Deck 15: Futures Markets and Securities

Question 1

Which of the following characteristics apply to futures contracts?
I) Futures contracts are an important tool to control risk.
II) Futures contracts are highly risky and involve speculation.
III) Futures contracts specify both the quantity and the quality of the item.
IV) The buyer must hold the contract until maturity.

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

Answer 1

C

Question 2

The amount paid at the time a futures contract is sold

A) represents the maximum loss for the buyer of the contract.
B) represents the maximum profit for the buyer of the contract.
C) is simply a refundable security deposit.
D) is the total value of the goods being traded in the future.

Answer 2

C

Question 3

All futures contracts trade continuously between 7:30 a.m. and 2:00 p.m., Monday through Friday.

Answer 3

False

Question 4

With a futures contract, an investor cannot lose more than the price of the contract itself.

Question 5

Which of the following features are shared by futures contracts and options?
I) They have specified expiration dates.
II) Their value is derived from changes in the value of some other asset
III) unprofitable futures or options can simply be allowed expire unexercised.
IV) futures and options specify a specific price at which the underlying asset can be bought or sold.

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

Question 6

The maximum loss on a futures contract is the price paid for the contract.

Question 7

Which of the following are specifically stated in futures contracts?
I) the quantity of the commodity to be delivered
II) the quality of the commodity to be delivered
III) the exact price at which the commodity must be delivered
V) the time and place at which the commodity must be delivered

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

Question 8

With futures contracts, the price at which the commodity must be delivered is

A) set when the futures contract is sold.
B) set when the contract expires.
C) is equivalent to the strike price for an options contract.
D) changes frequently during the life of the contract.

Question 9

The seller of a futures contract

A) has the option of canceling the contract the following day if the price is not acceptable to him/her.
B) is legally bound to make delivery of the specified item on the specified day.
C) receives the entire contract amount at the time the contract is made.
D) must make delivery before receiving any monies on the contract.

Question 10

Because a futures contract deals with very large trading units, even a modest price change in the price of the underlying commodity can have a large impact on the market value of the contract.

Question 11

A futures contract
I) obligates the buyer of the contract to buy a specified amount of a commodity.
II) grants the buyer the right to either buy or sell a specified amount of a commodity.
III) uses specified settle prices that vary with the type of commodity.
IV) establishes the delivery price based on the selling price of the futures contract.

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

Question 12

The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.

Question 13

Unlike stocks and bonds, futures contracts trade only at specific times during normal working hours.

Question 14

The definition of commodity is broad enough to include such things as. foreign currencies and the future value of stock market indexes.

Question 15

All trading in the futures market is done on a margin basis.

Question 16

Futures contracts for various commodities have different trading hours depending on the commodity.

Question 17

Commodity prices react to a unique set of economic, political, and international pressures, as well as to the weather.

Question 18

The majority of trading in futures contracts takes place on
I) the Chicago Mercantile Exchange.
II) the Chicago Board of Trade.
III) the American Exchange.
IV) the New York Mercantile Exchange.

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

Question 19

The Chicago Mercantile Exchange recently merged with

A) the Chicago Board of Trade.
B) the American Exchange.
C) the New York Mercantile Exchange.
D) NASDAQ.

Question 20

Futures contracts obligates a participant to buy or sell the commodity at the contracted price unless the contract is canceled or liquidated before the expiration date.

Question 21

There is no limit to the amount of loss that can occur with a futures contract.

Question 22

Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to benefit from

A) selling his crop at the market price when it is harvested.
B) buying a futures contract on corn for delivery at harvest time.
C) selling a futures contract on corn for delivery at harvest time.
D) buying a futures contract on corn and selling a futures contract on wheat.

Question 23

Rachel, an adventurous investor, bought a futures contract for May delivery of 40,000 lbs of lean pork. In late April, she is becoming uneasy about what to do with so much pork.

A) She can choose settle her profit or loss in cash rather than pork.
B) She can try to find someone willing to take delivery of the pork.
C) She can sell the contract or cancel it by entering into the opposite contract (to sell rather than buy).
D) She needs to buy a very large freezer.

Question 24

Fred purchased a futures contract on live hogs through Broker A. After purchasing the contract, Fred moved his investments to Broker B. During the transition, the contract on the hogs was forgotten. When the delivery date for the futures contract arrived,

A) the pigs were not delivered because Fred did not ask for them.
B) the futures contract was not exercised.
C) Fred took delivery of live hogs.
D) Broker A had to pay for the hogs so that they would not be delivered to Fred.

Question 25

Logan sold a corn futures contract using the initial margin of $2,700. His maintenance margin is $2,000. The price of began to rise in early summer, but Logan wants to keep his contract. When his margin falls below $2,000 (minimum maintenance)

A) his contract will be automatically sold or canceled.
B) he does not need to do anything since the most he can lose is $2,700.
C) he will need to deposit at least $700 with his broker to bring his margin back up to the initial deposit.
D) he will need to deliver the corn immediately.

Question 26

In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account. This procedure is called

A) checking the maintenance margin.
B) checking the maintenance deposit.
C) settling.
D) mark-to-the-market.

Question 27

Futures contracts have two sources of return namely the capital gains that can be earned when prices move in a favorable fashion, and dividend income from the underlying asset.

Question 28

The seller of a futures contract in euros hopes that the dollar will strengthen against the euro.

Question 29

The margin deposit associated with the purchase of a futures contract

A) is a partial payment on the contract with the amount of the payment equal to 10% or more of the contract value.
B) represents the purchasers equity in the contract with the balance of the contract financed with borrowed funds at the margin rate of interest.
C) is related to the value of the item underlying the contract.
D) is used to cover any loss in market value of the contract resulting from adverse price fluctuations.

Question 30

Hedgers who sell futures contracts are attempting to profit from future price increases.

Question 31

An investor's margin in a futures contract is checked each day under a procedure known as mark-to-the-market.

Question 32

All futures contracts are traded on a margin basis.

Question 33

The normal initial margin requirement for commodities or financial futures ranges from about 2% to 10% of the value of the contract.

Question 34

Speculators provide liquidity to the futures market.

Question 35

Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is 21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating oil is $2.15 when the contract expires, Eric's profit or loss is ________.

A) $(2,100) loss
B) $2,100 profit
C) $(3,975) loss
D) $(2,400) loss

Question 36

A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by

A) buying soy bean futures for delivery near the time of harvest.
B) selling soy bean futures for delivery near the time of harvest.
C) buying contracts in alternative crops for delivery near the time of harvest.
D) buying contracts in unrelated commodities for delivery near the time of harvest.

Question 37

Failure to meet a margin call will cause an investor's futures contract to be sold.

Question 38

Nearly all futures contracts traded in the United States are traded on the over-the-counter (OTC) market.

Question 39

Hedgers who buy futures contracts are protecting themselves from future price increases.

Question 40

Which of the following is(are) correct statements about the buyer of a futures contract?
I) The contract buyer is short on the position.
II) The contract buyer wants the price of the item to increase.
III) The buyer can liquidate the position with an offsetting transaction.
IV) The majority of the buyers actually take delivery of the item.

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

Question 41

For a commodities contract, the maximum daily price range is usually equal to twice the daily price limit.

Question 42

Each commodity quote identifies the product, the exchange on which the contract is traded, the size of the contract, the price of the contract, and the delivery month.

Question 43

In commodities trading, open interest at the end of a trading day is equal to

A) the net change in price from the prior day's close.
B) the number of speculative positions sold in the last 60-day period.
C) the number of contracts presently outstanding.
D) the advances minus the declines.

Question 44

A successful hedge results in a guaranteed sales price to the producers of commodities.

Question 45

The November 12, 2009 on-line edition of the Wall Street Journal listed the following information on oat futures. Based on this information, which one of the following statements is correct?

A) Oats trade on the New York Mercantile Exchange.
B) The highest price at which the May oats contract traded was $291.20 per contract.
C) The cost of a March 2010 contract was $13,430 at the market close.
D) The price of the March 2010 oats contract at the close was $100 higher than the previous day's closing price.

Question 46

Investors can trade futures on electricity and natural gas.

Question 47

Fred has just sold short 3 contracts of May wheat on the CBT. These are 5,000 bushel contracts. The initial deposit is $1,500 per contract with a maintenance margin of $1,200.
(a) What is Fred's total initial margin?
(b) How much of an increase in the price of wheat is necessary to cause a margin call?

Question 48

The rate of return on a futures contract is based on the size of the initial margin deposit.

Question 49

The futures market contains two basic types of traders: hedgers and speculators. Define the role played by each of these types of traders.

Question 50

The open interest at the end of the trading day indicates the volume of contracts traded during the day.

Question 51

Which of the following is NOT actively traded in the commodities futures markets?

A) soybeans
B) ethanol
C) weather
D) euros

Question 52

The high rates of returns, either positive or negative, on futures contracts are primarily due to the high initial margin requirement.

Question 53

The open interest at the end of the trading day indicates the number of contracts in existence at that time.

Question 54

All futures contracts are traded on a margin basis. What does "margin" mean, and how does the use of margin affect the inherent risk-return nature of the futures market?

Question 55

Producers and industrial users of commodities who also buy and sell futures contracts are known as speculators.

Question 56

Each commodity quote clearly identifies the contract's intrinsic value and time value.

Question 57

Every commodity contract specifies all the following EXCEPT

A) the settle price.
B) the product.
C) the delivery month.
D) the unit size of the contract.

Question 58

A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is

A) $529.
B) $2,645.
C) $26,450.
D) $9,451.80.

Question 59

If the purchaser of a futures contract fails to meet a margin call,

A) his/her contract will be sold at the current market price.
B) his/her contract will automatically be executed along with immediate delivery.
C) their local broker can decide to waive the call.
D) they will be given a 30-day grace period before payment is required.

Question 60

The purchaser of a futures contract

A) is required to obtain a margin loan equal in amount to the cost of the contract minus the cash down payment.
B) is generally required to make a cash deposit of 10 to 20% of the contract price at the time the contract is entered.
C) does not have to worry about margin calls since margin loans are not required.
D) is affected by the daily procedure known as mark-to-the-market.

Question 61

Joseph bought a contract for future delivery of 5000 bushels of corn at $2.80 per bushel and sold a later contract at $2.90 a bushel. A month later, corn prices were rising and Joseph sold his long contract for $3.10 per bushel and covered his short by purchasing the same contract for $3.25 per bushel. Ignoring trading costs, Joseph

A) broke even.
B) made $500.
C) lost $750.
D) made $750.

Question 62

If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following?
I) Realize that making a profit is relatively easy.
II) Be mentally prepared for an enormous loss.
III) Be financially able to meet repeated margin calls.
IV) Spend all of their available cash on margin deposits.

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

Question 63

You short sell contract A at 428 and buy contract B at 333. After one month, you close contract A at 435 and contract B at 339. What is you net profit in points?

A) -13
B) -1
C) 1
D) 13

Question 64

Hedging in the commodities market is a strategy primarily used by

A) individual investors with high risk tolerance levels for commodities.
B) institutional investors on behalf of their conservative investors.
C) by producers and processors of commodities.
D) investors looking for short-term capital gains.

Question 65

The basic reason why investors use spreading strategies when speculating in commodities is to

A) increase leverage.
B) increase profits.
C) reduce risk.
D) decrease transaction costs.

Question 66

A corn futures contract closed yesterday at a price of $3.90 a bushel. The maximum daily price range is $0.70 and the daily price limit is $0.35. Therefore, the

A) highest closing price for today is $4.25 a bushel.
B) most the price can fluctuate today is $0.35 a bushel.
C) minimum change in the price today is $0.35 a bushel.
D) lowest closing price for today is $3.55 a bushel.

Question 67

One reason that commodities appeal to investors is because they

A) act as hedges against inflation during periods of rapidly rising consumer prices.
B) offer high returns for low risks.
C) do not require much specialized knowledge on the part of the investor.
D) are a suitable investment vehicle for one's retirement savings.

Question 68

Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?

A) The speculator expects to profit from a decline in the price of the contract.
B) The speculator stands to make an unlimited amount of profit since there is no limit to how high the price of the underlying commodity or financial instrument can rise.
C) The speculator is hoping to gain some of the benefit derived from the volatile price while limiting his/her exposure to loss.
D) The speculator may be hedging if the underlying commodity is not in the speculator's possession.

Question 69

The purchasing manager of a jewelry manufacturer is worried that the rising price of gold will have a negative impact on profit margins on items it has promised to merchants in 3 months. She should

A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.

Question 70

Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss. This practice is called

A) speculating.
B) spreading.
C) gambling.
D) market making.

Question 71

The maximum amount that the price of a futures contract can change during the day is referred to as

A) the swing limit.
B) the maximum daily range.
C) the daily margin limit.
D) the leverage restriction.

Question 72

The return on a futures contract is calculated as

A) (purchase price - selling price)/purchase price.
B) (selling price - purchase price)/purchase price.
C) (purchase price - selling price)/margin deposit.
D) (selling price - purchase price)/margin deposit.

Question 73

What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.

A) 116.5%
B) 119.0%
C) 123.5%
D) 127.4%

Question 74

Midge feels that the price of gold is going to fall because inflation is on the decline. To profit from her prediction, assuming she is correct, Midge should

A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.

Question 75

Which of the following statements concerning futures are correct?
I) Investors in financial futures can earn both dividend income from the underlying security as well as the potential capital gain from the futures contract.
II) The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit.
III) It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage.
IV) Conservative investors tend to purchase one futures contract as a means of increasing the return on their portfolio while maintaining minimal risk.

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

Question 76

The return on a futures contract

A) is highly related to the low margin requirement.
B) is always equal to or greater than zero.
C) tends to be fairly stable from one trading day to the next.
D) is solely related to the current price of the underlying item.

Question 77

George purchased a futures contract at 349. The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit. George sold the contract at 278. What is George's return on invested capital?

A) -255.4%
B) -203.4%
C) -155.4%
D) -103.4%

Question 78

Assume the initial margin on a Swiss franc futures contract is $2,000. If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?

A) 3%
B) 50%
C) 100%
D) 125%

Question 79

Which of the following are advantages of using options for futures speculation?
I) increased leverage
II) Potential losses are limited to the cost of the option.
III) Options are available on a broad range of commodity, index, and currency futures.
IV) Investors avoid the possibility of having to take delivery of the commodity.

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

Question 80

For individual investors to adequately hedge their personal portfolios, they should always use the S&P 500 Stock Index futures contract.