Question 1

If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.

Accepted Answer

When there are more traders with buy offers than sell offers, demand exceeds supply, causing the futures price to rise until the imbalance is corrected.

Question 2

The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be

Accepted Answer

When numerous institutional investors sell stock index futures to prepare for a market decline, it increases the supply of these futures, leading to a decrease in their price. Therefore, the index futures price would likely be below the prevailing stock prices due to this selling pressure.

Question 3

Financial futures contracts on stock indexes are referred to as interest rate futures.

Accepted Answer

Financial futures contracts on stock indexes are referred to as stock index futures, not interest rate futures. Interest rate futures are contracts based on the rates of interest-bearing instruments.

Question 4

Trading restrictions imposed on specific stocks or stock indexes are referred to as

Accepted Answer

Circuit breakers are trading restrictions that are automatically triggered when a specific stock or stock index experiences a significant drop in price within a short period of time. The purpose of circuit breakers is to prevent extreme market volatility and to give investors time to assess market conditions before making any further trades.

Question 5

Which of the following statements is incorrect with respect to cross-hedging?

Accepted Answer

The answer of Which of the following statements is incorrect...

Question 6

Brokers commonly require margin deposits from their customers above those required by the exchanges.

Accepted Answer

Brokers commonly require margin deposits from their customers above those required by the exchanges in order to cover potential losses and minimize risk.

Question 7

Which of the following statements is incorrect?

Accepted Answer

Circuit breakers do not guarantee that prices will turn upward. They are designed to pause trading temporarily to prevent rapid and excessive price declines. The direction of future price movements cannot be guaranteed by circuit breakers.

Question 8

Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund

Accepted Answer

Dynamic asset allocation involves adjusting the portfolio's asset mix in response to market conditions, which may include buying or selling stock index futures, rather than maintaining a constant position or liquidating stocks entirely.

Question 9

Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura's position in theS&P500 futures contract is ____ percent.

Accepted Answer

The answer of Laura sells an S&P 500 futures contract...

Question 10

The prices of stock index futures

Accepted Answer

The prices of stock index futures are not always the same, above, or below the prices of the stocks representing the index. They are influenced by factors such as interest rates, dividends, and time to expiration, which can cause them to differ from the actual index prices.

Question 11

Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates will decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____.

Accepted Answer

The company should purchase MBI futures contracts. If interest rates decrease, the futures contract will generate a gain, offsetting the increased cost of the municipal bonds.

Question 12

Speculators who normally close out their futures positions on the same day that the positions were initiated are referred to as

Accepted Answer

Day traders are speculators who open and close out their futures positions on the same day. Hedgers use futures contracts to hedge against price risks in their underlying assets. Closed-end traders and position traders refer to different strategies that may involve holding futures positions for longer periods of time.

Question 13

Speculators in futures contracts that normally maintain their futures positions for extended periods of time (such as weeks or months) are referred to as

Accepted Answer

Speculators who maintain their futures positions for extended periods of time are known as position traders, as opposed to day traders who typically open and close positions within a single trading day. Hedgers use futures contracts to manage their exposure to price risk, while closed-end traders do not exist as a commonly recognized category of futures market participants.

Question 14

The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is 1619 when the position isclosed out, the gain is

Accepted Answer

The answer of The value of an S&P 500 futures...

Question 15

Companies with international trade can hedge ____ by ____ currency futures.

Accepted Answer

The answer of Companies with international trade can hedge ____...

Question 16

Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar.

Accepted Answer

The answer of Currency futures may be purchased to hedge...

Question 17

Which of the following is incorrect regarding organized exchanges trading financial futures contracts?

Accepted Answer

Organized exchanges do not ensure that the seller of the futures contract always delivers the securities covered by the contract, whether settled prior to the settlement date or not. Instead, the exchange acts as a counterparty to both buyers and sellers, guaranteeing the performance of the contract through the use of margin accounts and daily settlement.

Question 18

Financial futures contracts are rarely sold over the counter.

Accepted Answer

Financial futures contracts are standardized contracts traded on an exchange, not over the counter.

Question 19

____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.

Accepted Answer

Basis risk occurs when the underlying asset being hedged does not move in the same direction as the futures contract being used for hedging. This can occur due to factors such as differences in delivery dates, quality or location of the underlying asset, or changes in supply and demand conditions. As such, basis risk is a type of price risk that can affect the effectiveness of a hedging strategy.

Question 20

Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the credit (default) risk. A short position in Treasury bill futures ____ an effective hedge against the credit (default) risk.

Accepted Answer

The answer of Assume that corporate bond portfolio managers are...

Quiz 13: Financial Futures Markets

If there are traders with buy offers than sell offers for a particular contract, the futures price will until this imbalance is removed.