Deck 19: Commodity and Financial Futuresprivate

Question 1

The amount of margin required to enter into a futures contract is at least 50 percent of the value of the contract.

Answer 1

False

Question 2

Investing in futures contracts is considered to be among the riskiest of all investment alternatives.

Answer 2

True

Question 3

If an investor enters into a contract to sell corn, that position is closed by delivering the contract.

Answer 3

False

Question 4

Entering a futures contract to buy the S&P 500 stock index is a long position.

Question 5

Entering a futures contract to sell corn is a long position.

Question 6

When an investor enters (also referred to as "purchases") commodity contracts, the individual takes physical delivery of the goods.

Question 7

A position in a futures contract is canceled (offset) by entering into the opposite position.

Question 8

Investors can only buy futures, since these contracts cannot be sold.

Question 9

The daily limit establishes the maximum amount by which the price of a futures contract may rise or fall during a day.

Question 10

An important advantage offered investors (speculators) by futures contracts is the large amount of leverage.

Question 11

Futures contracts are bought and sold in organized
markets such as the Chicago Board of Trade.

Question 12

The investor must maintain a minimum amount of equity (i.e., maintenance margin) to maintain a futures position.

Question 13

Margin is required only of those investors who take long positions in futures contracts.

Question 14

If an investor has a short position in corn, the position is closed by buying corn.

Question 15

If a firm expects to buy a commodity in the future, it may hedge against a price increase by taking a short position in the futures contract.

Question 16

Since there are many grades of corn, the seller of a futures contract may deliver any type of corn.

Question 17

The Futures Trading Commission enforces the federal laws regulating commodity transactions.

Question 18

When an investor sells a contract and subsequently
offsets (closes) the position, the individual experiences neither losses nor profits.

Question 19

A farmer hedges by simultaneously buying and selling futures contracts.

Question 20

Since neither the SEC nor the Federal Reserve have jurisdiction over commodity trading, these markets are unregulated.

Question 21

Programmed trading (index arbitrage) transfers changes in the futures markets to the stock markets.

Question 22

If a speculator is short and the price of the
Commodity rises, the individual
1) can expect a margin call
2) may take profits out of the position
3) may close the position at a loss

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 23

The cost of carrying a commodity suggests that the
futures price will be less than the spot price.

Question 24

Currency futures refer to contracts to buy and sell foreign moneys (i.e., foreign exchange).

Question 25

A swap agreement converts a futures contract into a
spot contract.

Question 26

A currency swap is an agreement to convert payments
in a foreign currency to payments in the domestic currency.

Question 27

Futures contracts offer the advantage of

A) potential leverage
B) liquidity
C) safety
D) tax savings

Question 28

Speculators who are short

A) expect prices to rise
B) are not seeking capital gains
C) are hedging their long positions
D) anticipate lower prices

Question 29

If an individual has a long position in bond futures, that investor is anticipating lower interest rates.

Question 30

A swap agreement may be used by a financial manager to reduce risk exposure.

Question 31

The maximum daily price increase that is permitted
In the futures markets is

A) the daily limit
B) the daily range
C) $1 per contract
D) 5% per contract

Question 32

A futures contract to take delivery is canceled by

A) entering into a contract to make delivery
B) refusing to take delivery
C) refusing to make delivery
D) letting the contract expire

Question 33

If the commodity's futures price declines
1) the long position profits
2) the short position profits
3) the buyer of the contract profits
4) the seller of the contract profits

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 34

If an investor expects the stock market to rise, that individual enters into a short position in stock index futures.

Question 35

Investing in futures is

A) investing in physical goods
B) entering into contracts for future delivery
C) executing contracts for prior delivery
D) selling a contract in anticipation of price increases

Question 36

Commodity contracts are
1) bought and sold through commodity exchanges
2) considered to be speculative investments
3) permit investors to take either long or
Short positions

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 37

Speculators take the opposite positions of hedgers.

Question 38

Hedging with commodity futures

A) reduces the risk of loss
B) results when an investor buys a contract
C) occurs when the individual takes delivery
D) is the opposite of selling short

Question 39

If speculators anticipate interest rates will rise,
they enter into contracts to sell bonds.

Question 40

Hedging by using commodity futures locks in a price for the supplier of a commodity.

Question 41

If an individual expected securities prices to
Fall, that investor could
1) buy put options
2) sell a stock index futures contract
3) sell stock short

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) all of the above

Question 42

The futures price of gold is $1,000. Futures contracts are for 100 ounces of gold, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price of gold to rise and enters into a contract to buy gold.
a. How much must the speculator initially remit?
b. If the futures price of gold rises to $1,005, what is the profit and return on the position?
c. If the futures price of gold declines to $998, what is the loss on the position?
d. If the futures price declines to $984, what must the speculator do?
e. If the futures price continues to decline to $982, how much does the speculator have in the account?

Question 43

A swap agreement may be used to convert

A) variable payments into fixed payments
B) short-term gains into long-term gains
C) bonds into stock
D) futures prices into spot prices
PROBLEMS

Question 44

An individual with a large stock portfolio can
Hedge the position by

A) entering a stock index futures to buy
B) entering a stock index futures to sell
C) selling the stocks
D) maintaining the positions

Question 45

Investors acquiring of gold futures contracts

A) do not have to meet margin requirements
B) may anticipated an increase in inflation
C) are considered to have unleveraged positions
D) have less speculative positions

Question 46

One use for futures markets is "price discovery," that is, the future price mirrors the current consensus of the future price. If the current price of corn is $2.00 a bushel and the cost of carry is 7 percent, explain what an investor would do if futures price of wheat were $2.40. Is the investor at risk?

Question 47

The futures price of a commodity such as wheat is $2.50 a bushel. Futures contracts are for 10,000 bushels, and the margin requirement is $2,500 a contract. The maintenance market requirement is $1,000. A speculator expects the price of the commodity to rise and enters into a contract to buy wheat.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.60, what is the profit and return on the position?
c. If the futures price declines to $2.47, what is the loss on the position?
d. If the futures price rises to $2.70, what must the speculator do?
e. If the futures price continues to decline to $2.32, how much does the speculator have in the account?
SOLUTIONS TO PROBLEMS