Deck 10: Futures Regulations

Question 1

Which of the following statements is INCORRECT?

A) Futures markets got started in Chicago to help farmers manage price risk.
B) Futures on agricultural commodities dominated futures trading in the early years because agriculture constituted a significant portion of the US economy.
C) In nineteenth-century Chicago,metal futures could not overtake agricultural futures on corn and wheat because metal prices were fixed by the government.
D) Early regulators of futures markets were associated with the US Department of Agriculture because agricultural futures were the most actively traded futures contracts.
E) The modern futures contract developed through time as its structure evolved to reflect the economic needs of the market participants.

Answer 1

C

Question 2

Onion futures are banned in the United States because:

A) onions are perishable
B) some traders manipulated onion futures during the 1950s,and farmers lobbied to pass legislation banning these contracts because they were prone to manipulation
C) onion futures are not useful for price discovery
D) onion futures market attracted too many speculators who destabilized prices and destroyed the market
E) onion futures are not useful to hedgers

Answer 2

B

Question 3

In the United States,options on futures are regulated by the:

A) CFTC
B) Fed
C) OCC
D) SEC
E) Treasury

Answer 3

A

Question 4

Which of the following statements is FALSE?

A) Many economists believe that speculators generally play a beneficial role in markets by moderating price swings.
B) Speculators often play a beneficial role by adding liquidity to the markets.
C) In well-functioning futures markets,hedgers buy insurance against adverse price movements and speculators are among the sellers of such insurance,bearing the risk that adverse price movements will not occur.
D) Speculators are always detrimental to any market in which they participate.
E) In well-functioning markets,speculators can help the process of price discovery.

Question 5

Which of the following statements is INCORRECT?

A) The CFTC must approve new contracts and changes to existing contracts.
B) The CFTC develops rules and regulations that govern the NFA and all futures exchanges.
C) The CFTC detects market manipulations but leaves its prevention and prosecution to the Treasury.
D) The CFTC does research on futures markets and provides technical assistance to government bodies.
E) The CFTC helps coordinate global regulatory efforts.

Question 6

Which of the following statements is INCORRECT about the National Futures Association (NFA)?

A) The NFA is a self-regulating organization composed of futures commission merchants,commodity pool operators,commodity trading advisers,introducing brokers,leverage transaction merchants,commodity exchanges,commercial firms,and others who work in the futures industry.
B) The NFA must approve new contracts and changes to existing contracts.
C) The NFA screens and tests registration applicants and determines their qualifications and proficiency.
D) The NFA requires futures commission merchants and introducing brokers to keep sufficient capital and maintain good trading records.
E) The NFA audits,examines,and conducts financial surveillance to enforce compliance by members.

Question 7

Which of the following statements regarding why no futures market exists for diamonds is INCORRECT?

A) Diamond sellers,led by South African diamond manufacturing conglomerate De Beers,have acted as an effective cartel.
B) Diamonds are hard to standardize.
C) Price volatility is largely controlled by the De Beers-led cartel,which kills any incentive for hedgers and speculators to participate.
D) There is no hedging demand from firms using diamonds for jewelry production.
E) Given the market structure,a futures contract fails to play a price discovery role in the diamond market.

Question 8

Which of the following was an unlikely factor that contributed to a spectacular increase in oil prices and volatility in the new millennium?

A) A new kind of trader,a commodity index trader,increased activity in the commodity markets.
B) A new kind of trader,a swap dealer,increased activity in the commodity markets.
C) Day traders increased their trading activity in the spot oil market through exchange-traded funds.
D) Lax regulatory oversight allowed many speculators to trade and destabilize energy markets.
E) Demand from emerging economies and production squeezes.

Question 9

In the United States,options on equity are regulated by the:

A) CFTC
B) Fed
C) OCC
D) SEC
E) Treasury

Question 10

Successful futures markets are NOT associated with the following feature:

A) competitive markets for the underlying commodity
B) an ability for the commodity to be sold in standardized units
C) volatile commodity prices that change randomly across time in an erratic fashion
D) an ability to attract algorithmic traders who supply large trading volumes
E) a well-designed structure of margins and daily settlement to hold down credit risk

Question 11

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 did NOT have the following feature:

A) increased regulation by the SEC and the CFTC
B) required central clearing and exchange trading for more derivatives
C) required greater market transparency
D) additional financial safeguards
E) streamlining of regulation through the creation of three types of markets with decreasing amounts of regulation: designated contract markets,derivative transaction execution facilities,and an exempt board of trades

Question 12

In July 2003,the US Department of Defense's research wing DARPA submitted a proposal to Congress to create a "policy analysis market," which would be a futures market based on terrorist indicators.The policy analysis market

A) was discontinued after a month because it attracted very little trading volume
B) never got started because the trading mechanism was badly designed
C) lost out to other websites that offered the same facilities
D) never got started because it received negative publicity
E) was designed to help traders protect against terrorist events

Question 13

Which of the following statements is INCORRECT regarding the oil futures market?

A) The organization of the Petroleum Exporting Countries (OPEC)exhibits market power,but it is not the only force affecting oil prices.
B) The global business cycle probably plays a more powerful role than OPEC in influencing oil prices.
C) Demand from developing countries like China and India can play a significant role in determining oil futures prices.
D) The presence of large players like OPEC and China makes it impossible for oil futures contracts to help in price discovery.
E) Due to the existence of numerous users and suppliers of oil,oil prices are volatile and oil futures can be successfully used by the hedgers.

Question 14

Which of the following is NOT an effective tool in the hands of regulators to fight a short corner and market squeeze?

A) forcing the manipulator to quit the market when the short positions mature (liquidation-only trading)
B) restricting the manipulator from increasing the size of their position
C) limiting the amount of contracts the manipulator can hold (enforce position limits,lower position limits)unless they are doing it for legitimate hedging purposes
D) imposing significant penalties and fines on the manipulators
E) ordering producers to produce more to increase the deliverable supply

Question 15

The Commodity Futures Trading Commission (CFTC)does NOT consider the following criteria while approving futures trading on a particular commodity:

A) usefulness to speculators
B) usefulness for price discovery
C) usefulness to hedgers
D) whether trading in the contract is contrary to the public interest
E) manipulation possibilities of the proposed futures contract

Question 16

The Commodity Futures Modernization Act of 2000 (CFMA)led to the creation of the

A) CFTC
B) NFA
C) 35 percent rule
D) futures on individual stocks
E) Dodd-Frank Wall Street Reform and Consumer Protection Act

Question 17

Which of the following statement is FALSE regarding price discovery in a futures market?

A) As futures markets are believed to be semi-strong-form efficient,futures trading generates prices that reflect more information and provide better price forecasts.
B) Price discovery has long been justified by regulators as a prime reason for the existence of futures markets.
C) Futures markets can help discover prices in manipulated markets.
D) Futures markets cannot play their price discovery role in times of extreme market volatility.
E) Price discovery makes a futures market useful for planning output and input decisions in the production of goods.

Question 18

The Commodity Futures Trading Commission (CFTC)was established in 1974 to regulate:

A) forward markets
B) futures markets
C) options markets
D) stock markets
E) the libor market

Question 19

Which of the following was NOT a feature in the three manipulation stories (Great Western,Hunt brothers,Salomon)involving forwards or futures markets?

A) There were "shorts" generated in a futures or forward market.
B) Shorts were "cornered" because the manipulators took significant control of the deliverable supply.
C) Deliverable supply could not be increased without incurring significant additional costs.
D) Shorts were forced to pay high prices when they tried to buy the underlying commodity from the manipulator.
E) The regulators broke the squeeze by ordering producers to increase their supply.

Question 20

Hedging in a futures market does NOT have which of the following features?

A) Hedging protects against adverse price swings.
B) Hedging requires that the spot and the futures prices are positively correlated.
C) Hedging can protect (one's investment or an investor)against loss by making balancing or compensating contracts or transactions.
D) Hedging requires no payment between counterparties due to futures having zero initial value.
E) Hedging protects against the downside but allows you to benefit from the upside.