Deck 19: Future Contracts and Forward Rate Agreements

Question 1

An orange grower who is concerned that the price of oranges will fall before harvest and sale can:

A) buy an orange futures contract today.
B) sell an orange futures contract today.
C) carry out in the futures market the opposite of what he plans to do in the physical market when his crop is ready for sale.
D) take a long position in orange futures.

Answer 1

B

Question 2

The Chicago Board of trade (CBOT)established an organised market in grain futures contracts in:

A) 1794.
B) 1848.
C) 1894.
D) 1904.

Answer 2

B

Question 3

In the futures markets,the price of a futures contract is:

A) determined by market expectations of the spot price on the day of delivery.
B) determined each day by the futures exchange.
C) specified in each futures contract.
D) determined by demand and supply between market participants in the futures market.

Answer 3

D

Question 4

Which of the following statements about futures is correct?

A) Most futures contracts result in delivery.
B) Only a small percentage of financial futures contracts results in actual delivery.
C) Only a quarter of financial futures contracts results in actual delivery.
D) Financial futures contracts never result in actual delivery.

Question 5

In Australia the Sydney Futures Exchange (SFE)that is now merged with the ASX introduced the 90-day bank-accepted bills futures contract in:

A) 1959.
B) 1969.
C) 1979.
D) 1989.

Question 6

In the futures markets,the seller of a futures contract:

A) takes the long position.
B) has the obligation to deliver the underlying financial asset at the specified future date.
C) has the obligation to receive the underlying financial asset at the specified future date.
D) may, at their choosing, deliver or receive the underlying financial assets at the specified future date.

Question 7

In the futures markets,the seller of a futures contract:

A) takes the long position.
B) takes the short position.
C) has the obligation to receive the underlying financial assets at the specified future date.
D) is expecting the price of the underlying asset to increase.

Question 8

Which of the following about Australian Treasury bond futures is NOT correct?

A) The Australian Treasury bond futures contract of 8 per cent is quoted as 92.0.
B) If a dealer buys a futures bond contract at 92.750 and sells at 93.500, she makes a profit.
C) If a dealer buys a futures contract at 7 per cent and sells at 8 per cent, he makes a profit.
D) Futures are quoted as index of 100 minus the yield so that the dealer can buy high and sell low.

Question 9

The Chicago Board of trade (CBOT)introduced the world's first financial (interest rate)futures contract in:

A) 1965.
B) 1975.
C) 1985.
D) 1995.

Question 10

At the end of six months for a wheat farmer who sold previously a 6 month wheat futures contract,he may:

A) deliver the wheat as per the contract and pay out the original agreed-upon price.
B) can sell the wheat via the spot grain market and at the same time sell a futures contract identical to the contract originally taken out.
C) can sell the wheat via the spot grain market and at the same time buy a futures contract identical to the contract originally taken.
D) will make a profit if the price of wheat has gone up on the day the farmer closes out his contract.

Question 11

Which of the following statements is characteristic of futures trading on the Australian Futures Exchange (ASX Trade 24)?

A) Pricing of bond contracts is on the basis of their yield to maturity.
B) Transactions in the 'trading pits' are conducted by 'open outcry'.
C) The ASX Trade 24 clearing house enforces full payment of the initial contract amount.
D) All of the given answers are correct.

Question 12

Any Australian Treasury bond futures contract for a yield of 7.50 per cent per annum is quoted on the futures exchange as:

A) 7.500
B) 92.50
C) 92.500
D) 107.50

Question 13

In the futures markets the buyer of a financial futures contract:

A) takes the long position.
B) takes the short position.
C) has to record the contract with the clearing house.
D) has the obligation to deliver the underlying financial asset at the specified future date.

Question 14

In futures markets,the terms of a futures contract,for instance the quality and quantity of the commodity and the delivery date,are specified by the:

A) buyers.
B) buyers and sellers.
C) futures exchange.
D) brokers and dealers.

Question 15

At the present time:

A) open-outcry trading occurs for commodity futures contracts in Australia.
B) the convention for quoting the prices of futures contracts varies between exchanges around the world.
C) futures trading is permitted only for commodities.
D) futures trading is permitted only for financial instruments.

Question 16

Which of the following about futures orders is incorrect?

A) The order generally specifies whether it is a buy or sell order.
B) The order specifies the type of contract and the delivery month.
C) The orders are put into the trading system on the basis of size details any price restrictions.
D) The order specifies the time limit on the order.

Question 17

Which of the following is a derivative product?

A) Commercial paper
B) Mortgage
C) Futures
D) Treasury note

Question 18

Which of the following about futures contracts is incorrect?

A) Futures contracts are exchange-traded financial instruments.
B) The futures exchanges offer standardised futures contracts.
C) The interest rate futures contracts, the FRA are traded on the larger exchanges.
D) The standard features of futures contracts include the underlying physical asset, the amount traded, how quoted and how the contracts is settled.

Question 19

Which of the following statements about futures contracts is correct?

A) Most futures contracts are held to maturity.
B) Future contract holders will either buy or sell an opposite contract on or before expiry date to close-out the contract.
C) The majority of commodity futures are held to maturity.
D) Financial futures contracts are delivered at maturity whereas all commodity futures are closed-out.

Question 20

In the futures markets,the buyer of a financial futures contract:

A) takes the short position.
B) has the obligation to deliver the underlying financial asset at the specified future date.
C) has the obligation to receive the underlying financial asset at the specified future date.
D) has to record the contract with the clearing house.

Question 21

When Australian financial futures still in existence at trading close are settled with the clearing house,final settlement in the form of standard delivery means:

A) the contract is settled in cash.
B) the contract is settled by delivery of actual underlying financial asset.
C) the contract is closed out by delivery of the opposite contract.
D) the contract is settled by the sum of the initial margin and the variation margin.

Question 22

If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 8 per cent,they will have:

A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question 23

A futures exchange imposes an initial margin:

A) as the exchange needs to make a profit.
B) as it gives the client trader more leverage.
C) to ensure brokers and traders are able to pay for any losses incurred over the life of the futures contract.
D) the exchange wants to ensure that futures contracts are closed-out.

Question 24

In futures markets investors who expect to purchase future bonds may hedge against the effects of falling interest rates by:

A) taking an arbitrage position on bond futures contracts.
B) buying bond futures contracts.
C) selling bond futures contracts.
D) buying and selling similar bond futures contracts.

Question 25

On the ASX Trade 24,financial futures contracts are currently traded on all the following securities,except:

A) bank bills.
B) Treasury bonds.
C) corporate bonds.
D) interest rate swaps.

Question 26

Which of the following statements in relation to margins is correct?

A) An initial margin is held by the futures exchange.
B) The maintenance margin is the quantity of money you place with your broker when you buy or sell a futures contract.
C) The maintenance margin is the value of the margin account below which the holder receives a margin call.
D) All futures contracts have the same margin deposit.

Question 27

In the futures market,the instruction to a futures broker to buy or sell at the current market price is a:

A) call order.
B) limit order.
C) market order.
D) phone order.

Question 28

If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 6 per cent,they will have:

A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question 29

If an investor buys a three-year Commonwealth Treasury bond futures contract at 7 per cent and on the delivery date the interest rate of Treasury bonds is lower than they expected at 6 per cent,they will have:

A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question 30

Which of the following relating to Commonwealth Treasury bond futures is incorrect?

A) The three-year and 10-year Treasury bonds must be settled in cash
B) They are quoted on the basis of their clean price
C) A 10-year Treasury bond futures contract's yield is quoted to three decimal places
D) Currently the three- and 10-year bond futures are traded on the SFE

Question 31

An orange grower who wishes to protect his future orange crop from price fluctuations can hedge by taking a/an:

A) arbitrage position on an orange futures contract.
B) long position on an orange futures contract.
C) short position on an orange futures contract.
D) marked-to-market position on an orange futures contract.

Question 32

A wheat grower who wishes to protect his future wheat crop from price fluctuations can:

A) take an arbitrage position on a wheat futures contract.
B) buy a wheat futures contract.
C) sell a wheat futures contract.
D) take a marked-to-market position on a wheat futures contract.

Question 33

A company has sold a three-year Commonwealth Treasury bond futures contract,and now wishes to close out its open position on maturity date.Which of the following statements relating to the closing out of a futures position is incorrect?

A) The company may enter into a 'buy' contract of the same face value.
B) A new 'buy' contract will have the identical delivery date as the original 'sell' contract.
C) The company may choose to deliver the physical market Treasury bonds in settlement.
D) The clearing house acts as counterparty to the contracts, through the process of novation.

Question 34

As part of futures trading,exchanges have traders place an initial margin with its clearing house because:

A) as the exchange has to cover its costs.
B) as it acts like a performance bond to support the value of the futures contract.
C) the exchange wants to ensure that brokers make profits.
D) the exchange wants to ensure that futures contracts can be closed-out.

Question 35

In the futures market,an instruction to a futures broker to buy or sell up to a specified price and within a specified time is a:

A) market order.
B) margin order.
C) limit order.
D) liquid order.

Question 36

If an investor buys a three-year Commonwealth Treasury bond futures contract at 6 per cent and on the delivery date the interest rate of Treasury bonds is lower than they expected at 7 per cent,they will have:

A) gained money on their long position.
B) lost money on their long position.
C) lost money on their short position.
D) gained money on their short position.

Question 37

A company who intends to borrow in 3 months can hedge and lock in the cost of borrowing by:

A) buying an interest rate futures contract.
B) selling an interest rate futures contract.
C) selling a FRA.
D) buying an interest rate swap.

Question 38

An investor holds a long oil futures contract that expires in June.To close out her position in oil futures before the delivery date,she must:

A) buy one June oil futures contract.
B) buy two June oil futures contracts.
C) sell one June oil futures contract.
D) sell one July oil futures contract.

Question 39

The price of a short-term interest rate risk contract is generally derived from:

A) traded equity prices.
B) the money market instruments.
C) an underlying FX contract.
D) commodities.

Question 40

In futures markets investors who expect to purchase future bonds can reduce the risk of price fluctuations by taking a/an:

A) arbitrage position on futures contracts.
B) long position on futures contracts.
C) short position on futures contracts.
D) marked-to-market position on futures contracts.

Question 41

A futures trader who has a _______ position in oil futures wants the price of oil to _______ in the future.

A) short; double
B) short; fall
C) short; stay the same
D) short; rise

Question 42

In the futures markets,profits from speculation primarily arise because of the:

A) spread between the bid and ask prices on bonds.
B) illiquidity of markets for derivative securities.
C) high information costs in markets for derivative instruments.
D) difference in expectations among market participants about future prices of a commodity or financial asset.

Question 43

Buying a September bank bill futures contract and simultaneously selling a June Commonwealth Treasury bond futures contract is a/an:

A) typical trading strategy for a hedger.
B) typical trading strategy for an arbitrageur.
C) example of a spread.
D) example of a straddle.

Question 44

In the futures markets speculators are mainly interested in:

A) attempting to make a profit by betting on expected price changes.
B) reducing their exposure to risk of price changes.
C) increasing market liquidity.
D) reducing the spread between the bid and ask prices on bonds.

Question 45

In the futures markets,price differences between the futures and the underlying assets are reduced by the actions of:

A) speculators.
B) arbitrageurs.
C) hedgers.
D) traders.

Question 46

A lender,worried that the value of their loan might fall during the term of the loan,can hedge this fall by:

A) buying futures contracts on Treasury bonds.
B) selling futures contracts on Treasury bonds.
C) buying Treasury bonds on the spot market.
D) increasing now the amount of money that has been lent.

Question 47

In the futures markets,hedgers are mainly interested in:

A) attempting to make a profit by betting on expected price changes.
B) reducing their exposure to risk of price changes.
C) increasing market liquidity.
D) reducing the spread between the bid and ask prices on bonds.

Question 48

Buying a September bank bill futures contract and simultaneously selling a June bank bill futures contract is a/an:

A) typical trading strategy for a hedger.
B) typical trading strategy for an arbitrageur.
C) example of a spread.
D) example of a straddle.

Question 49

In the futures markets,speculators take on extra risk in futures markets as a result of the actions of:

A) day traders.
B) hedgers.
C) brokers.
D) traders.

Question 50

_______ try to make a profit by taking advantage of price differentials between the futures markets or different markets.

A) Hedgers
B) Arbitrageurs
C) Speculators
D) Traders

Question 51

In the futures markets,arbitrageurs are mainly interested in:

A) reducing their exposure to risk of price changes.
B) attempting to make a profit by taking advantage of price differentials between different markets.
C) increasing market liquidity.
D) reducing the spread between the bid and ask prices on bonds.

Question 52

An Australian exporter with FX receivable in 3 months can hedge and lock in the price of the required foreign currency by:

A) buying AUD futures.
B) buying a currency swap.
C) selling AUD futures.
D) selling a currency swap.

Question 53

Which one of the following statements about speculators in futures markets is correct?

A) Their main aim is to reduce their exposure to risk.
B) They make it difficult for hedgers to find someone to take the opposite position.
C) They aid hedgers by adding to the liquidity in the markets.
D) Once a trader is known as a speculator they are no longer allowed to participate in the markets.

Question 54

In the futures markets,speculators who strongly believe that interest rates will rise are likely to:

A) buy futures contracts on Treasury bonds.
B) sell futures contracts on Treasury bonds.
C) buy Treasury bonds on the spot market.
D) increase the amount of money that they currently lend.

Question 55

A steel manufacturing company that expects a future iron price rise can hedge and take a/an:

A) arbitrage position on iron futures contracts.
B) long position on iron futures contracts.
C) short position on iron futures contracts.
D) marked-to-market position on iron futures contracts.

Question 56

Buying a futures contract for one delivery date and selling an identical futures contract with a different delivery date is called a:

A) margin position.
B) spread position.
C) straddle.
D) speculative position.

Question 57

In the futures markets,speculators who strongly believe that interest rates will fall are likely to:

A) go long and buy futures contracts on Treasury bonds.
B) go short and sell futures contracts on Treasury bonds.
C) sell Treasury bonds on the spot market.
D) decrease the amount of money that they currently lend.

Question 58

A futures trader who has a _______ position in oil futures wants the price of oil to _______ in the future.

A) long; increase
B) long; fall
C) short; stay the same
D) short; rise

Question 59

An Australian importer with FX payable in 3 months can hedge and lock in the price of the required foreign currency by:

A) buying AUD futures.
B) buying a currency swap.
C) selling AUD futures.
D) selling a currency swap.

Question 60

In the futures markets,speculators who strongly believe that prices of treasury bonds will fall are likely to:

A) buy futures contracts on Treasury bonds.
B) sell futures contracts on Treasury bonds.
C) sell Treasury bonds on the spot market.
D) decrease the amount of money that they currently lend.

Question 61

One of the problems of hedging with a futures contract compared with a forward contract is:

A) basis risk.
B) default risk.
C) settlement risk.
D) interest rate risk.

Question 62

The terms of futures contracts _______ standardised and the terms of forward contracts _______ standardised.

A) are; are also
B) are not; are
C) are; are not
D) are; may be

Question 63

Calculate the market value of a bank bill futures contract with a face value of $1 000 000,a reported price of $93.75 and 90 days to maturity.

A) $866 468.84
B) $983 628.65
C) $984 822.93
D) $998 461.28

Question 64

Futures contracts _______ traded on a formal,organised exchange,and forward contracts _______ traded on a formal,organised exchange.

A) are; are also
B) are not; are
C) are; are not
D) are; may be

Question 65

In comparing forwards and futures,futures are typically:

A) riskier than forwards.
B) more liquid than forwards.
C) traded on an organised exchange.
D) all of the given choices.

Question 66

If a borrower has entered into a FRA and its interest cover is specified as 3Mv9M,this means:

A) nine-month interest rates beginning in three months.
B) six-month interest rates beginning in three-months.
C) nine-month interest rates beginning in six months.
D) six-month interest rates beginning in six months.

Question 67

A company has identified an exposure to movements in interest rates on its existing debt facilities.The company is considering selling futures contracts to manage that risk and is unsure which of the following contracts may NOT be used for managing interest rate risk exposures.

A) 90-day bank-accepted bills contract
B) S&P/ASX 200 Index
C) Three-year Commonwealth Treasury bond contract
D) Option on a 90-day bank-accepted bill futures contract

Question 68

Which of the following about hedging is incorrect?

A) With the Australian future market an investor will have to use a 90-day bank-accepted-bill to hedge commercial paper.
B) In the Australian futures market a borrower will have to use 3-year Treasury bond futures to hedge a loan facility with a term to maturity of 3 to 5 years.
C) A borrower will have to use a 10-year Treasury bond future to hedge an issue of long-term debentures.
D) When prices of 3-year Treasury bond futures varies over time with the prices of long-term debentures this is called spread-commodity hedging.

Question 69

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However,it is concerned about the impact of basis risk.Which of the following statements regarding basis risk is incorrect?

A) Basis is the difference between price in the physical market and the price of the relevant futures market contract.
B) The existence of basis risk removes the opportunity for a perfect borrowing hedge.
C) Initial basis will be evident while the market is of the view that physical market prices will remain stable.
D) Final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product.

Question 70

Calculate how much a futures trader who enters into a 90-day bank bill futures contract on 20 September with a reported price of $93.25 will need to pay on settlement date (30 September),if the face value of the underlying bill is $1 000 000.

A) $857 310.63
B) $983 628.65
C) $984 822.93
D) $998 338.38

Question 71

The over-the-counter derivative product used to manage interest rate risk is a/an:

A) futures contract.
B) forward rate agreement.
C) yield rate agreement.
D) duration agreement.

Question 72

A funds manager manages a diversified Australian share portfolio,but is concerned that stock prices in the market will fall over the next three months.The manager decides to hedge the risk by selling 100 S&P/ASX All Ordinaries Share Price Index futures contracts at 23.55.Three months later,when the manager closes out the position,the contract is trading at 24.10.Calculate the profit or loss position of the futures transactions.

A) $5500 loss
B) $24 100 profit
C) $137 500 loss
D) $550 000 profit

Question 73

Which of the following statements is a key difference between forwards and futures?

A) Futures contracts are more expensive than forward contracts.
B) Forward contracts are offered only for foreign currencies.
C) Futures contracts are always delivered.
D) Forward contracts are not generally marked-to-market.

Question 74

A key characteristic of forward contracts that recommends their use over futures contracts is:

A) forwards are not traded on exchanges and marked-to-market.
B) forward contracts allow flexibility with respect to contract period.
C) forwards are not standardised instruments with regard to the amount of each contract.
D) all of the given answers.

Question 75

Which of the following best describes the risks associated with futures contracts?

A) The possibility of making an unexpected profit on a futures contract
B) The probability of making a loss, or a fall in the value of a futures contract
C) The variability of changing prices and costs associated with buying and selling futures contracts
D) The possibility of loss associated with the default by the holder of the opposite position in the contract

Question 76

In using futures contracts for hedging which of the following is an important consideration?

A) The standard contract size
B) The margin payment
C) The basis risk
D) All of the given choices

Question 77

Basis risk refers to the risk:

A) associated with anticipated price movements in the cash market.
B) associated with unanticipated price movements on the underlying asset.
C) of default on the futures contract.
D) from a change in the spread between the price on the commodity or financial security in the physical market and the price of the related futures contract.

Question 78

An Australian bank must pay US$10 million in 90 days.It wishes to hedge the risk in the futures market.To do so,the bank should:

A) buy AUD 10 million in US dollar futures.
B) sell AUD 10 million in US dollar futures, with three-month maturity.
C) buy USD 10 million in US dollar futures.
D) sell USD 10 million in US dollar futures.

Question 79

A company has an existing $900 000 promissory note facility,which it will roll over in 90 days.It is concerned that interest rates will rise before the roll-over date and enters into a 90-day bank-accepted bill futures contract at 92.50.Three months later,the company closes out its futures position at 91.75.Using the following data,calculate the profit or loss position of the futures transactions.(Disregard margin calls and transaction costs.)

A) $1 601.58 profit
B) $1 601.58 loss
C) $1 779.54 profit
D) $1 779.54 loss

Question 80

If a FRA covers six-month interest rates but will begin its cover in three months it will be written:

A) 6Mv9M.
B) 3Mv9M.
C) 3Mv6M.
D) 6Mv3M.