Deck 16: Commodities and Financial Futures

Question 1

Eurodollar contracts represent dollar-denominated deposits held in the United States intended for delivery outside of the United States.

Answer 1

False

Question 2

Speculators are not significant participants in the commodities markets.

Answer 2

False

Question 3

A hedger reduces risk of loss and enhances additional profit opportunities.

Answer 3

False

Question 4

Commodities can usually be purchased with a very small margin requirement.

Question 5

Cross-hedging refers to the practice of using one form of security to reduce risk on another form of security.

Question 6

Because of price movement limitations,the commodities market is not always in equilibrium.

Question 7

Trading in financial futures is similar to trading in commodities except for considerably higher margin requirements for financial futures.

Question 8

The commodity exchanges are primary regulated by the Federal Reserve.

Question 9

The commodities exchanges are regulated primarily by the SEC.

Question 10

The use of financial futures will most likely increase as financial managers gain a greater understanding and appreciation of their uses.

Question 11

Hedging is the basic reason for the existence of the commodity exchanges.

Question 12

Most commodity futures contracts are closed out before the actual transaction is to take place.

Question 13

Corporate financial managers use interest rate futures to reduce the risk of loss from a change in interest rates.

Question 14

The margin requirement on commodities futures is generally the same as or lower than financial futures.

Question 15

For a hedge to work,the futures contract must continue until actual delivery takes place.

Question 16

A requirement of a futures contract is that the buyer take possession on a given date.

Question 17

To close a position,the seller./buyer of a contract would buy/sell a similar contract.

Question 18

As in the stock and bond markets,interest is paid on a margined commodity contract.

Question 19

Commodity trading is based on the use of margin rather than actual cash dollars.

Question 20

The futures markets were originally set up to allow livestock producers to speculate in their positions in a given commodity.

Question 21

A cross hedge uses the same form of security to hedge against potential rate changes even though there may be different maturity dates in the securities.

Question 22

If a corporate treasurer wants to hedge against interest rate increases on a new bond issue to be floated,he can sell short in the futures market.

Question 23

Prices in the cash market are somewhat dependent on prices in the futures market.

Question 24

Margin maintenance requirements usually run 5-10 percent of the initial margin.

Question 25

Initial margin requirements usually runs 70-80 percent of the contract price

Question 26

The high risk in commodities contracts is due primarily to the volatility of price movements.

Question 27

An example of an interest rate futures contract would be a Treasury bill future.

Question 28

A(n)______ contract is an agreement which provides for the delivery of a given amount of something at a given time in the future at a given price.

A)Seasonal
B)Futures
C)Options
D)None of the above

Question 29

The margin requirement,relative to size,is less for financial futures,than traditional commodities.

Question 30

A basis point is .01 percent.

Question 31

Margin requirements on commodities are much higher than those on common stock transactions.

Question 32

The basic premise behind interest rate swaps is that one party is able to trade one type of risk exposure for another.

Question 33

The primary participants in the commodities market include both the speculators and the hedgers.

Question 34

Treasury bonds are quoted in percent of par,taken to 32nd of a percentage point.

Question 35

Commodity exchanges do not limit maximum daily price movements.

Question 36

Treasury bond futures trade on the New York Stock Exchange.

Question 37

If a financial manager wishes to protect against an interest rate drop,he can go long in the futures market.

Question 38

The daily trading limits do not effect the efficiency of the market much because the commodity exchanges place very broad limitations on maximum daily price movements.

Question 39

There is no real difference in loss potential in the options and the commodities markets.

Question 40

Cash prices and spot prices are very different in nature.

Question 41

In what city are the two largest commodities exchanges?

A)Chicago
B)New York
C)Kansas City
D)Minneapolis

Question 42

Assume you have just purchased a corn futures contract - 5,000 bushels at $3.24 per bushel.What will your percentage profit on the cash investment be if the price of corn rises $ .10 per bushel in 4 months? Your initial margin requirement was $1,500.

A)3.1 percent
B)33 percent
C)9.2 percent
D)None of the above

Question 43

Financial futures consist of

A)Gold and foreign currencies
B)Foreign exchange and interest rate futures
C)Corporate bonds and common stock
D)None of the above

Question 44

Which of the following exchanges is more important within the financial futures market?

A)Amex Commodity Exchange
B)New York Futures Exchange
C)IMM of the Chicago Mercantile Exchange
D)May be either (a)or (b)

Question 45

The high risk,speculative nature of commodities futures is due primarily to

A)The presence of hedgers in the markets
B)High leverage brought about by low margin requirements
C)Both A and B
D)None of the above

Question 46

The financial futures market has evolved over recent time because of

A)Volatility and risk in the foreign exchange markets
B)Volatility of interest rates
C)Appeal to speculators due to low margin requirements
D)All of the above

Question 47

Assume you have purchased a contract for 25,000 British pounds for $35,000.Your margin requirement is $2,000.If the value of a pound increases .01,what is your percentage profit?

A)10.0 percent
B)12.5 percent
C)15.0 percent
D)8.0 percent
E)None of the above

Question 48

Hedging through futures contracts

A)Increases risk of loss if prices fall
B)Eliminates profit maximization potential
C)Is considered to be speculative in nature
D)All of the above

Question 49

The settle price is the same as the

A)Opening price
B)Closing price
C)Intraday high price
D)None of the above

Question 50

The difference between speculators and hedgers is that speculators are _______ while hedgers are ______

A)Risk-takers; risk averters
B)Individual investors; financial managers
C)Short term; long-term
D)None of the above

Question 51

Which of the following is not one of the primary categories of commodities?

A)Food and fiber
B)Wood
C)Gemstones
D)All of the above are primary categories

Question 52

While hedging through interest rate futures reduces or eliminates the risk of loss,it also

A)Is illegal in some cases
B)Has not been accepted by most corporate financial managers
C)Eliminates the possibility of an abnormal gain
D)None of the above

Question 53

The New York Futures Exchange specializes in

A)Transactions involving companies listed on AMEX and NYSE
B)American-produced commodities
C)Financial futures
D)Grains and livestock
E)More than one of the above

Question 54

Which of the following statements about the margin requirements on commodities contracts is NOT ?

A)Use of margin is less common than trading with actual cash dollars
B)They are generally much lower than those on stock transactions
C)It is merely a good faith payment against losses
D)All of the above are true

Question 55

The interest rate futures market includes all of the following except

A)Treasury bonds,notes and bills
B)Eurodollars
C)GNMA certificates and bank CDs
D)All of the above are traded in the interest rate futures market

Question 56

Which of the following is not a major category of financial futures?

A)Commodity futures
B)Currency futures
C)Interest rate futures
D)Stock index futures
E)None of the above are major categories

Question 57

The primary difference between options and futures is that

A)The option premium is the full liability of the purchaser,while a futures contract may call for additional margin to hold the position
B)Options are more speculative than futures
C)Futures require the physical transfer of goods,while options do not
D)More than one of the above

Question 58

Margin requirements on commodities contracts

A)Are much higher than those on common stock transactions
B)Vary over time and even among exchanges for a given commodity
C)Typically are 2 to 10 percent of the value of the contract
D)None of the above are true

Question 59

Corn futures are traded on the

A)New York Futures Exchange
B)Chicago Board of Trade
C)International Money Market of the CME
D)All of the above

Question 60

All of the following are characteristics of the cash market except

A)The spot price represents the actual dollar value for the immediate transfer of a commodity
B)There must be a transfer of the actual physical possession of the goods
C)Prices in the cash market are independent of prices in the futures market
D)All of the above are characteristics of the cash market

Question 61

A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%.The price goes up to $1.13 in three months.What is the percentage of profit?

A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%

Question 62

An investor may be asked to put up more margin if

A)The price of the commodity goes up in a long position
B)The price of the commodity goes down in a short position
C)The price of the commodity goes up in a short position
D)If the contract has less than one week to run

Question 63

Commodity trading is based on the use of:

A)Actual dollars
B)A margin
C)A hedge
D)Fictitious money

Question 64

The difference between the cash market and the futures market is:

A)That commodity prices cannot be negotiated in the futures market,while they can be in the cash market
B)That larger margins are used in the cash market
C)That in the cash market,there must be a transfer of the physical possession of the goods
D)The commodities are usually less expensive in the futures market

Question 65

In the futures market the yen may strengthen against the dollar for all of the following reasons except

A)Declining inflation in Japan
B)Increasing inflation in the U.S.
C)Decreasing Japanese interest rates
D)Decreasing U.S.interest rates

Question 66

Margin maintenance contracts normally represent what percent of the initial margin?

A)2-10 percent
B)20-50 percent
C)60-80 percent
D)100 percent

Question 67

If a pension fund manager is afraid interest rates may go down on his short-term portfolio of 90-day Treasury bills,he could hedge by going

A)Long on Treasury bill futures contracts
B)Short (sell)Treasury bill futures contracts
C)Long on U.S.dollar contracts
D)Short (sell)the U.S.dollar contracts

Question 68

An interest rate futures contract represents a bet or hedge on:

A)The direction or future interest rates
B)The direction of future bond prices
C)The expectation of future interest rates
D)All of the above

Question 69

Interest rate swaps are __________ structured than futures and options contracts.

A)Usually less
B)Usually more
C)Always more
D)Never less

Question 70

Using paper gains to expand the number of contracts outstanding is referred to as

A)Horizontal pyramiding
B)Vertical pyramiding
C)Reserve pyramiding
D)Inverse pyramiding

Question 71

You,a farmer,anticipate taking 80,000 bushels of soybeans to the market in three months.The current cash price for soybeans is $5.85.The size of the futures contract is 5,000 bushels per contract and the current three-month futures price is $5.88.You decide to hedge one-half of your exposure to a drop in the value of soybeans.Assume that in three months,when you take the soybeans to market,you close out the futures contracts and the price has fallen to $5.80.What was your overall net gain or loss when considering the actual gain or loss when taking the actual soybeans to market and the partial hedge in the futures market?

A)$800 gain
B)$800 loss
C)$400 gain
D)$400 loss
E)$320 gain

Question 72

You,a farmer,anticipate taking 80,000 bushels of soybeans to the market in three months.The current cash price for soybeans is $5.85.The size of the futures contract is 5,000 bushels per contract and the current three-month futures price is $5.88.You decide to hedge one-half of your exposure to a drop in the value of soybeans.Assume that in three months,when you take the soybeans to market,you close out the futures contracts and the price has fallen to $5.80.What is the total loss in value over the three months on the actual soybeans you produced and took to market?

A)$2,400
B)$2,000
C)$6,400
D)$4,000
E)$3,200

Question 73

As opposed to a farmer,a miller (processor of wheat)is likely to go __________ in the futures market.

A)Long
B)Short
C)Long and short
D)Around in circles

Question 74

A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%.The price goes up to $1.13 in three months.What is the annualized gain?

A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%

Question 75

A banker who is paying a fixed 6 percent rate on CDs for the next two years and is afraid interest rates may go down on new loans,may hedge this exposure with interest rate swaps by

A)Swapping a fixed rate for a variable rate
B)Swapping a variable rate for a fixed rate
C)Swapping short-term exposure for long-term exposure
D)Swapping long-term exposure for short-term exposure

Question 76

You,a farmer,anticipate taking 80,000 bushels of soybeans to the market in three months.The current cash price for soybeans is $5.85.The size of the futures contract is 5,000 bushels per contract and the current three-month futures price is $5.88.If you wanted to hedge one-half of your exposure to a drop in the value of soybeans,how many futures contracts would you buy or sell?

A)Sell sixteen futures contracts
B)Buy sixteen futures contracts
C)Sell eight futures contracts
D)Buy eight futures contracts
E)Sell four futures contracts

Question 77

An investor controls contracts on five (5)5,000 bushel futures contract on grain at a price of $3 per bushel.The margin requirement is 5 percent and the maintenance margin is 80 percent.How much would the price per bushel have to change to provide a $750 profit.

Question 78

Given a 5,000 bushel futures contract on grain at a price of $2.75 per bushel,margin requirement is 5 percent,maintenance margin is 80 percent.What would the return on investment be if the price increases by $.08 per bushel?

Question 79

You,a farmer,anticipate taking 80,000 bushels of soybeans to the market in three months.The current cash price for soybeans is $5.85.The size of the futures contract is 5,000 bushels per contract and the current three-month futures price is $5.88.You decide to hedge one-half of your exposure to a drop in the value of soybeans.Assume that in three months,when you take the soybeans to market,you close out the futures contracts and the price has fallen to $5.80.How much did this hedge in the futures market generate in gains?

A)$2,400
B)$2,000
C)$6,400
D)$4,000
E)$3,200

Question 80

The currency futures market is different than the other types of futures markets because:

A)The contracts are standardized
B)The currency futures market provides a strong secondary market
C)The currency market has communication networks throughout the world,whereas,the other ones do not
D)A and b