Deck 4: Forwards and Futures

Question 1

Suppose you trade futures contracts on precious metals.Which of the following risks are you are exposed to?

A) credit risk,legal risk,liquidity risk,and market risk
B) no credit risk;legal risk,liquidity risk,and market risk
C) no credit risk or legal risk;liquidity risk and market risk
D) no credit risk,legal risk,or liquidity risk;market risk
E) no credit risk,legal risk,liquidity risk,or market risk

Answer 1

C

Question 2

The holder of a short forward position has:

A) the option to buy the underlying asset at a fixed price on a fixed future date
B) the option to sell the underlying asset at a fixed price on a fixed future date
C) the obligation to buy the underlying asset at a fixed price on a fixed future date
D) the obligation to sell the underlying asset at a fixed price on a fixed future date
E) None of these answers are correct.

Answer 2

D

Question 3

Which of the following is INCORRECT?

A) The buyer and seller in a forward contract agree to trade a commodity on some later delivery date at a fixed delivery (forward)price.
B) Forwards are zero net supply contracts.
C) Forward trading is a zero-sum game.
D) Forward contracts have significant counterparty risk.
E) Forward contracts are regulated by the Commodity Futures Trading Commission.

Answer 3

E

Question 4

Shaq buys a futures contract today.Which of the following is true?

A) Shaq agrees to buy the asset at a fixed price at some future date.
B) Shaq will get dividends on the underlying asset.
C) Shaq acquires voting rights on the asset.
D) Shaq will have to return the asset when closing out his position.
E) None of these answers are correct.

Question 5

The holder of a long forward contract has:

A) the option to buy the underlying asset at a fixed price on a fixed future date
B) the option to sell the underlying asset at a fixed price on a fixed future date
C) the obligation to buy the underlying asset at a fixed price on a fixed future date
D) the obligation to sell the underlying asset at a fixed price on a fixed future date
E) None of these answers are correct.

Question 6

•A US company has bought a machine worth 3 million euros from a German manufacturer with payment due in three months.The treasurer finds that DeutscheUSA (a fictitious name),a large commercial bank,bids euros for $1.5000 and offers euros for $1.5010 in three months' time.He readily agrees and locks in that price.
•Suppose DeutscheUSA would like to hedge its trade.It finds that a German importer hoping to buy 2 million euros worth of computer parts from the United States in three months' time.They also agree to trade.
What is DeutscheUSA's profit and risk exposure after three months time?

A) a profit of $1,000 US dollars plus risk exposure on $2 million dollars
B) a profit of $2,000 US dollars
C) a profit of $2,000 US dollars plus risk exposure on $1 million dollars
D) a profit of $2,000 US dollars plus risk exposure on 1 million euros
E) None of these answers are correct.

Question 7

Which of the following is NOT a job performed by a futures clearinghouse?

A) guaranteeing contract performance
B) providing price support in case of a market crash
C) resolving small disputes among traders regarding an executed trade
D) recording and recognizing trades
E) checking that trades match

Question 8

Settlement of a futures trade:

A) takes place on the following trading day
B) takes place five days after a trade is executed
C) have real time,instant settlement due to advances in technology
D) takes place on every trading day until the contract is closed out or it matures
E) None of these answers are correct.

Question 9

•A US company has bought a machine worth 3 million euros from a German manufacturer with payment due in three months.The treasurer finds that DeutscheUSA (a fictitious name),a large commercial bank,bids euros for $1.5000 and offers euros for $1.5010 in three months' time.He readily agrees and locks in that price.
•Suppose DeutscheUSA would like to hedge its trade.It finds that a German importer hoping to buy 2 million euros worth of computer parts from the United States in three months' time.They also agree to trade.
What is the price risk exposure remaining for DeutscheUSA?

A) $1 million US dollars today
B) $2 million US dollars in three months' time
C) 3 million euros today
D) 1 million euros in three months' time
E) None of these answers are correct.

Question 10

Golddiggers,Inc. ,mines gold and sells refined,pure gold in the world market.To hedge some of its price risk,the company can:

A) short gold futures to hedge input risk
B) long gold futures to hedge output risk
C) short gold futures to hedge output risk
D) long gold futures to hedge input risk
E) There's no suitable contract that Golddiggers can use for hedging purposes.

Question 11

The open interest on a futures contract is:

A) the sum of both the outstanding long and short positions
B) the total of all hedged positions
C) the total number of contracts that got traded during the day
D) the number of contracts in which traders have shown trading interest by submitting a bid or an ask price quote
E) the total of all outstanding contracts

Question 12

Suppose that July gold futures just become eligible for trading.Tim buys 20 of those contracts from Ned.Next,he sells 10 contracts to Mary.Finally,Ned buys 10 contracts from Tim.As a result of these three trades:

A) trading volume is 20 contracts and open interest rate is 20 contracts
B) trading volume is 30 contracts and open interest rate is 15 contracts
C) trading volume is 40 contracts and open interest rate is 10 contracts
D) trading volume is 40 contracts and open interest rate is 20 contracts
E) None of these answers are correct.

Question 13

You manufacture silver jewelry.To hedge some of your risks,you can:

A) go long silver futures to hedge input price risk
B) go short silver futures to hedge input price risk
C) go long silver futures to hedge output price risk
D) do nothing with silver futures
E) do nothing as silver futures do not trade

Question 14

The main distinction between a forward and a futures contract is:

A) a forward contract has a final cash flow,while a futures contract has daily cash flows
B) a forward contract requires no collateral,while a futures contract requires traders to post margins
C) a forward trade is usually closed out early,while a futures trade usually ends with physical delivery
D) a forward trade requires cash settlement,while a futures trade does not require this
E) minor-they are the same contracts

Question 15

Which statement is INCORRECT about futures contracts?

A) Futures contracts are regulated.
B) Futures require counterparties to know each other.
C) Futures trades require margins.
D) Performance of futures contracts are guaranteed by a clearinghouse.
E) Most futures contracts are closed out before maturity.