Question 1

Swap agreements​
A) ​transfer ownership
B) ​transfer liabilities
C) ​transfer payments
D) ​transfer tax obligations

Accepted Answer

Swap agreements involve the exchange of payments between parties, often involving different types of financial instruments or currencies. They do not involve the transfer of ownership, liabilities, or tax obligations.

Question 2

Hedging with commodity futures contracts​
A) ​increases price fluctuations
B) ​reduces the risk of loss from price fluctuations
C) ​increases the potential return
D) ​does not require margin delivery

Accepted Answer

Hedging with commodity futures contracts reduces the risk of loss from price fluctuations. This is because by taking offsetting positions in the futures market, a party can protect themselves against adverse price movements in the underlying commodity. The goal of hedging is not to increase potential returns or price fluctuations, and margin delivery may still be required for futures contracts.

Question 3

If the futures price falls,​
1) the short position sustains a profit
2) the short position sustains a loss
3) the long position sustains a loss
4) the long position sustains a profit
A)​1 and 3
B)​1 and 4
C)2 and 3
D)2 and 4

Accepted Answer

If the futures price falls, the short position (which is betting on the price going down) sustains a profit, while the long position (which is betting on the price going up) sustains a loss. Therefore, choice 1 is correct, but choice 4 is incorrect. Choice 2 is also correct, but choice 3 is incorrect.

Question 4

Speculators reduce risk of loss by buying instead of selling stock index futures.​

Accepted Answer

Speculators can both increase and reduce risk by buying or selling stock index futures depending on their market expectations and strategies. Buying does not inherently reduce risk of loss.

Question 5

If a lender agrees to lend a firm $1,000,000 after six months at the going rate, that individual can hedge against the loss from a decline in interest rates by
A) ​buying a financial futures contract
B) ​selling a financial futures contract
C) ​taking a short position
D) ​making the loan now

Accepted Answer

By buying a financial futures contract, the lender can lock in the current interest rate and effectively hedge against a decline in interest rates. This means that if interest rates do decrease, the lender will still be able to earn the same return as they would have if they had made the loan at the current rate. Selling a futures contract or taking a short position would not provide the same level of protection as buying a futures contract. Making the loan now would not allow the lender to benefit from any potential increases in interest rates over the next six months.

Question 6

Which of the following statements are true concerning stock index futures?
​1) Stock index futures may be used to hedge against stock prices rising.
2) Stock index futures require substantial margin and are a source of financial leverage.
3) Stock index futures are settled in cash and not in delivery.
4) Stock index futures are settle in specific securities.
A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Accepted Answer

1) Stock index futures can be used to hedge against a rise in stock prices, as the value of the futures contract will decrease as the underlying stock index increases.
3) Stock index futures are settled in cash, which means the profits and losses are realized through cash transactions rather than the physical delivery of the underlying securities.

Question 7

Swap agreements are one means to help manage risk. tures.​

Accepted Answer

Swap agreements involve exchanging cash flows or assets with another party in order to manage risk or achieve a specific investment objective. Therefore, they are a means of managing risk.

Question 8

​The margin requirement for a futures contract is a
1) small percent of the value of the contract
2) large percent of the value of the contract
3) source of leverage
A)1 and 2
B)​1 and 3
C)​2 and 3
D)​only 3

Accepted Answer

The margin requirement for a futures contract is a small percentage of the value of the contract, typically between 5% and 15%, which makes it a source of leverage. This means that traders can control a large amount of an underlying commodity or financial instrument with a relatively small amount of capital.

Question 9

If a financial manager must sell a product in the​ future that is currently being manufactured, that individual may reduce the risk of loss from a price decline by
1) entering a futures contract to sell the good
2) entering a futures contract to buy the good
3) establishing a short position
4) establishing a long position
A)​1 and 3
B)1 and 4
C)2 and 3
D)​2 and 4

Accepted Answer

Entering a futures contract to sell the good (choice 1) allows the financial manager to lock in the sale price, thus reducing the risk of loss from a price decline. Establishing a short position (choice 3) also allows the financial manager to profit from a price decline in the future, thereby reducing the risk of loss. Entering a futures contract to buy the good (choice 2) and establishing a long position (choice 4) would not provide protection against price declines and may actually increase the risk of loss.

Question 10

Small margin requirements for futures contracts implies
1) the potential profit is magnified
2) the potential loss is magnified
3) the speculator's risk exposure is increased
4) the speculator's risk exposure is decreased​
A)1 and 3
B)1 and 4
C)1, 2, and 3
D)1, 2, and 4

Accepted Answer

Small margin requirements for futures contracts mean that investors can control large positions with a relatively small amount of capital. This leverage magnifies both potential profits and potential losses, increasing the speculator's risk exposure.

Question 11

The futures price and the spot price must be equal
A) ​when the contract is sold
B) ​when the contract is bought
C) ​when the contract is canceled
D) ​when the contract expires

Accepted Answer

The futures price and the spot price must be equal when the contract expires, as at that point the futures price should reflect the current spot price of the underlying asset.

Question 12

If interest rates increase, the short sellers of Treasury bond futures profit. accepting delivery.​

Accepted Answer

When interest rates increase, the price of Treasury bond futures falls. Short sellers of Treasury bond futures profit when the price of the futures contract falls, as they can buy back the contract at a lower price than they sold it for.

Question 13

When a stock index futures contract expires, the buyer takes delivery of the securities.​

Accepted Answer

Stock index futures contracts are cash settled, meaning no physical delivery of securities takes place. Instead, the profit or loss is settled in cash.

Question 14

If an individual has a contract to accept future delivery of Treasury bills, the individual cannot close the contract without accepting delivery.​

Accepted Answer

The individual can close the contract before delivery by entering into an offsetting contract, effectively neutralizing the obligation to accept delivery.

Question 15

​If the futures price of a commodity rises,
1) the long position sustains a loss
2) the long position experiences a profit
3) the short position sustains a loss
4) the short position experiences a profit
A)1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Accepted Answer

When the futures price of a commodity rises, the long position (the party that agrees to buy the commodity in the future) experiences a profit because they can buy the commodity at a lower price than the market price. Conversely, the short position (the party that agrees to sell the commodity in the future) sustains a loss because they have to sell the commodity at a lower price than the market price.

Question 16

When speculators invest in commodity futures, they​
A) ​enter contracts to make future delivery
B) ​enter contracts to accept future delivery
C) ​either enter contracts to make or accept future delivery
D) ​rarely experience losses

Accepted Answer

Speculators can take either a long or short position on commodity futures contracts, meaning they can either agree to buy the commodity in the future (make delivery) or agree to sell the commodity in the future (accept delivery). It is important to note that speculators do not typically intend to take physical delivery of the commodity, but rather use futures contracts as a way to bet on the future market price movements of the commodity. Additionally, speculators can experience losses if the price of the commodity moves against their position.

Question 17

The futures price of a metal is $250 an ounce. Futures contracts are for 100 ounces, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price to rise and enters into a contract to buy the metal.​ a. How much must the speculat or initially remit?
b. If the futures price rises to $\$ 255$, what is the profit and return on the position?
c. If the futures price declines to $\$ 2.48$, what is the loss on the position?
f. If the futures price declines to $\$ 2.34$, what must the speculator do?
e. If the futures price continues to decline to $\$ 2.32$, how much does the speculator have in the account? ​

Accepted Answer

The answer of The futures price of a metal is...

Question 18

A swap agreement transfers ownership in a stock from the seller to the buyer.​

Accepted Answer

A swap agreement does not transfer ownership of a stock, but rather involves the exchange of cash flows or other assets between parties.

Question 19

When a speculator invests in a financial futures contract, the individual
A) ​enters a contract to make future delivery
B) ​enters a contract to accept future delivery
C) ​either enters a contract to make or to accept future delivery
D) ​hedges to reduce the risk of loss

Accepted Answer

When a speculator invests in a financial futures contract, he or she may either enter a contract to make (sell) or to accept (buy) future delivery. This allows the speculator to profit from the price movements of the underlying asset without actually taking delivery or making delivery of the asset. Speculators do not use futures to hedge against risk; instead, they use it as a tool for pure speculation.

Question 20

If the firm must buy silver in the future and thus pay for the metal in the future, management may reduce the risk of loss from an increase in the price of silver by
A) ​taking a long position and entering a contract to buy silver
B) ​taking a short position and entering a contract to deliver silver
C) ​accepting delivery early
D) ​refusing to accept delivery if the price rises

Accepted Answer

By taking a long position and entering a contract to buy silver, the firm can lock in the current price and reduce the risk of price increases in the future. This allows for greater certainty in budgeting and planning for future business operations. Options B, C, and D do not provide a similar level of risk reduction.

Quiz 29: Futures and Swaps

Swap agreements

Hedging with commodity futures contracts

If the futures price falls, 1) the short position sustains a profit 2) the short position sustains a loss 3) the long position sustains a loss 4) the long position sustains a profit

Speculators reduce risk of loss by buying instead of selling stock index futures.

If a lender agrees to lend a firm $1,000,000 after six months at the going rate, that individual can hedge against the loss from a decline in interest rates by

Swap agreements are one means to help manage risk. tures.

The margin requirement for a futures contract is a 1) small percent of the value of the contract 2) large percent of the value of the contract 3) source of leverage

Small margin requirements for futures contracts implies 1) the potential profit is magnified 2) the potential loss is magnified 3) the speculator's risk exposure is increased 4) the speculator's risk exposure is decreased

The futures price and the spot price must be equal

If interest rates increase, the short sellers of Treasury bond futures profit. accepting delivery.

When a stock index futures contract expires, the buyer takes delivery of the securities.

If an individual has a contract to accept future delivery of Treasury bills, the individual cannot close the contract without accepting delivery.

If the futures price of a commodity rises, 1) the long position sustains a loss 2) the long position experiences a profit 3) the short position sustains a loss 4) the short position experiences a profit

When speculators invest in commodity futures, they

A swap agreement transfers ownership in a stock from the seller to the buyer.

When a speculator invests in a financial futures contract, the individual

If the firm must buy silver in the future and thus pay for the metal in the future, management may reduce the risk of loss from an increase in the price of silver by