Deck 8: Structure of Forward and Futures Markets

Question 1

Margin in a futures transaction differs from margin in a stock transaction because

A) stock transactions are much smaller
B) delivery occurs immediately in a stock transaction
C) no money is borrowed in a futures transaction
D) futures are much more volatile
E) none of the above

Answer 1

C

Question 2

Where did the U.S. futures market originate?
A) Chicago

A) none of the above
B) Kansas
C) New York
D) Minneapolis

Answer 2

A

Question 3

Which of the following is a trader on the floor of the futures exchange?

A) introducing broker
B) commission broker
C) commodity trading advisor
D) commodity pool operator
E) none of the above

Answer 3

B

Question 4

Most futures contracts are closed by
A) delivery

A) none of the above
B) offset
C) exercise
D) default

Question 5

Which of the following is a false statement related to options on futures?

A) options on futures are also known as futures options
B) options on futures are also known as options on the underlying instrument
C) options on futures is a derivative on a derivative
D) options on futures are also known as commodity options
E) all of the above statements are true related to options on futures

Question 6

Which of the following contract terms is not set by the futures exchange?

A) the dates on which delivery can occur
B) the expiration months
C) the deliverable commodities
D) the size of the contract
E) the price

Question 7

Which of the following organizations has the ultimate regulatory authority in the futures industry?

A) National Futures Association
B) Commodity Futures Trading Commission
C) Commodity Exchange Authority
D) Securities and Exchange Commission
E) none of the above

Question 8

Which of the following duties is not performed by the clearinghouse?

A) holding margin deposits
B) guaranteeing performance of buyer and writer
C) maintaining records of transactions
D) lending money to meet margin requirements
E) none of the above

Question 9

The number of long or short futures positions outstanding is called the

A) reportable position
B) minimum volume
C) open interest
D) spread position
E) none of the above

Question 10

One of the first automated trading systems that matched bids and offers implemented at the CME is called

A) COMEX
B) GLOBEX
C) LIFFE
D) CFTC
E) none of the above

Question 11

Most forward contracts are closed by

A) delivery
B) offset
C) exercise
D) default
E) none of the above

Question 12

Variation margin is which of the following?

A) the difference in margin between hedger and speculator
B) margin differences according to trading style
C) margin deposited as a result of marking-to-market
D) margin set by the variability of a futures price
E) none of the above

Question 13

Which of the following is the most actively traded U.S. futures contract?

A) S&P 500 Index
B) crude oil
C) Treasury bonds
D) Wheat
E) none of the above

Question 14

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $3,100, how much must you deposit?

A) $1,500
B) $400
C) $1,900
D) 0
E) none of the above

Question 15

What are circuit breakers?

A) rules that stop trading when futures are about to expire
B) a system that shuts down the exchange computer during periods of abnormal volume
C) limits on the number of contracts that can be traded on high volume days
D) rules that limit the number of contracts a speculator can hold
E) none of the above

Question 16

Trading as both a broker and a dealer is called

A) dual trading
B) spreading
C) scalping
D) arbitraging
E) none of the above

Question 17

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $4,000, how much must you deposit?

A) $6,000
B) $1,500
C) $9,000
D) nothing
E) none of the above

Question 18

The trading procedure on the floor of the futures exchange is referred to as

A) against actuals
B) open interest
C) open outcry
D) index participation
E) none of the above

Question 19

Which of the following is not a method of terminating a futures contract?

A) offset
B) delivery
C) exchange for physicals
D) scalping
E) none of the above

Question 20

Which of the following is not a forward contract?

A) a long-term employment contract at a fixed salary
B) an automobile lease non-cancelable for three years
C) a rain check
D) a signed contract to buy a house in six months
E) none of the above

Question 21

This financial instrument (sometimes referred to as a commodity option) permits the holder to buy if a call, or to sell if a put, a specific underlying futures contract at a fixed price up to a specific expiration day

A) forward
B) futures option
C) swap
D) commodity swap
E) futures swap

Question 22

Many futures contracts specify that there are several grades of a commodity that are acceptable for delivery.

Question 23

A limit move is when a futures price reaches its all time high or low price.

Question 24

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound. If the initial margin is $2,525 and the maintenance margin is $1,000, at what price would there be a margin call?

A) 31.91
B) 32.11
C) 31.29
D) 31.09
E) 31.80

Question 25

The following process is the only type of permissible futures transaction that occurs off the floor of the exchange

A) determination of the position day
B) determination of the delivery day
C) determination of a daily settlement price
D) offsetting
E) exchange for physicals

Question 26

Futures contracts are similar to forward contracts because they both represent a commitment to buy something at a future time at a fixed price.

Question 27

Stock index futures contracts are terminated by delivery the portfolio of stocks represented by the index.

Question 28

Despite the fact that forward contracts carry more credit risk than futures contracts, forward contracts offer what primary advantage over futures contracts?

A) the over-the-counter forward market is a highly regulated market
B) forward contracts prevent the writer from assuming the credit risk of the buyer
C) terms and conditions are tailored to the specific needs of the two parties involved
D) transaction information between the two parties involved in the forward contract is readily available to the public
E) conditions of the forward contract, such as delivery date and location, cannot be altered

Question 29

Which of the following is not a type of futures trader?

A) scalpers
B) arbitrageurs
C) profit-takers
D) hedgers
E) day traders

Question 30

This individual takes a futures contract position that is opposite to the position in the spot market in order to reduce risk

A) speculator
B) hedger
C) spreader
D) arbitrageur
E) trading advisor

Question 31

Very few futures contracts are terminated in delivery of the underlying commodity or security.

Question 32

Which is the most active group of futures?

A) energy
B) agriculture
C) currency
D) financials
E) none of the above

Question 33

Options on futures have been trading since

A) 1973
B) 1982
C) 1966
D) 1936
E) none of the above

Question 34

The earliest financial futures contracts were futures on foreign currencies.

Question 35

Forward contracts are regulated by the Commodity Forward Trading Commission.

Question 36

Credit risk is handled in forward markets by daily marking-to-market.

Question 37

Individuals engaging in this type of trading strategy are characterized by their attempt to profit from guessing the direction of the market

A) hedgers
B) spreaders
C) speculators
D) arbitraguers
E) none of the above

Question 38

One attraction of options on futures is that they trade side-by-side with the futures.

Question 39

One of the advantages of forward markets is
A) performance is guaranteed by the G-30

A) trading is less costly and governed by more rules
B) none of the above
B) trading is conducted in the evening over computers
C) the contracts are private and customized

Question 40

Which of the following correctly orders the process of daily settlement?

A) clearinghouse officials establish a settlement price; each account is marked to market; accounts of those holding long/short positions are credited/debited appropriately; differences between today's settlement price and the previous days settlement price are determined
B) clearinghouse officials establish a settlement price; each account is marked to market; differences between today's settlement price and the previous day's settlement price are determined; accounts of those holding long/short positions are credited/debited appropriately
C) differences between today's settlement price and the previous day's settlement price are determined; accounts are marked to market; clearinghouse officials establish a settlement price; accounts of those holding long/short positions are credited/debited appropriately
D) clearinghouse officials establish a settlement price; differences between today's settlement price and the previous days settlement price are determined; accounts of those holding long/short positions are credited/debited appropriately; each account is marked to market
E) differences between today's settlement price and the previous day's settlement price are determined; accounts are marked to market; clearinghouse officials establish a settlement price; accounts of those holding long/short positions are credited/debited appropriately

Question 41

The daily settlement procedure is a major difference between futures contracts and forward contracts.

Question 42

One party to a futures transaction does not bear the risk that the other party will default.

Question 43

The federal regulator of the futures markets is the National Futures Association.

Question 44

Each futures contract has both a long and a short position and counts as only one unit of open interest.

Question 45

The most actively traded futures contract on a short-term financial instrument is Treasury bill futures.

Question 46

Futures funds have typically provided outstanding returns to their investors.

Question 47

Because futures markets do not have designated market makers, there is no such thing as a bid-ask spread.

Question 48

A hedge fund is a very risky form of investment.

Question 49

Position traders are futures traders who take very large positions.

Question 50

Firms that solicit futures trading business from the public are called Futures Commission Merchants.

Question 51

When futures accounts are marked-to-market, an account balance below the maintenance margin must be brought up to the initial margin.

Question 52

The clearinghouse is the middleman in a futures trade.

Question 53

Scalping is a colorful term used to describe a futures trading style that involves aggressive, emotional trading.

Question 54

An arbitrageur operates by two rules, take risk and spend money.

Question 55

Less than half of futures contracts launched in the United States are successful.

Question 56

There are no futures contracts on the Dow Jones Industrial Average.

Question 57

Futures trades are executed in the pit.

Question 58

The largest futures exchange in the United States is the Chicago Mercantile Exchange.

Question 59

Options on futures contracts expire after the underlying futures contract expires.

Question 60

Locals are futures traders who are in business for themselves.

Question 61

The minimum price fluctuation is called a tick.