Deck 22: Futures Markets

Question 1

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

A) are; are
B) are not; are
C) are; are not
D) are not; are not
E) are; may or may not be

Answer 1

C
Explanation: Futures contracts are standardized and are traded on organized exchanges; forward contracts are not traded on organized exchanges, the participant negotiates for the delivery of any quantity of goods, and banks and brokers negotiate contracts as needed.

Question 2

Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.

A) are not; are
B) are; are
C) are not; are not
D) are; are not
E) are; may or may not be

Answer 2

D
Explanation: Futures contracts are traded on an organized exchange, and forward contracts are not traded on an organized exchange.

Question 3

Financial futures contracts are actively traded on the following indices except

A) the S&P 500 Index.
B) the New York Stock Exchange Index.
C) the Nikkei Index.
D) the Dow Jones Industrial Index.
E) All are actively traded.

Answer 3

E
Explanation: The indices are listed in Table 22.1.

Question 4

The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are

A) specified by the buyers and sellers.
B) specified only by the buyers.
C) specified by the futures exchanges.
D) specified by brokers and dealers.
E) None of the options are correct.

Question 5

Which of the following statements is false? I) The maintenance-margin is the amount of money you post with your broker when you buy or sell a futures contract.
II) If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call.
III) A margin deposit can only be met with cash.
IV) All futures contracts require the same margin deposit.

A) I only
B) II only
C) III only
D) IV only
E) I, III, and IV

Question 6

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity.

A) make delivery; take delivery
B) take delivery; make delivery
C) take delivery; take delivery
D) make delivery; make delivery
E) negotiate the price; pay the price

Question 7

Agricultural futures contracts are actively traded on

A) soybeans.
B) oats.
C) wheat.
D) soybeans and oats.
E) All of the options are correct.

Question 8

The open interest on silver futures at a particular time is the

A) number of silver futures contracts traded during the day.
B) number of outstanding silver futures contracts for delivery within the next month.
C) number of silver futures contracts traded the previous day.
D) number of all long or short silver futures contracts outstanding.

Question 9

The buyer of a futures contract is said to have a __________ position, and the seller of a futures contract is said to have a __________ position in futures.

A) long; short
B) long; long
C) short; short
D) short; long
E) margined; long

Question 10

Which one of the following statements regarding delivery is true?

A) Most futures contracts result in actual delivery.
B) Only 1% to 3% of futures contracts result in actual delivery.
C) Only 15% of futures contracts result in actual delivery.
D) Approximately 50% of futures contracts result in actual delivery.
E) Futures contracts never result in actual delivery.

Question 11

Agricultural futures contracts are actively traded on

A) corn.
B) oats.
C) pork bellies.
D) corn and oats.
E) All of the options are correct.

Question 12

Which one of the following statements is true?

A) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
B) If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call.
C) A margin deposit can only be met with cash.
D) All futures contracts require the same margin deposit.
E) The maintenance margin is set by the producer of the underlying asset.

Question 13

A futures contract

A) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract.
B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.
C) gives the buyer the right, but not the obligation, to buy an asset sometime in the future.
D) is a contract to be signed in the future by the buyer and the seller of the commodity.
E) None of the options are correct.

Question 14

Financial futures contracts are actively traded on which of the following indices?

A) The S&P 500 Index
B) The New York Stock Exchange Index
C) The Nikkei Index
D) The Dow Jones Industrial Index
E) All of the options are correct.

Question 15

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

A) long; decrease
B) short; decrease
C) short; stay the same
D) short; increase
E) long; stay the same

Question 16

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

A) long; increase
B) long; decrease
C) short; increase
D) long; stay the same
E) short; stay the same

Question 17

Which of the following statements regarding delivery is false? I) Most futures contracts result in actual delivery.
II) Only 1% to 3% of futures contracts result in actual delivery.
III) Only 15% of futures contracts result in actual delivery.

A) I only
B) II only
C) III only
D) I and II
E) I and III

Question 18

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must

A) buy one May corn futures contract.
B) buy two April corn futures contract.
C) sell one April corn futures contract.
D) sell one May corn futures contract.

Question 19

Agricultural futures contracts are actively traded on

A) milk.
B) orange juice.
C) lumber.
D) milk and orange juice.
E) All of the options are correct.

Question 20

In a futures contract, the futures price is

A) determined by the buyer and the seller when the delivery of the commodity takes place.
B) determined by the futures exchange.
C) determined by the buyer and the seller when they initiate the contract.
D) determined independently by the provider of the underlying asset.
E) None of the options are correct.

Question 21

An increase in the basis will __________ a long hedger and __________ a short hedger.

A) hurt; benefit
B) hurt; hurt
C) benefit; hurt
D) benefit; benefit
E) benefit; have no effect upon

Question 22

Metals and energy currency futures contracts are actively traded on

A) gold.
B) silver.
C) propane.
D) gold and silver.
E) All of the options are correct.

Question 23

You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $950 profit
B) $95 profit
C) $950 loss
D) $95 loss
E) None of the options are correct.

Question 24

Foreign currency futures contracts are actively traded on the

A) euro.
B) British pound.
C) drachma.
D) euro and British pound.
E) All of the options are correct.

Question 25

On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be a

A) $125 loss.
B) $125 profit.
C) $12.50 loss.
D) $1,250 loss.
E) None of the options are correct.

Question 26

An investor with a long position in Treasury notes futures will profit if

A) interest rates decline.
B) interest rates increase.
C) the prices of Treasury notes decrease.
D) the price of the S&P 500 Index increases.
E) None of the options are correct.

Question 27

You sold one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

A) $5.50 profit
B) $5,500 profit
C) $5.50 loss
D) $5,500 loss
E) None of the options are correct.

Question 28

To exploit an expected increase in interest rates, an investor would most likely

A) sell Treasury bond futures.
B) take a long position in wheat futures.
C) buy S&P 500 Index futures.
D) take a long position in Treasury bond futures.
E) None of the options are correct.

Question 29

To hedge a long position in Treasury bonds, an investor would most likely

A) buy interest rate futures.
B) sell S&P futures.
C) sell interest rate futures.
D) buy Treasury bonds in the spot market.
E) None of the options are correct.

Question 30

You purchased one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $30 profit
B) $300 profit
C) $300 loss
D) $30 loss

Question 31

Metals and energy currency futures contracts are actively traded on

A) copper.
B) platinum.
C) weather.
D) copper and platinum.
E) All of the options are correct.

Question 32

Foreign currency futures contracts are actively traded on the

A) Japanese yen.
B) Australian dollar.
C) Brazilian real.
D) Japanese yen and Australian dollar.
E) All of the options are correct.

Question 33

Which one of the following statements regarding "basis" is true?

A) The basis is the difference between the futures price and the spot price.
B) The basis risk is borne by the hedger.
C) A short hedger suffers losses when the basis decreases.
D) The basis increases when the futures price increases by more than the spot price.
E) The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price.

Question 34

Agricultural futures contracts are actively traded on

A) rice.
B) sugar.
C) canola.
D) rice and sugar.
E) All of the options are correct.

Question 35

You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $30 profit
B) $300 profit
C) $300 loss
D) $30 loss

Question 36

You sold one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $950 profit
B) $95 profit
C) $950 loss
D) $95 loss
E) None of the options are correct.

Question 37

Which one of the following statements regarding "basis" is not true?

A) The basis is the difference between the futures price and the spot price.
B) The basis risk is borne by the hedger.
C) A short hedger suffers losses when the basis decreases.
D) The basis increases when the futures price increases by more than the spot price.

Question 38

You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

A) $5.50 profit
B) $5,500 profit
C) $5.50 loss
D) $5,500 loss

Question 39

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by

A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index.
B) selling short all the stocks in the S&P 500 and buying S&P Index futures.
C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index.
D) selling S&P 500 Index futures and buying all the stocks in the S&P 500.
E) None of the options are correct.

Question 40

Interest rate futures contracts are actively traded on the

A) eurodollars.
B) euroyen.
C) sterling.
D) eurodollars and euroyen.
E) All of the options are correct.

Question 41

On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

A) $1,550 loss
B) $15,550 loss
C) $15,550 profit
D) $1,550 profit

Question 42

On January 1, you bought one April S&P 500 index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

A) $2,500 loss
B) $10 loss
C) $2,500 profit
D) $10 profit

Question 43

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

A) the offsetting short trader.
B) the corn farmer.
C) the clearinghouse.
D) the broker.
E) the commodities dealer.

Question 44

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)?

A) $2,500 loss
B) $10 loss
C) $2,500 profit
D) $10 profit

Question 45

Futures contracts are regulated by

A) the Commodities Futures Trading Corporation.
B) the Chicago Board of Trade.
C) the Chicago Mercantile Exchange.
D) the Federal Reserve.
E) the Securities and Exchange Commission.

Question 46

Given a stock index with a value of $1,000, an anticipated dividend of $30, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

A) $943.40
B) $970.00
C) $1,030.00
D) $915.09
E) $1,000.00

Question 47

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?

A) $1,343.40
B) $62.00
C) $1,418.44
D) $1,524.25

Question 48

Delivery of stock index futures

A) is never made.
B) is made by a cash settlement based on the index value.
C) requires delivery of 1 share of each stock in the index.
D) is made by delivering 100 shares of each stock in the index.
E) is made by delivering a value-weighted basket of stocks.

Question 49

You bought one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $65 profit
B) $650 profit
C) $650 loss
D) $65 loss

Question 50

The expectations hypothesis of futures pricing

A) is the simplest theory of futures pricing.
B) states that the futures price equals the expected value of the future spot price of the asset.
C) is not a zero-sum game.
D) is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset.
E) is the simplest theory of futures pricing and is not a zero-sum game.

Question 51

You sold one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

A) $65 profit
B) $650 profit
C) $650 loss
D) $65 loss

Question 52

Open interest includes

A) only contracts with a specified delivery date.
B) the sum of short and long positions.
C) the sum of short, long, and clearinghouse positions.
D) the sum of long or short positions and clearinghouse positions.
E) only long or short positions but not both.

Question 53

On April 1, you sold one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?

A) $1,550 loss
B) $15,550 loss
C) $15,550 profit
D) $1,550 profit

Question 54

Taxation of futures trading gains and losses

A) is based on cumulative year-end profits or losses.
B) occurs based on the date contracts are sold or closed.
C) can be timed to offset stock-portfolio gains and losses.
D) is based on the contract holding period.
E) None of the options are correct.

Question 55

Contango

A) holds that the natural hedgers are the purchasers of a commodity, not the suppliers.
B) is a hypothesis polar to backwardation.
C) holds that F_O must be less than (P_T).
D) holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and holds that F_O must be less than (P_T).
E) holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and is a hypothesis polar to backwardation.

Question 56

Given a stock index with a value of $1,125, an anticipated dividend of $33, and a risk-free rate of 4%, what should be the value of one futures contract on the index?

A) $1137.00
B) $1070.00
C) $993.40
D) $995.09
E) $1000.00

Question 57

The establishment of a futures market in a commodity should not have a major impact on spot prices because

A) the futures market is small relative to the spot market.
B) the futures market is illiquid.
C) futures are a zero-sum game.
D) the futures market is large relative to the spot market.
E) most futures contracts do not take delivery.

Question 58

Speculators may use futures markets rather than spot markets because

A) transaction costs are lower in futures markets.
B) futures markets provide leverage.
C) spot markets are less efficient.
D) futures markets are less efficient.
E) transaction costs are lower in futures markets, and futures markets provide leverage.

Question 59

The process of marking to market

A) posts gains or losses to each account daily.
B) may result in margin calls.
C) impacts only long positions.
D) posts gains or losses to each account daily and may result in margin calls.
E) All of the options are correct.

Question 60

Normal backwardation

A) maintains that, for most commodities, there are natural hedgers who desire to shed risk.
B) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
C) assumes that risk premiums in the futures markets are based on systematic risk.
D) maintains that, for most commodities, there are natural hedgers who desire to shed risk, and that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
E) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk.

Question 61

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

A) long; decrease
B) short; decrease
C) short; stay the same
D) short; increase
E) long; stay the same

Question 62

Who guarantees that a futures contract will be fulfilled?

A) The buyer
B) The seller
C) The broker
D) The clearinghouse
E) Nobody

Question 63

A trader who has a __________ position in oil futures believes the price of oil will __________ in the future.

A) short; increase
B) long; increase
C) short; stay the same
D) long; stay the same

Question 64

Which of the following is false about profits from futures contracts? I) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
II) It is possible for both the holder of the long position and the holder of the short position to earn a profit.
III) The clearinghouse makes most of the profit.
IV) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

A) I only
B) II only
C) III only
D) IV only
E) I, II, and III

Question 65

To exploit an expected decrease in interest rates, an investor would most likely

A) buy Treasury bond futures.
B) take a long position in wheat futures.
C) buy S&P 500 Index futures.
D) take a short position in Treasury bond futures.
E) None of the options are correct.

Question 66

Financial futures contracts are actively traded on which of the following indices?

A) The All ordinary index
B) The DAX 30 Index
C) The CAC 40 Index
D) The Toronto 35 Index
E) All of the options are correct.

Question 67

Financial futures contracts are actively traded on the following indices except

A) the All ordinary index.
B) the DAX 30 Index.
C) the CAC 40 Index.
D) the Toronto 35 Index.
E) All of the options are correct.

Question 68

Given a stock index with a value of $1,200, an anticipated dividend of $45, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

A) $1,227.00
B) $1,070.00
C) $993.40
D) $995.09
E) $1,000.00

Question 69

Which of the following items is not specified in a futures contract? I) The contract size
II) The maximum acceptable price range during the life of the contract
III) The acceptable grade of the commodity on which the contract is held
IV) The market price at expiration
V) The settlement price

A) II and IV
B) I, III, and V
C) I and V
D) I, IV, and V
E) I, II, III, IV, and V

Question 70

With regard to futures contracts, what does the word "margin" mean?

A) It is the amount of the money borrowed from the broker when you buy the contract.
B) It is the maximum percentage that the price of the contract can change before it is marked to market.
C) It is the maximum percentage that the price of the underlying asset can change before it is marked to market.
D) It is a good-faith deposit made at the time of the contract's purchase or sale.
E) It is the amount by which the contract is marked to market.

Question 71

A decrease in the basis will __________ a long hedger and __________ a short hedger.

A) hurt; benefit
B) hurt; hurt
C) benefit; hurt
D) benefit; benefit
E) benefit; have no effect upon

Question 72

To hedge a short position in Treasury bonds, an investor would most likely

A) ignore interest rate futures.
B) buy S&P futures.
C) buy interest rate futures.
D) sell Treasury bonds in the spot market.

Question 73

Which of the following is true about profits from futures contracts?

A) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
B) It is possible for both the holder of the long position and the holder of the short position to earn a profit.
C) The clearinghouse makes most of the profit.
D) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.
E) Holders of short positions can recognize profits by making delivery early.

Question 74

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

A) Nothing-the seller understands that these things happen.
B) You would wake up to find the pork bellies on your front lawn.
C) Your broker would send you a nasty letter.
D) You would be notified that you owe the holder of the short position a certain amount of cash.
E) You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies.

Question 75

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date, you must

A) buy one May oil futures contract.
B) buy two April oil futures contracts.
C) sell one April oil futures contract.
D) sell one May oil futures contract.
E) None of the options are correct.

Question 76

Some of the newer futures contracts include I) fashion futures.
II) weather futures.
III) electricity futures.
IV) entertainment futures.

A) I and II
B) II and III
C) III and IV
D) I, II, and III
E) I, III, and IV

Question 77

If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

A) the offsetting short trader.
B) the oil producer.
C) the clearinghouse.
D) the broker.
E) the commodities dealer.

Question 78

Which of the following items is specified in a futures contract? I) The contract size
II) The maximum acceptable price range during the life of the contract
III) The acceptable grade of the commodity on which the contract is held
IV) The market price at expiration
V) The settlement price

A) I, II, and IV
B) I, III, and V
C) I and V
D) I, IV, and V
E) I, II, III, IV, and V

Question 79

Given a stock index with a value of $1,100, an anticipated dividend of $27, and a risk-free rate of 3%, what should be the value of one futures contract on the index?

A) $943.40
B) $970.00
C) $913.40
D) $1,106.00
E) $1,000.00

Question 80

An investor with a short position in Treasury notes futures will profit if

A) interest rates decline.
B) interest rates increase.
C) the prices of Treasury notes increase.
D) the price of the long bond increases.
E) None of the options are correct.