Deck 20: Understanding Derivative Securities: Futures

Question 1

Futures contracts were first traded on

A) stock indexes.
B) foreign currencies.
C) commodities.
D) government bonds.

Answer 1

C

Question 2

An investor with a bond portfolio wishes to protect the value of his position by using futures contracts. This investor should use a

A) long hedge.
B) short hedge.
C) time spread.
D) money spread.

Answer 2

B

Question 3

Which of the following variables is not established on a futures contract?

A) contract size
B) price
C) delivery date
D) specified grade

Answer 3

B

Question 4

The cumulative number of futures contracts that are not offset at any point in time is called:

A) margin.
B) open interest.
C) hedged position.
D) marked to the market position.

Question 5

The difference between the cash price and the futures price on the same asset or commodity is known as the

A) basis.
B) spread.
C) yield spread.
D) premium.

Question 6

In the case of a futures contract, buyers can settle a contract

A) only by taking delivery.
B) only by arranging an offsetting contract.
C) either by delivery or offset.
D) by a combination of delivery and offset.

Question 7

When trading futures, margin

A) is seldom used.
B) indicates that credit is being extended.
C) is a down payment.
D) in effect, is a performance bond.

Question 8

The initial margin required for futures trading

A) is only put up by the seller.
B) is only put up by the buyer.
C) can be put up by either party, whoever initiates the transaction.
D) must be put up by both the buyer and the seller.

Question 9

To protect the value of a bond portfolio against a rise in interest rates using futures, the portfolio owner could execute a ____________ hedge.

A) long
B) duration
C) short
D) maturity

Question 10

A forward contract differs from a futures contract in that:

A) a forward contract is for a shorter period of time.
B) a forward contract does not specify the selling price.
C) a forward contract does specify the selling price.
D) a forward contract is non-binding.

Question 11

On the other side of every futures transaction is:

A) the dealer.
B) the futures exchange.
C) the commodity producer.
D) the clearinghouse.

Question 12

Futures exchange members:

A) trade strictly for their own accounts.
B) trade strictly for others.
C) can trade for their own accounts or for others.
D) are all controlled by commodity firms.

Question 13

Spot markets are for immediate delivery. Forward prices are:

A) The price agreed upon today for an asset for deferred delivery in the future.
B) The price in the future for an asset delivered in the future.
C) The price today for a forward price in the future.
D) Based on current spot market prices.

Question 14

Which of the following exchanges claims that its 3,600 members trade 50 different futures and options products by open auction and electronically?:

A) Chicago Board Options Exchange.
B) Chicago Board of Trade.
C) Chicago Mercantile Exchange.
D) Globex.

Question 15

Approximately what percentage of futures contracts is closed by offset before the contract expires:

A) 25.
B) 50
C) 95.
D) 75.

Question 16

Futures contracts are regulated by the:

A) Securities Exchange Commission.
B) National Association of Security Dealers.
C) National Association of Commodity Dealers.
D) Commodity Futures Trading Commission.

Question 17

Of the following statements about futures trading, which one is INCORRECT?

A) There are no specialists on futures exchanges.
B) All futures contracts are eligible for margin trading.
C) Trading is halted for the day if the prices reach the daily limit.
D) The uptick rule applies to the shorting of futures contracts.

Question 18

How often are futures contracts marked to market?

A) daily
B) weekly
C) monthly
D) quarterly

Question 19

A futures contract is

A) a nonnegotiable, nonmarketable instrument.
B) a security, like stocks and bonds.
C) a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity.
D) not a legal contract, and therefore its terms can be changed .

Question 20

Which of the following is a characteristic of futures contracts? They

A) are marked to the market daily.
B) can be sold short only on an uptick.
C) are handled by specialists on futures exchanges.
D) have no daily price limits.

Question 21

Futures are essentially standardized forward contracts.

Question 22

An attempt to exploit the differences between the prices of a stock index future and the prices of a stock index is known as:

A) index programming.
B) arbitrage speculation.
C) index arbitrage.
D) program speculation.

Question 23

The DJIA is the most popular stock-index futures contract.

Question 24

Investors can speculate on interest rate declines by purchasing interest rate futures.

Question 25

Most futures contracts are settled by delivery.

Question 26

The National Futures Association is the federal agency which regulates the futures markets.

Question 27

An investor who sells a Treasury bond futures contract is expecting to profit from

A) an increase in the price of the treasury bond.
B) an increase in the underlying level of interest rates.
C) interest rates remaining unchanged.
D) a decrease in the underlying level of interest rates.

Question 28

Stock-index futures can be used to hedge against which of the following types of risks?

A) Diversifiable risk
B) Systematic risk
C) Unsystematic risk
D) Company specific risk

Question 29

With futures, hedging requires one to simply take an opposite position.

Question 30

Futures contracts are handled by specialists on futures exchanges.

Question 31

Interest rate futures are not currently available on which of the following securities?

A) Corporate bonds
B) Treasury notes
C) one-month LIBOR rate
D) Treasury bonds

Question 32

If an investor strongly believes that the stock market is going to have a sharp decline shortly, he or she could maximize profit by

A) short selling stock-index futures contracts.
B) hedging current short positions.
C) using stock-index futures to straddle the market.
D) buying stock-index futures contracts.

Question 33

Which of the following is NOT a potential advantage of speculating in futures?

A) Leverage
B) Ease of transacting
C) Low transactions costs
D) High and narrow probability distribution of expected returns

Question 34

In a margin account, if the account balance falls below the maintenance margin, a margin call is triggered.

Question 35

Basis =

A) cash price
B) futures price
C) cash price + futures price
D) cash price - futures price

Question 36

Select the CORRECT statement regarding basis risk associated with futures.

A) Basis risk can be completely eliminated.
B) Although the basis fluctuates over time, it can be precisely predicted.
C) The basis must be zero on the maturity date of the contract.
D) A hedge will reduce risk as long as basis fluctuations are positive.

Question 37

Investors in futures can take either a long, short, or neutral position.

Question 38

Speculators in the futures markets

A) make the market more volatile.
B) contribute liquidity to the market.
C) engage mainly in short sales.
D) serve no real economic function.

Question 39

Japan, which banned financial futures in 1985, is now very active in developing futures exchanges.

Question 40

One difference between a hedger and a speculator is that the hedger

A) may have either a profit or a loss.
B) may not close out his position by taking an opposite position.
C) does not have to put up margin.
D) faces a risk without the futures contract.

Question 41

What economic functions are fulfilled by futures?

Question 42

The intermarket spread is also known as a quality spread, involving two different markets, such as buying an NYSE contract and selling an S&P contract for the same month.

Question 43

What is the difference between hedgers and speculators in the futures markets?

Question 44

An organized futures exchange standardizes nonstandard forward contracts,
establishing such features as contract size, delivery dates, and condition of items that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Question 45

What is the role of the clearinghouse in futures trading?

Question 46

Index arbitrage attempts to exploit the differences between the prices on two different stock indices.

Question 47

What is the focus of speculators who spread stock-index futures?

Question 48

Compare the obligation entered into in a futures contract to the obligation in an options contract.

Question 49

Program trading generally involves positions in both stocks and stock-index futures.

Question 50

Explain the difference between a forward contract and a futures contract.

Question 51

A pension fund holds $10 million in Treasury bonds. In order to protect against a rise in interest rate, the pension fund should use a short hedge in T-bond futures.

Question 52

An anticipatory hedge is when an investor anticipates a falling market and liquidates his position.

Question 53

What are the methods of settling a futures contract?

Question 54

Explain a long position and a short position in futures trading.

Question 55

U.S. Futures trading occurs in futures exchanges' trading pits.

Question 56

The calendar or time spread is also known as the intramarket spread, and involves contracts for two different settlement months, such as buying a March contract and selling a June contract.

Question 57

The initial margin requirement on an SSF contract is 15 percent.

Question 58

Stock-index futures may be settled either by cash or by delivery of securities.

Question 59

Briefly discuss the concept of margin in futures trading.

Question 60

What is meant by the term "marked to the market"?

Question 61

Assume a portfolio manager holds $2 million (par value) of 9 percent Treasury bonds due 1994-1999. The current market price is 77, for a yield of 12 percent. Fearing a rise in interest rates over the next three months, the manager seeks to protect this position by hedging in futures.
(a) If T-bond futures are available at 67, what is the gain or loss from a simple hedge of 20 contracts if the price three months later is 60?
(b) What is the gain or loss on the cash position if the bonds are priced at 68 three months hence?
(c) What is the net effect of this hedge?

Question 62

Assume that an investor buys one June NYSE Composite Index Futures Contract on May 1 at a price of 72. The position is closed out after four days. The prices on the three days after purchase were 72.5, 72.1 and 72.2. The initial margin is $3500.
(a) Calculate the current equity on each of the next three days.
(b) Calculate the excess equity for those three days.
(c) Calculate the final gain or loss on this position.

Question 63

Do options on futures serve any economic purpose or are they just sophisticated
games?

Question 64

Are futures - commodity, interest-rate, stock-index, or currency - appropriate for
most individual investors?

Question 65

An investor has just sold seven contracts of June corn on the CBOT. The price per bushel is $1.64, and each contract is for 5000 bushels. The performance bond (initial margin deposit) is $2000 per contract with the maintenance margin at $1250.
(a) How much does the investor have to deposit on the investment?
(b) If the prices of the futures on the three days following the short sales were: 1.60,
1.66, and 1.68 calculate the current equity on each of the next three days.
(c) If the investor closes out his position on the fourth day, what is his final gain or loss over the four days in dollars and as a percentage of investment?