Deck 5: Currency Futures and Futures Markets

Question 1

One disadvantage of exchange-traded currency futures contracts is that the buyer doesn't know the identity of the seller of the contract.

Answer 1

False

Question 2

True prices can never change more than the daily trading limits on exchange-traded futures contracts.

Answer 2

False

Question 3

If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, a party that has sold dollars at a forward rate of $0.5754/C$ has an incentive to default.

Answer 3

False

Question 4

If one of the parties to a futures contract defaults, it is the clearinghouse that usually bears the loss.

Question 5

Standardization in currency futures contracts increases liquidity and marketability, but reduces their flexibility relative to forward contracts.

Question 6

If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, the party that has sold C$ at a forward rate of $0.5754/C$ has an incentive to default.

Question 7

In a forward contract, an exchange clearinghouse takes one side of every transaction.

Question 8

A 90-day currency futures contract on the Chicago Mercantile Exchange contains three renewable one-month contracts.

Question 9

A foreign currency futures contract is a commitment to exchange a specified amount of one currency for another currency at a specified time in the future using the actual spot rate on that future date.

Question 10

Price limits are intended to avoid overreaction by giving market participants ample time to incorporate new information into prices.

Question 11

Futures contracts can be viewed as a bundle of renewable one-day forward contracts.

Question 12

Forward contracts are marked-to-market daily.

Question 13

A major problem with a currency forward contract is that one party always has an incentive to default when the actual spot rate diverges from the contract price.

Question 14

If an investor cannot meet a margin call, the exchange clearinghouse subtracts the amount due from the margin account and closes out the futures contract.

Question 15

Initial and maintenance margins are required on currency futures contracts.

Question 16

Exchange-traded currency futures contracts are customized to fit the needs of individual clients.

Question 17

A currency futures contract is closer in function to a currency option contract than to a currency forward contract.

Question 18

Changes in the underlying spot rate of exchange are settled daily in a futures contract whereas they are settled at maturity in a forward contract.

Question 19

The choice between a currency forward or futures contract depends on whether the instrument is to be used for hedging or for speculation.

Question 20

A foreign currency futures contract is a commitment to exchange a specified amount of one currency for a specified amount of another currency at a specified time in the future.

Question 21

A company should compare forward and futures contracts solely on the basis of cost.

Question 22

On exchange-traded currency futures contracts, ______.

A) commissions are charged as a bid-ask spread
B) expiration dates are negotiated
C) initial and maintenance margins are required
D) the contracts are traded only during normal banking hours
E) the contracts are typically settled by physical delivery

Question 23

The exposure of a futures hedge in which there is a match with the underlying position on maturity but not on currency is called a ______.

A) cross-hedge
B) delta-cross-hedge
C) delta-hedge
D) perfect hedge
E) None of the above

Question 24

Forward contracts are designed to reduce the default risk inherent in a futures contract.

Question 25

Both currency forward and currency futures contracts allow you to hedge against unexpected changes in real exchange rates.

Question 26

The majority of forward contracts are settled at maturity.

Question 27

Currency forward contracts can hedge the currency risk exposure of a contractual cash flow to be received in a foreign currency on a known future date.

Question 28

Cross rate futures market hedges can be used to reduce commissions.

Question 29

The sum of the daily settlements on a currency futures contract equals the net gain or loss at the expiration of a comparable forward contract.

Question 30

Forward and futures contracts are equivalent once they are adjusted for contract terms and liquidity.

Question 31

The exposure of a futures hedge in which there is a match with the underlying position on currency but not on maturity is called a ______.

A) cross-hedge
B) delta-cross-hedge
C) delta-hedge
D) perfect hedge
E) None of the above

Question 32

When choosing between forwards and futures in hedging a transaction exposure to currency risk, the benefits of a higher quality hedge with a forward contract must be weighed against the transactions costs of the forward contract.

Question 33

Any collateral required in a forward contract is negotiated between the bank and the customer.

Question 34

Margin requirements on futures contracts are determined by the futures exchange.

Question 35

A futures hedge in which there is a match with the underlying position on both currency and maturity is called a ______.

A) cross-hedge
B) delta-cross-hedge
C) delta-hedge
D) perfect hedge
E) None of the above

Question 36

Advantages of currency futures contracts relative to forward contracts include ______

A) the ability to trade in any currency
B) extensive availability of delivery dates
C) freedom to liquidate the contract at any time before its maturity
D) More than one of the above
E) None of the above

Question 37

Transactions costs in forward contracts typically take the form of a bid-ask spread whereas transactions costs on futures contracts are charged as a fee per contract.

Question 38

One advantage of currency futures contracts traded on organized futures exchanges is that there is no initial margin requirement.

Question 39

Gains and losses are settled monthly on Chicago Merc futures contracts.

Question 40

Both currency forward and currency futures contracts allow you to hedge against unexpected changes in nominal currency values.

Question 41

A currency futures contract can be viewed as ______.

A) a combination of a long (or short) position in a foreign currency forward contract and an offsetting position in the Eurocurrency market
B) a forward contract that provides a perfect hedge against currency risk
C) a portfolio of renewable one-day forward contracts
D) a portfolio of simultaneous forward contracts of different maturities
E) None of the above

Question 42

At the expiration of a futures contract, futures prices converge to ______.

A) Eurocurrency rates
B) forward prices
C) market prices
D) shadow prices
E) spot prices

Question 43

The ____ provides the optimal amount in a futures hedge per unit of value exposed to currency risk.

A) basis
B) hedge ratio
C) margin requirement
D) omega factor
E) None of the above

Question 44

The risk of unexpected change in the relationship between currency futures prices and currency spot prices is called ______.

A) basis risk
B) currency risk
C) exchange rate risk
D) interest rate risk
E) None of the above

Question 45

Which of statements a) through d) concerning futures contracts is FALSE?

A) An exchange clearinghouse takes one side of every transaction.
B) An initial margin and a maintenance margin are required.
C) Futures contracts are marked-to-market on a daily basis.
D) Futures contracts are pure credit instruments and have significant default risk.
E) All of the above are true.