Deck 20: Futures Contracts

Question 1

Approximately what percentage of futures contracts are offset prior to delivery?

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

Answer 1

D

Question 2

The number of unliquidated futures contracts at any point in time is called:

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

Answer 2

B

Question 3

Futures trade on the:

A) spot market.
B) over-the-counter market.
C) forward exchanges.
D) futures exchanges.

Answer 3

D

Question 4

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

A) Contract size
B) Contract premium
C) Delivery date
D) Specified grade

Question 5

The initial margin required for futures trading:

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

Question 6

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 7

Which of the following is a characteristic of futures contracts?

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

Question 8

A futures contract is:

A) a negotiable, nonmarketable instrument.
B) a security, like a stock or bond.
C) a standardized, transferable agreement providing for deferred delivery of an asset.
D) not a legal contract, and therefore its terms can be changed.

Question 9

The forward price is:

A) the price agreed upon today for deferred delivery of an asset.
B) the spot price of an asset at the time it is delivered in the future.
C) the future value of the spot price of an asset.
D) a multiple of the current spot market price.

Question 10

When trading futures, margin:

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

Question 11

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 not allowed to trade on the exchange where they are members.

Question 12

To protect the value of a bond portfolio against a rise in interest rates using bond futures contracts, the portfolio owner should execute a:

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

Question 13

How often are futures contracts marked to market?

A) Daily
B) Weekly
C) Monthly
D) Quarterly

Question 14

As an economic function of futures markets, what does "price discovery" mean?

A) The futures price and spot price converge over time.
B) The spot price is a discounted value of the futures price.
C) The futures price provides information about the expected future spot price.
D) In equilibrium, the spot price and futures price are equal.

Question 15

An investor planning to buy bonds in the future and wishing to lock in the current price using bond contracts should enter a:

A) long hedge.
B) short hedge.
C) basis hedge.
D) margin hedge.

Question 16

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 is not standardized.
D) a forward contract is non-binding.

Question 17

Which of the following statements about futures trading 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 price reaches the daily limit.
D) The uptick rule applies to the shorting of futures contracts.

Question 18

The underlying asset type that futures contracts were first traded on were:

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

Question 19

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 20

Who assumes the other side of every futures transaction?

A) The dealer
B) The futures exchange
C) The commodity producer
D) The clearinghouse

Question 21

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

Question 22

Which of the following statements about the basis risk on futures is correct?

A) Basis risk is often completely eliminated by hedging.
B) Although the basis fluctuates over time, it can be precisely predicted.
C) The basis is approximately zero on the maturity date of the contract.
D) A hedge will reduce risk as long as the basis does not fluctuate.

Question 23

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

Question 24

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

Question 25

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 26

Which of the following represents the most popular stock-index futures position that is used to benefit from a stock market decline?

A) A short position in the S&P 500 contract
B) A long position in the S&P 500 contract
C) A short position in the DJIA contract
D) A long position in the DJIA contract

Question 27

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) Eurodollars

Question 28

An attempt to exploit differences between the prices of a stock index futures contract and the prices of the underlying stocks is known as:

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

Question 29

Most futures contracts are settled by delivery.

Question 30

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 31

An investor who sells a T-bond futures contract is expecting to profit from:

A) an increase in the price of the T-bond.
B) an increase in the level of interest rates.
C) interest rates remaining unchanged.
D) the coupon payments from the T-bond.

Question 32

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

A) may experience 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 33

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

Question 34

Futures contracts are handled by specialists on futures exchanges.

Question 35

Which of the following statements about derivatives is correct?

A) Both futures and options represent zero-sum games.
B) Futures represent a zero-sum game, but options do not.
C) Options represent a zero-sum game, but futures do not.
D) Neither options nor futures represent a zero-sum game.

Question 36

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 37

The basis is equal to the:

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

Question 38

Speculators in the futures market:

A) make the market more volatile.
B) contribute liquidity to the market.
C) engage mainly in short positions.
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

Futures are essentially standardized forward contracts.

Question 41

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

Question 42

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

Question 43

U.S. futures trading is regulated primarily by the CFTC.

Question 44

The initial margin requirement on an SSF contract is 50 percent.

Question 45

Futures exchanges standardize nonstandard forward contracts, establishing such features as contract size, delivery dates, and grades that can be delivered. Only the price and number of contracts are left for futures traders to negotiate.

Question 46

With an anticipatory hedge an investor anticipates a falling market and liquidates his position.

Question 47

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

Question 48

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

Question 49

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

Question 50

What is the role of the clearinghouse in futures trading?

Question 51

A pension fund holds $10 million in T-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

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 53

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

Question 54

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

Question 55

Briefly discuss the concept of margin in futures trading.

Question 56

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

Question 57

Short selling is not allowed in single stock futures (SSFs).

Question 58

What are the methods of settling a futures contract?

Question 59

Index arbitrage attempts to exploit price differences between two different stock indices.

Question 60

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 61

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

Question 62

What is the general approach that is used by firms in deciding what risks to hedge and what risks to bear?

Question 63

Assume 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 64

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

Question 65

What economic functions are fulfilled by futures?

Question 66

An investor 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 price of the futures on the three days following the contract sale are: 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?

Question 67

Assume a portfolio manager holds $2 million (par value) of 9 percent T-bonds that mature in 5 to 10 years. 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 68

In August, Rex sold a futures contract on corn at $3.20 per bushel. The contract had a November expiration date. At expiration, corn was selling at $3.05 per bushel. What profit/loss did Rex experience on the contract? Assume Rex had no other position in corn.

Question 69

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

Question 70

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