Deck 17: Futures Markets and Risk Management

Question 1

Which of the following provides the profit to a long position at contract maturity?

A) original futures price − Spot price at maturity
B) spot price at maturity − Original futures price
C) zero
D) basis

Answer 1

B

Question 2

A wheat farmer should ________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

A) sell wheat futures
B) buy wheat futures
C) buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time
D) sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

Answer 2

A

Question 3

An investor who goes short in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.

A) pay; pay
B) pay; receive
C) receive; pay
D) receive; receive

Answer 3

B

Question 4

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have ________.

A) an arbitrage
B) a cross-hedge
C) an over hedge
D) a spread hedge

Question 5

If an asset price declines, the investor with a ________ is exposed to the largest potential loss.

A) long call option
B) long put option
C) long futures contract
D) short futures contract

Question 6

An investor who goes long in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.

A) pay; pay
B) pay; receive
C) receive; pay
D) receive; receive

Question 7

Interest rate futures contracts exist for all of the following except ________.

A) federal funds
B) Eurodollars
C) banker's acceptances
D) repurchase agreements

Question 8

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates ________ risk.

A) market
B) credit
C) interest rate
D) basis

Question 9

The clearing corporation has a net position equal to ________.

A) the open interest
B) the open interest times 2
C) the open interest divided by 2
D) zero

Question 10

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a ________.

A) cross-hedge
B) reversing trade
C) spread position
D) straddle

Question 11

Which one of the following contracts requires no cash to change hands when initiated?

A) listed put option
B) short futures contract
C) forward contract
D) listed call option

Question 12

In the futures market the short position's loss is ________ the long position's gain.

A) greater than
B) less than
C) equal to
D) sometimes less than and sometimes greater than

Question 13

A person with a long position in a commodity futures contract wants the price of the commodity to ________.

A) decrease substantially
B) increase substantially
C) remain unchanged
D) increase or decrease substantially

Question 14

The advantage that standardization of futures contracts brings is that ________ is improved because ________.

A) liquidity; all traders must trade a small set of identical contracts
B) credit risk; all traders understand the risk of the contracts
C) pricing; convergence is more likely to take place with fewer contracts
D) trading cost; trading volume is reduced

Question 15

________ are likely to close their positions before the expiration date, while ________ are likely to make or take delivery.

A) Investors; regulators
B) Hedgers; speculators
C) Speculators; hedgers
D) Regulators; investors

Question 16

The open interest on silver futures at a particular time is the number of ________.

A) all outstanding silver futures contracts
B) long and short silver futures positions counted separately on a particular trading day
C) silver futures contracts traded during the day
D) silver futures contracts traded the previous day

Question 17

The S&P 500 Index futures contract is an example of a(n) ________ delivery contract. The pork bellies contract is an example of a(n) ________ delivery contract.

A) cash; cash
B) cash; actual
C) actual; cash
D) actual; actual

Question 18

Futures contracts have many advantages over forward contracts except that ________.

A) futures positions are easier to trade
B) futures contracts are tailored to the specific needs of the investor
C) futures trading preserves the anonymity of the participants
D) counterparty credit risk is not a concern on futures

Question 19

Today's futures markets are dominated by trading in ________ contracts.

A) metals
B) agriculture
C) financial
D) commodity

Question 20

Synthetic stock positions are commonly used by ________ because of their ________.

A) market timers; lower transaction cost
B) banks; lower risk
C) wealthy investors; tax treatment
D) money market funds; limited exposure

Question 21

Which one of the following is a true statement?

A) A margin deposit can be met only by cash.
B) All futures contracts require the same margin deposit.
C) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
D) The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

Question 22

Single stock futures, as opposed to stock index futures, are ________.

A) not yet being offered by any exchanges
B) offered overseas but not in the United States
C) currently trading on OneChicago, a joint venture of several exchanges
D) scheduled to begin trading in 2015 on several exchanges

Question 23

Which one of the following refers to the daily settlement of obligations on future positions?

A) marking to market
B) the convergence property
C) the open interest
D) the triple witching hour

Question 24

An established value below which a trader's margin may not fall is called the ________.

A) daily limit
B) daily margin
C) maintenance margin
D) convergence limit

Question 25

Futures markets are regulated by the ________.

A) CFA Institute
B) CFTC
C) CIA
D) SEC

Question 26

Initial margin is usually set in the region of ________ of the total value of a futures contract.

A) 5%-15%
B) 10%-20%
C) 15%-25%
D) 20%-30%

Question 27

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you ________.

A) that the market believed that Obama had a 57% chance of winning
B) that the market believed that Obama would not win the election
C) nothing about the market's belief concerning the odds of Obama winning
D) that the market believed Obama's chances of winning were about 43%

Question 28

The most actively traded interest rate futures contract is for ________.

A) LIBOR
B) Treasury bills
C) Eurodollars
D) Treasury bonds

Question 29

You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called ________.

A) a cross-hedge
B) a reversing trade
C) a speculation
D) marking to market

Question 30

Margin must be posted by ________.

A) buyers of futures contracts only
B) sellers of futures contracts only
C) both buyers and sellers of futures contracts
D) speculators only

Question 31

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

A) index arbitrage
B) marking to market
C) reversing trades
D) settlement transactions

Question 32

Which of the following provides the profit to a short position at contract maturity?

A) original futures price − Spot price at maturity
B) spot price at maturity − Original futures price
C) zero
D) basis

Question 33

Margin requirements for futures contracts can be met by ________.

A) cash only
B) cash or highly marketable securities such as Treasury bills
C) cash or any marketable securities
D) cash or warehouse receipts for an equivalent quantity of the underlying commodity

Question 34

A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of ________ to limit its risk.

A) cross-hedging
B) long hedging
C) spreading
D) speculating

Question 35

The CME weather futures contract is an example of ________.

A) a cash-settled contract
B) an agricultural contract
C) a financial future
D) a commodity future

Question 36

An investor would want to ________ to exploit an expected fall in interest rates.

A) sell S&P 500 Index futures
B) sell Treasury-bond futures
C) buy Treasury-bond futures
D) buy wheat futures

Question 37

A futures contract ________.

A) is a contract to be signed in the future by the buyer and the seller of a commodity
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) is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract
D) gives the buyer the right, but not the obligation, to buy an asset some time in the future

Question 38

A hog farmer decides to sell hog futures. This is an example of ________ to limit risk.

A) cross-hedging
B) short hedging
C) spreading
D) speculating

Question 39

At maturity of a futures contract, the spot price and futures price must be approximately the same because of ________.

A) marking to market
B) the convergence property
C) the open interest
D) the triple witching hour

Question 40

The daily settlement of obligations on futures positions is called ________.

A) a margin call
B) marking to market
C) a variation margin check
D) the initial margin requirement

Question 41

Approximately ________ of futures contracts result in actual delivery.

A) 0%
B) less than 1% to 3%
C) less than 5% to 15%
D) less than 60% to 80%

Question 42

An investor would want to ________ to hedge a long position in Treasury bonds.

A) buy interest rate futures
B) buy Treasury bonds in the spot market
C) sell interest rate futures
D) sell S&P 500 futures

Question 43

At year-end, taxes on a futures position ________.

A) must be paid if the position has been closed out
B) must be paid if the position has not been closed out
C) must be paid regardless of whether the position has been closed out or not
D) need not be paid if the position supports a hedge

Question 44

A speculator will often prefer to buy a futures contract rather than the underlying asset because:
I) Gains in futures contracts can be larger due to leverage.
II) Transaction costs in futures are typically lower than those in spot markets.
III) Futures markets are often more liquid than the markets of the underlying commodities.

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

Question 45

Forward contracts ________ traded on an organized exchange, and futures contracts ________ traded on an organized exchange.

A) are; are
B) are; are not
C) are not; are
D) are not; are not

Question 46

A long hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

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

Question 47

If you expect a stock market downturn, one potential defensive strategy would be to ________.

A) buy stock-index futures
B) sell stock-index futures
C) buy stock-index options
D) sell foreign exchange futures

Question 48

An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be ________.

A) F0 − FT
B) F0 − S0
C) FT − F0
D) FT − S0

Question 49

The ________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

A) CBOE
B) CBOT
C) CME
D) Eurex

Question 50

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be ________ if you close your position. (The contract multiplier is 250.)

A) −$12,500
B) −$15,000
C) $15,000
D) $12,500

Question 51

The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be ________.

A) 1,274.33
B) 1,286.95
C) 1,268.61
D) 1,291.29

Question 52

Violation of the spot-futures parity relationship results in ________.

A) fines and other penalties imposed by the SEC
B) arbitrage opportunities for investors who spot them
C) suspension of delivery privileges
D) suspension of trading

Question 53

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

A) make; make
B) make; take
C) take; make
D) take; take

Question 54

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as ________.

A) F1 = S0(1 + rf)
B) F0 = S0(1 + rf − d)T
C) F0 = S0(1 + rf + d)T
D) F0 = S0(1 + rf)T

Question 55

A long hedger will ________ from an increase in the basis; a short hedger will ________.

A) be hurt; be hurt
B) be hurt; profit
C) profit; be hurt
D) profit; profit

Question 56

Futures contracts are said to exhibit the property of convergence because ________.

A) the profits from long positions and short positions must ultimately be equal
B) the profits from long positions and short positions must ultimately net to zero
C) price discrepancies would open arbitrage opportunities for investors who spot them
D) the futures price and spot price of any asset must ultimately net to zero

Question 57

The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be ________.

A) $1,504.99
B) $1,569.08
C) $1,554.04
D) $1,557.73

Question 58

A short hedge is a simultaneous ________ position in the spot market and a ________ position in the futures market.

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

Question 59

In the context of a futures contract, the basis is defined as ________.

A) the futures price minus the spot price
B) the spot price minus the futures price
C) the futures price minus the initial margin
D) the profit on the futures contract

Question 60

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should ________.

A) buy all the stocks in the S&P 500 and write put options on the S&P 500 Index
B) sell all the stocks in the S&P 500 and buy call options on S&P 500 Index
C) sell S&P 500 Index futures and buy all the stocks in the S&P 500
D) sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

Question 61

On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

After Monday's close the balance on your margin account will be ________.

A) $2,700
B) $2,000
C) $3,137.50
D) $2,262.50

Question 62

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

A) $95.24
B) $100
C) $105
D) $107

Question 63

At contract maturity the basis should equal ________.

A) 1
B) 0
C) the risk-free interest rate
D) −1

Question 64

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.
The arbitrage profit implied by these prices is ________.

A) $3.27
B) $4.39
C) $5.24
D) $6.72

Question 65

The swap market is a huge component of the derivatives market, with around ________ in interest rate and exchange rate swap agreements outstanding.

A) $40 million
B) $400 million
C) $400 billion
D) $400 trillion

Question 66

The use of leverage is practiced in the futures markets due to the existence of ________.

A) banks
B) brokers
C) clearinghouses
D) margin

Question 67

On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

On which of the given days do you get a margin call?

A) Monday
B) Tuesday
C) Wednesday
D) none of these options

Question 68

Interest rate swaps involve the exchange of ________.

A) actual fixed-rate bonds for actual floating-rate bonds
B) actual floating-rate bonds for actual fixed-rate bonds
C) net interest payments and an actual principal swap
D) net interest payments based on notional principal, but no exchange of principal

Question 69

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is ________.

A) 17%
B) LIBOR
C) LIBOR + 1%
D) LIBOR − 1%

Question 70

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ________.

A) buy the September contract and sell the June contract
B) sell the September contract and buy the June contract
C) sell the September contract and sell the June contract
D) buy the September contract and buy the June contract

Question 71

On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

At the close of day on Tuesday your cumulative rate of return on your investment is ________.

A) 16.2%
B) −5.8%
C) −0.16%
D) −2.2%

Question 72

The ________ contract dominates trading in stock-index futures.

A) S&P 500
B) DJIA
C) Nasdaq 100
D) Russell 2000

Question 73

If the risk-free rate is greater than the dividend yield, then we know that ________.

A) the futures price will be higher as contract maturity increases
B) F0 < S0
C) FT > ST
D) arbitrage profits are possible

Question 74

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.
Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

A) Buy gold in the spot with borrowed money, and sell the futures contract.
B) Buy the futures contract, and sell the gold spot and invest the money earned.
C) Buy gold spot with borrowed money, and buy the futures contract.
D) Buy the futures contract, and buy the gold spot using borrowed money.

Question 75

On Monday morning you sell one June T-bond futures contract at $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

The cumulative rate of return on your investment after Wednesday is a ________.

A) 79.9% loss
B) 2.6% loss
C) 33% gain
D) 53.9% loss

Question 76

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ________.

A) long call
B) short call
C) short stock position
D) long stock position

Question 77

The ________ and the ________ have the lowest correlations with the large-cap indexes.

A) Nasdaq Composite; Russell 2000
B) NYSE; DJIA
C) S&P 500; DJIA
D) Russell 2000; S&P 500

Question 78

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or 0.05%. What is the price value of a basis point?

A) $10,400
B) $14,300
C) $16,500
D) $21,300

Question 79

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

A) $76.29
B) $93.46
C) $107
D) $131.08

Question 80

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ________ loss on your money invested.

A) 31%
B) 41%
C) 52%
D) 64%