Deck 10: Introduction to Financial Futures Markets

Question 1

Financial futures can be classified as:

A) Stock index futures.
B) Interest rate futures.
C) Commodity futures.
D) Currency futures.
E) a, b and d.

Answer 1

a, b and d.

Question 2

A futures contract is a firm legal agreement between a buyer and a seller in which:

A) The buyer agrees to take delivery of an asset at a specified price at the end of a designated period of time.
B) The value of the futures contract is derived from the value of the underlying instrument.
C) The seller agrees to make delivery of an asset at a specified price at the end of a designated period of time.
D) a and c only.
E) All of the above.

Answer 2

All of the above.

Question 3

The futures price is:

A) The price paid for the futures contract.
B) The price at which the parties in a futures contract agree to transact in the future.
C) The present value of all expected future cash benefits.
D) The cost of the futures contract today.
E) None of the above.

Answer 3

The price at which the parties in a futures contract agree to transact in the future.

Question 4

A party to a futures contract can liquidate the position by:

A) Taking an offsetting position in the same contract.
B) Waiting until the settlement date.
C) Walking away from the futures contract.
D) a and b only.
E) All of the above.

Question 5

The role of the clearinghouse is to:

A) Interpose itself as the buyer to every sale and the seller to every purchase.
B) Guarantee fulfillment of the futures contract on the settlement date.
C) Make it simple for parties to unwind their positions prior to the settlement date.
D) All of the above.
E) b and c only.

Question 6

When a position is first taken in a futures contract, the investor must deposit a minimum dollar amount per contract as specified by:

A) The Federal Reserve.
B) The pit trader.
C) The exchange.
D) An informal agreement between the parties involved.
E) None of the above.

Question 7

The minimum level by which an investor's equity position may fall as a result of unfavorable price movement before the investor is required to deposit additional margin is called:

A) The initial margin.
B) The maintenance margin.
C) The variation margin.
D) A and b only.
E) None of the above.

Question 8

Futures contracts are traded:

A) In the interbank market.
B) In the OTC market.
C) On an organized exchange.
D) Electronically.
E) None of the above.

Question 9

The price of a futures contract is determined by:

A) Supply and demand conditions.
B) Open outcry of bids and offers in an auction market.
C) The pit trader.
D) Locals.
E) None of the above.

Question 10

Which of the following statements is most correct?

A) A forward contract, just like a futures contract, is an agreement for the future delivery of something at a specified price at the end of a designated period of time.
B) A forward contact, just like a futures contract, is traded on an exchange floor.
C) A forward contract differs from a futures contract in that is it usually nonstandardized.
D) a and c only.
E) All of the above.

Question 11

When an investor takes a position in the market by buying a futures contract, the investor is said to be in a:

A) Long position.
B) Short position.
C) Short futures.
D) Hedge position.
E) None of the above.

Question 12

At the end of each trading day, futures contracts are:

A) Delivered.
B) Marked-to-market.
C) Liquidated.
D) Closed out.
E) None of the above.

Question 13

The difference between the cash price and the futures price is called:

A) Bid-ask spread.
B) Income spread.
C) Basis.
D) Profit.
E) None of the above.

Question 14

The seller of a futures contract will realize a profit if the futures price:

A) Increases.
B) Decreases.
C) Stays the same.
D) None of the above.
E) All of the above.

Question 15

The criticism of futures contracts that their introduction will increase the price volatility of the underlying asset in the cash market is referred to as:

A) Asset volatility hypothesis.
B) Speculation.
C) Destabilization hypothesis.
D) Hedging.
E) None of the above.

Question 16

Investors can use the cash or futures market to alter their risk exposure, which requires them to consider which of the following factors?

A) Liquidity.
B) Transactions costs.
C) Taxes.
D) Leveraging aspect of futures.
E) All of the above.

Question 17

Locals are brokers who:

A) Buy and sell for their own account.
B) Are professional risk takers.
C) Add liquidity to the futures market.
D) Play the same effective role as a market maker.
E) All of the above.

Question 18

Most financial futures contracts have settlement dates in March, June, September, and December.

Question 19

The amount necessary to bring the equity in the account back to its initial margin level is called the variation margin.

Question 20

A daily price limit sets the minimum and maximum price at which the futures contract may trade during its life.

Question 21

In general, less than 2% of futures contracts are settled by delivery.

Question 22

The major function of futures markets is to transfer price risk from hedgers to speculators.

Question 23

Compare and contrast futures and forwards.

Question 24

Explain the mark-to-market and margin requirements of a futures contract and use an example.

Question 25

Discuss the principles of hedging and explain the risks associated with hedging.