates, and condition of items that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Assume that an investor buys one June NYSE Composite Index Futures Contract on May 1 at a price of 72. The position is closed out after four days. The prices on the three days after purchase were 72.5, 72.1 and 72.2. The initial margin is $3500. (a) Calculate the current equity on each of the next three days. (b) Calculate the excess equity for those three days. (c) Calculate the final gain or loss on this position.

The difference between the cash price and the futures price on the same asset or commodity is known as the

Futures contracts are regulated by the:

What are the methods of settling a futures contract?

A futures contract is

Program trading generally involves positions in both stocks and stock-index futures.

A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in interest rate, the pension fund should use a short hedge in T-bond futures.

Explain a long position and a short position in futures trading.

Assume a portfolio manager holds $2 million (par value) of 9 percent Treasury bonds due 1994-1999. The current market price is 77, for a yield of 12 percent. Fearing a rise in interest rates over the next three months, the manager seeks to protect this position by hedging in futures. (a) If T-bond futures are available at 67, what is the gain or loss from a simple hedge of 20 contracts if the price three months later is 60? (b) What is the gain or loss on the cash position if the bonds are priced at 68 three months hence? (c) What is the net effect of this hedge?

Of the following statements about futures trading, which one is INCORRECT?

An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as:

If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by

An investor has just sold seven contracts of June corn on the CBOT. The price per bushel is $1.64, and each contract is for 5000 bushels. The performance bond (initial margin deposit) is $2000 per contract with the maintenance margin at $1250. (a) How much does the investor have to deposit on the investment? (b) If the prices of the futures on the three days following the short sales were: 1.60, 1.66, and 1.68 calculate the current equity on each of the next three days. (c) If the investor closes out his position on the fourth day, what is his final gain or loss over the four days in dollars and as a percentage of investment?

Stock-index futures can be used to hedge against which of the following types of risks?