Question 1

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called ________.

Accepted Answer

This is called a spread position, where an investor takes long and short positions in two different futures contracts of the same commodity but with different maturities. This strategy is used to profit from the difference in prices between the two contracts, rather than solely on the direction of the price of the underlying asset. A cross hedge refers to hedging against a different underlying asset than the one being traded, a reversing trade refers to closing out an existing position and reopening a new position in the opposite direction, and a straddle involves taking both long and short positions in the same futures contract to profit from volatility.

Question 2

The daily settlement of obligations on futures positions is called ________.

Accepted Answer

Marking to market is the daily settlement process where gains and losses on futures positions are calculated and settled. The other options are related to the margin requirements and checks for futures trading.

Question 3

Margin requirements for futures contracts can be met by ________.

Accepted Answer

Margin requirements for futures contracts can be met by cash or highly marketable securities such as Treasury bonds, which provide a level of security to the lender in the event that the margin call is not met. Cash or any marketable securities could also potentially be used, but highly marketable securities provide a greater level of assurance. Warehouse receipts for an equivalent quantity of the underlying commodity would not be a valid option for meeting margin requirements in most cases.

Question 4

A futures contract ________.

Accepted Answer

A futures contract is a standardized agreement between two parties to buy or sell a specified amount of an asset at a predetermined price on a specific date in the future. Both the buyer and seller are obligated to fulfill the contract on the expiration date.

Question 5

An established value below which a trader's margin may not fall is called the ________.

Accepted Answer

The established value below which a trader's margin may not fall is called the maintenance margin. The daily limit refers to a maximum price change allowed in a contract on a given trading day. Daily margin is not a commonly used term and convergence limit does not relate to the concept of margin.

Question 6

Which one of the following refers to the daily settlement of obligations on future positions?

Accepted Answer

Marking to market refers to the daily settlement of obligations on future positions, where profits or losses are credited or debited to the margin account of the traders. The convergence property refers to the tendency of futures prices to converge to the spot price at maturity. The open interest refers to the total number of outstanding contracts in a futures market. The triple witching hour refers to the simultaneous expiration of stock index futures, stock index options, and stock options on the third Friday of March, June, September, and December.

Question 7

An investor who goes short in a futures contract will ________ any increase in value of the underlying asset and will ________ any decrease in value in the underlying asset.

Accepted Answer

When an investor goes short in a futures contract, they are agreeing to sell the underlying asset at a future date. If the value of the asset decreases, they benefit from being able to sell it at a higher price than the market value. If the value of the asset increases, they will have to pay more to buy the asset in order to fulfill their obligation to sell it, resulting in a loss. Therefore, the investor who goes short will receive any decrease in value of the underlying asset and will have to pay to cover any increase in value.

Question 8

A wheat farmer should ________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

Accepted Answer

Selling wheat futures allows the farmer to lock in a price for their wheat at a future date, thus reducing their exposure to price fluctuations in the market. By selling futures, the farmer is essentially transferring the risk of price changes to the buyer of the futures contract. Option B is not a good choice because buying wheat futures would increase the farmer's exposure to price fluctuations. Option C would require the farmer to have the physical wheat to sell at harvest time, which may not always be the case. Option D involves timing the market based on the basis (the difference between the cash price and futures price), which can be difficult to predict and is not a reliable risk management strategy.

Question 9

Which one of the following is a true statement?

Accepted Answer

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call. A) is false because margin deposits can also be met by securities. B) is false because margin requirements vary depending on the underlying asset and contract specifications. C) is false because the initial margin is the amount of money required to buy or sell a futures contract.

Question 10

The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates ________ risk.

Accepted Answer

Credit risk is the risk that the counter-party to a transaction will default on their obligations. In a futures contract, the exchange acts as the counter-party to every contract issued, which means that there is no credit risk as the exchange guarantees the performance of the contract.

Question 11

The clearing corporation has a net position equal to ________.

Accepted Answer

The clearing corporation acts as a middleman between buyers and sellers in the financial markets, facilitating the settlement of trades. Its net position will always be zero because it does not take a directional bet on the market and simply ensures that all trades are settled properly.

Question 12

Initial margin is usually set in the region of ________ of the total value of a futures contract.

Accepted Answer

Initial margin is usually set in the region of 5-15% of the total value of a futures contract. This means that if the value of a futures contract is $100,000, the initial margin required would be $5,000 to $15,000.

Question 13

Which one of the following contracts requires no cash to change hands when initiated?

Accepted Answer

A forward contract does not require any cash to change hands when initiated. It is an agreement between two parties to buy or sell an asset at a specified price on a predetermined date in the future. No cash is exchanged at the time of entering into the contract, but rather at the expiration of the contract. Option contracts (listed put option and listed call option) require a premium to be paid upfront, while a short futures contract involves an initial margin payment.

Question 14

A person with a long position in a commodity futures contract wants the price of the commodity to ________.

Accepted Answer

A person with a long position in a commodity futures contract has agreed to buy a certain amount of the commodity at a set price in the future. They would make a profit if the market price of the commodity increases above their purchase price. Therefore, they want the price of the commodity to increase substantially.

Question 15

The advantage that standardisation of futures contracts brings is that ________ is improved because ________.

Accepted Answer

Standardisation of futures contracts allows for a small set of identical contracts to be traded, leading to increased liquidity as all traders are able to trade the same contracts without confusion or complications. This can lead to tighter bid-ask spreads and improved market efficiency. Credit risk, pricing, and trading costs may also be impacted by standardisation, but the most directly and widely recognized benefit is improved liquidity.

Question 16

The open interest on silver futures at a particular time is the number of ________.

Accepted Answer

Open interest is the total number of outstanding contracts that exist at a particular point in time. It includes contracts that have been traded but not yet closed out or delivered, as well as contracts that have not yet been traded but are still open for trading. So, option A is the correct choice.

Question 17

Synthetic stock positions are commonly used by ________ because of their ________.

Accepted Answer

Synthetic stock positions are often used by market timers because they offer a lower transaction cost compared to buying and selling actual stocks. Banks, wealthy investors, and money market funds may also use synthetic stock positions, but for different reasons.

Question 18

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have a(n) ________.

Accepted Answer

When an investor uses a futures contract to hedge a portfolio that is not perfectly aligned with the underlying asset of the futures contract, it is called cross-hedging. In this case, the investor is hedging a corporate bond portfolio using a T-bond futures contract, which is not a perfect match.

Question 19

Which of the following provides the profit to a short position at contract maturity?

Accepted Answer

The answer of Which of the following provides the profit...

Question 20

Futures contracts have many advantages over forward contracts except that ________.

Accepted Answer

Futures contracts are standardized and cannot be tailored to the specific needs of the investor. This is the main advantage of forward contracts over futures contracts. The other options are all advantages of futures contracts over forward contracts.

Quiz 15: Futures and Risk Management