Deck 15: Commodities and Financial Futures

Question 1

One of the biggest differences between a futures option and a futures contract is that

A) a futures contract can be traded on the secondary market, whereas an option cannot.
B) the futures contract limits the loss exposure to the price of the contract.
C) an option can be traded on the secondary market, whereas a futures contract cannot.
D) the option limits the loss exposure to the price of the option.

Answer 1

D

Question 2

The margin deposit associated with the purchase of a futures contract

A) is used to cover any loss in market value of the contract resulting from adverse price fluctuations.
B) is a partial payment on the contract with the amount of the payment equal to 10% or more of the contract value.
C) represents the purchasers equity in the contract with the balance of the contract financed with borrowed funds at the margin rate of interest.
D) is related to the value of the item underlying the contract.

Answer 2

A

Question 3

The seller of a futures contract

A) must make delivery before receiving any monies on the contract.
B) receives the entire contract amount at the time the contract is made.
C) has the option of canceling the contract the following day if the price is not acceptable to him/her.
D) is legally bound to make delivery of the specified item on the specified day.

Answer 3

D

Question 4

Assume an investor thinks the share market is about to undergo a sharp retreat. Under these conditions, the investor's best course of action would be to

A) use a long hedge against the investor's existing positions.
B) short sell share- index futures contracts.
C) buy share- index futures contracts.
D) use single share futures to sit out the market.

Question 5

Hedging in the commodities market is a strategy primarily used by

A) by producers and processors of commodities.
B) investors looking for short- term capital gains.
C) institutional investors on behalf of their conservative investors.
D) individual investors with high risk tolerance levels for commodities.

Question 6

The value of a futures option is defined as

A) the difference between the option's strike price and the market price of the underlying futures contract.
B) the mark- to- market value divided by the strike price.
C) the strike price of the option multiplied by the mark- to- market value.
D) the difference between the option's strike price and its original purchase price.

Question 7

The amount paid at the time a futures contract is sold

A) is simply a refundable security deposit.
B) represents the maximum loss for the buyer of the contract.
C) is the total value of the goods being traded in the future.
D) represents the maximum profit for the buyer of the contract.

Question 8

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

A) increase profits.
B) decrease transaction costs.
C) increase leverage.
D) reduce risk.

Question 9

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?

A) - 1.
B) 13.
C) - 13.
D) 1.

Question 10

The purchaser of a futures contract

A) does not have to worry about margin calls since margin loans are not required.
B) is affected by the daily procedure known as mark- to- market.
C) is generally required to make a cash deposit of 10 to 20% of the contract price at the time the contract is entered.
D) is required to obtain a margin loan equal in amount to the cost of the contract minus the cash down payment.

Question 11

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

A) sell short one futures contract and offset it by buying an equivalent long futures contract.
B) buy gold bullion today and then sell an equivalent amount of gold futures.
C) buy a gold futures contract today.
D) sell short a futures contract today.

Question 12

In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account. This procedure is called

A) checking the maintenance margin.
B) mark- to- market.
C) checking the maintenance deposit.
D) settling.

Question 13

To hedge a bond portfolio against rising interest rates, an investor should

A) sell interest rate futures.
B) buy a share- index future.
C) buy interest rate futures.
D) buy Treasury Notes

Question 14

A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is

A) $2,645.
B) $26,450.
C) $529.
D) $9,451.80.

Question 15

The value of an interest rate futures contract will go up when

A) gold prices rise.
B) interest rates go up.
C) gold prices fall.
D) interest rates go down.

Question 16

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?

A) - 255.4%.
B) - 103.4%.
C) - 155.4%.
D) - 203.4%.

Question 17

What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.

A) 127.4%.
B) 116.5%.
C) 119.0%.
D) 123.5%.

Question 18

Assume a portfolio manager created a short interest rate hedge for his/her portfolio. Given this hedge, the manager is

A) essentially eliminating both the downside risk and the upside potential.
B) partially diminishing the downside risk without impairing the upside potential.
C) eliminating the downside risk and increasing the upside potential.
D) eliminating the downside risk without hampering the upside potential.

Question 19

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?

A) 3%.
B) 100%.
C) 50%.
D) 125%.

Question 20

Larry is a corn farmer. To attempt to maximise the value of his crop, Larry is most likely to benefit from

A) buying a futures contract on corn for delivery at harvest time.
B) selling his crop at the market price when it is harvested.
C) buying a futures contract on corn and selling a futures contract on wheat.
D) selling a futures contract on corn for delivery at harvest time.

Question 21

One reason that commodities appeal to investors is because they

A) are a suitable investment vehicle for one's retirement savings.
B) do not require much specialised knowledge on the part of the investor.
C) act as hedges against inflation during periods of rapidly rising consumer prices.
D) offer high returns for low risks.

Question 22

If the purchaser of a futures contract fails to meet a margin call,

A) his/her contract will automatically be executed along with immediate delivery.
B) their local broker can decide to waive the call.
C) they will be given a 30- day grace period before payment is required.
D) his/her contract will be sold at the current market price.

Question 23

Fred purchased a futures contract on live cattle through Broker A. After purchasing the contract, Fred moved his investments to Broker B. During the transition, the contract on the cattle was forgotten. When the delivery date for the futures contract arrived,

A) Fred took delivery of live cattle.
B) Broker A had to pay for the cattle so that they would not be delivered to Fred.
C) the futures contract was not exercised.
D) the cattle were not delivered because Fred did not ask for them.

Question 24

Speculators are especially interested in financial futures because price volatility can lead to potentially highly profitable outcomes.

Question 25

The November 12, 2009 online edition of the Wall Street Journal listed the following information on oat futures. (Hint: each contract represents 5000 bushels) Based on this information, which one of the following statements is correct?

A) The highest price at which the May oats contract traded was $291.20 per contract.
B) The cost of a March 2010 contract was $13,430 at the market close.
C) The price of the March 2010 oats contract at the close was $100 higher than the previous day's closing price.
D) Oats trade on the New York Mercantile Exchange.

Question 26

The return on a futures contract is calculated as

A) (purchase price - selling price)/purchase price.
B) (selling price - purchase price)/purchase price.
C) (selling price - purchase price)/margin deposit.
D) (purchase price - selling price)/margin deposit.

Question 27

The Chicago Mercantile Exchange recently merged with

A) NASDAQ.
B) the American Exchange.
C) the Chicago Board of Trade.
D) the New York Mercantile Exchange.

Question 28

The return on a futures contract

A) is highly related to the low margin requirement.
B) tends to be fairly stable from one trading day to the next.
C) is solely related to the current price of the underlying item.
D) is always equal to or greater than zero.

Question 29

Interest rate futures are traded on all the following EXCEPT

A) municipal bonds.
B) Treasury notes.
C) Treasury bills.
D) savings bonds.

Question 30

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

Question 31

Failure to meet a margin call will cause an investor's futures contract to be sold.

Question 32

Investors can trade futures on electricity and natural gas.

Question 33

The use of futures contracts for commodities is a key method of controlling risk.

Question 34

There is no limit to the amount of loss than can occur with a futures contract.

Question 35

Every commodity contract specifies all the following EXCEPT

A) the delivery month.
B) the product.
C) the unit size of the contract.
D) the settlement price.

Question 36

To hedge a bond portfolio, an investor should use

A) a certificate of deposit.
B) a share- index future.
C) an interest rate future.
D) a foreign- currency future.

Question 37

In commodities trading, open interest at the end of a trading day is equal to

A) the advances minus the declines.
B) the net change in price from the prior day's close.
C) the number of speculative positions sold in the last 60- day period.
D) the number of contracts presently outstanding.

Question 38

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

A) gambling.
B) speculating.
C) market making.
D) spreading.

Question 39

The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.

Question 40

With futures contracts, the price at which the commodity must be delivered is

A) is equivalent to the strike price for an options contract.
B) changes frequently during the life of the contract.
C) set when the futures contract is sold.
D) set when the contract expires.

Question 41

All trading in the futures market is done on a margin basis.

Question 42

The open interest at the end of the trading day indicates the volume of contracts traded during the day.

Question 43

Share- index futures can substitute for indexed managed funds in conservative portfolios.

Question 44

A successful hedge results in a guaranteed sales price to the producers of commodities.

Question 45

An investor's margin in a futures contract is checked each day under a procedure known as mark- to- market.

Question 46

All futures contracts are traded on a margin basis.

Question 47

The futures market contains two basic types of traders: hedgers and speculators. Define the role played by each of these types of traders.

Question 48

The maximum loss on a futures contract is the price paid for the contract.

Question 49

Speculating originally provided the economic rationale to create financial futures.

Question 50

The open interest at the end of the trading day indicates the number of contracts in existence at that time.

Question 51

The high rates of returns, either positive or negative, on futures contracts are primarily due to the high initial margin requirement.

Question 52

All futures contracts are traded on a margin basis. What does "margin" mean, and how does the use of margin affect the inherent risk- return nature of the futures market?

Question 53

With a futures contract, an investor cannot lose more than the price of the contract itself.

Question 54

The normal initial margin requirement for commodities or financial futures ususally represents about 5% of the value of the contract.

Question 55

Speculators provide liquidity to the futures market.

Question 56

Each commodity quote identifies the product, the exchange on which the contract is traded, the size of the contract, the price of the contract, and the delivery month.

Question 57

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

Question 58

The rate of return on a futures contract is based on the size of the initial margin deposit.

Question 59

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.)