Question 1

When Australian financial futures still in existence at trading close are settled with the clearing house,final settlement in the form of standard delivery means:

Accepted Answer

Final settlement in the form of standard delivery means the contract is settled by delivery of actual underlying financial asset.

Question 2

If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 8 per cent,they will have:

Accepted Answer

When a bond investor sells a futures contract (taking a short position) and interest rates rise, the value of the bond decreases. Since they agreed to sell at a higher price (when rates were lower) and can now buy back or settle at a lower price (due to the rate increase), they profit from the difference.

Question 3

A futures exchange imposes an initial margin:

Accepted Answer

The initial margin is imposed to ensure brokers and traders are able to pay for any losses incurred during the life of the futures contract. This is important for the stability of the market and to prevent defaults or losses that could impact the integrity of the exchange. The other choices are incorrect - the exchange does not impose initial margin to make a profit (it charges fees and commissions instead) or to give traders more leverage (it actually limits leverage through margin requirements). Finally, while the exchange wants to ensure that futures contracts are closed-out, this is not the reason for imposing initial margin specifically.

Question 4

In futures markets investors who expect to purchase future bonds may hedge against the effects of falling interest rates by:

Accepted Answer

Buying bond futures contracts allows investors to lock in a price for the bonds they plan to purchase in the future, essentially hedging against the risk of falling interest rates. The other options either involve taking advantage of market inefficiencies (arbitrage) or opening positions that may amplify the effects of interest rate changes.

Question 5

On the ASX Trade 24,financial futures contracts are currently traded on all the following securities,except:

Accepted Answer

On the ASX Trade 24, financial futures contracts are traded on a variety of securities including bank bills, Treasury bonds, and interest rate swaps. However, corporate bonds are not currently traded in the form of financial futures contracts on this platform.

Question 6

Which of the following statements in relation to margins is correct?

Accepted Answer

The maintenance margin is indeed the minimum amount of equity that must be maintained in a margin account. When the account balance falls below this level, the trader receives a margin call, requiring them to deposit additional funds to bring the account back up to the initial margin requirement.

Question 7

In the futures market,the instruction to a futures broker to buy or sell at the current market price is a:

Accepted Answer

A market order is an instruction to a futures broker to buy or sell at the best currently available price. This is in contrast to a limit order, which is an instruction to buy or sell at a specific price or better. A call order and phone order do not accurately describe the kind of instruction given to a futures broker.

Question 8

If a bond investor sells a three-year Commonwealth Treasury bond futures contract at 7 per cent and on delivery date the interest rate of Treasury bonds is higher than they expected at 6 per cent,they will have:

Accepted Answer

The answer of If a bond investor sells a three-year...

Question 9

If an investor buys a three-year Commonwealth Treasury bond futures contract at 7 per cent and on the delivery date the interest rate of Treasury bonds is lower than they expected at 6 per cent,they will have:

Accepted Answer

When the interest rate drops from 7% to 6%, it means the bond value has increased. As the investor has a long position, they will make a profit on the increase in bond value, resulting in a gain on their position.

Question 10

Which of the following relating to Commonwealth Treasury bond futures is incorrect?

Accepted Answer

The answer of Which of the following relating to Commonwealth...

Question 11

An orange grower who wishes to protect his future orange crop from price fluctuations can hedge by taking a/an:

Accepted Answer

The orange grower can hedge against price fluctuations by taking a short position on an orange futures contract, which means that they are selling futures contracts of oranges at a predetermined price. If the market price of oranges decreases, the loss incurred is offset by the profit earned from the short position in the futures contract. This helps the grower to protect their future crop from price fluctuations.

Question 12

A wheat grower who wishes to protect his future wheat crop from price fluctuations can:

Accepted Answer

The wheat grower should sell a wheat futures contract to hedge against the risk of falling prices in the future. By doing so, they lock in a price for their crop, ensuring they can sell it at that price regardless of market fluctuations.

Question 13

A company has sold a three-year Commonwealth Treasury bond futures contract,and now wishes to close out its open position on maturity date.Which of the following statements relating to the closing out of a futures position is incorrect?

Accepted Answer

The company cannot choose to deliver physical market Treasury bonds in settlement as futures contracts are cash-settled. The other options are correct: A) the company may enter into a 'buy' contract of the same face value, B) the new 'buy' contract will have the identical delivery date as the original 'sell' contract, and D) the clearing house acts as counterparty to the contracts, through the process of novation.

Question 14

As part of futures trading,exchanges have traders place an initial margin with its clearing house because:

Accepted Answer

The initial margin acts as a performance bond to support the value of the futures contract, ensuring that the parties fulfill their obligations. It is not primarily to cover the exchange's costs, ensure broker profits, or facilitate close-out of contracts.

Question 15

In the futures market,an instruction to a futures broker to buy or sell up to a specified price and within a specified time is a:

Accepted Answer

A limit order is an instruction to a futures broker to buy or sell up to a specified price and within a specified time. The order will only be executed if the market reaches the specified price. This allows traders to control the price they enter or exit the market, providing more control over their trading strategies. A market order is an instruction to buy or sell immediately at the current market price, while a margin order involves borrowing funds from a broker to open a position in the market. A liquid order is not a commonly used term in the futures market.

Question 16

If an investor buys a three-year Commonwealth Treasury bond futures contract at 6 per cent and on the delivery date the interest rate of Treasury bonds is lower than they expected at 7 per cent,they will have:

Accepted Answer

The investor has bought the futures contract at a rate of 6% for a three-year Commonwealth Treasury bond. This means they are long on the contract, meaning they will profit if interest rates fall. However, if the interest rate on the delivery date is lower than expected, at 7%, the investor will have lost money on their long position, as they are now locked into the higher rate of 6% instead of being able to take advantage of the lower rate of 7%. Therefore, the correct choice is B.

Question 17

A company who intends to borrow in 3 months can hedge and lock in the cost of borrowing by:

Accepted Answer

Selling an interest rate futures contract allows the company to lock in the current interest rate, hedging against the risk of rising rates when they borrow in 3 months.

Question 18

An investor holds a long oil futures contract that expires in June.To close out her position in oil futures before the delivery date,she must:

Accepted Answer

The answer of An investor holds a long oil futures...

Question 19

The price of a short-term interest rate risk contract is generally derived from:

Accepted Answer

Short-term interest rate risk contracts are typically based on money market instruments such as Treasury bills, commercial paper, and certificates of deposit. Therefore, the price of these contracts is derived from the performance of these instruments in the financial markets.

Question 20

In futures markets investors who expect to purchase future bonds can reduce the risk of price fluctuations by taking a/an:

Accepted Answer

A long position on futures contracts allows investors to lock in a fixed price for bonds at a future date, thereby reducing the risk of price fluctuations. This is because the futures contracts are standardized and traded on an exchange, providing a transparent and regulated marketplace for buyers and sellers to transact. Arbitrage and short positions involve more complex strategies and may not be appropriate or effective for all investors. A marked-to-market position simply reflects the current value of the investor's futures contract holdings and does not provide any risk mitigation benefits.

Quiz 19: Future Contracts and Forward Rate Agreements