Question 1

Which of the following futures contracts is settled differently than the rest?

Accepted Answer

The answer of Which of the following futures contracts is...

Question 2

The initial margin for a futures contract varies, but generally ranges between _________ of the contract value on ________.

Accepted Answer

The initial margin for a futures contract varies depending on the contract but generally ranges between 2-5% of the contract value and is required for both long and short positions. Therefore, option D is the best choice. Options A, B, and C are incorrect as they either specify the margin requirement for only long positions or provide incorrect margin ranges. Option E includes a margin range that is not commonly seen for futures contracts.

Question 3

Which of the following is incorrect about futures margin?

Accepted Answer

This statement is incorrect as the excess margin may be withdrawn from the account at any time, as long as the remaining margin is sufficient to cover the margin requirement.

Question 4

All else the same, a decrease in the dividend yield of a stock index will _________ the price of a futures contract in the index.

Accepted Answer

A decrease in the dividend yield of a stock index would generally lead to an increase in the price of a futures contract in the index. This is because lower dividends imply that more of the return from holding stocks is expected to come from capital gains rather than dividend income, making the index more valuable and thus increasing futures prices.

Question 5

In the futures market, ________ transfer price risk, and _________ absorb price risk.

Accepted Answer

Hedgers use futures contracts to protect themselves against price movements in the underlying asset, effectively transferring price risk. Speculators, on the other hand, willingly accept this risk with the hope of making a profit from price movements.

Question 6

Assuming a futures contract is correctly price, according to the spot-futures parity relationship, an increase in the risk-free rate of interest will:

Accepted Answer

The spot-futures parity relationship implies that the futures price increases with an increase in the risk-free rate of interest. This is because the cost of carrying or holding the underlying asset until the future date (which includes the opportunity cost represented by the risk-free rate) increases, thus increasing the futures price.

Question 7

The two key considerations when determining the delivery mechanism for a futures contract are:

Accepted Answer

The answer of The two key considerations when determining the...

Question 8

Suppose the cheapest-to-deliver bond deliverable against the Treasury bond futures contract changes. The new bond has a shorter duration than the previous bond. This will __________ the number of contracts needed to hedge a bond portfolio.

Accepted Answer

When the cheapest-to-deliver bond has a shorter duration, more contracts are needed to achieve the same hedge because the shorter duration bond has less interest rate sensitivity. Therefore, to match the duration of the bond portfolio being hedged, an increased number of futures contracts would be required.

Question 9

The required initial margin of a futures trading account can be viewed as

Accepted Answer

The required initial margin of a futures trading account is a performance guarantee, meaning it is a deposit made to ensure that the trader will fulfill their contractual obligations. It is not a down payment, commission, or maintenance fee, although these may also apply to futures trading accounts.

Question 10

A speculator expecting interest rates to rise will

Accepted Answer

Taking a short position in Treasury bond futures involves selling bonds at the current interest rate, with the hope of buying them back at a lower price when interest rates rise in the future. This allows the speculator to profit from the expected rise in interest rates.

Question 11

Which of the following is false regarding futures and forward contracts?

Accepted Answer

Marking to market is a feature of futures contracts, where the gains and losses are settled on a daily basis. Forward contracts, on the other hand, do not have this feature; the gains or losses are realized at the end of the contract term.

Question 12

The primary difference between a forward contract and a futures contract is

Accepted Answer

The primary difference between a forward contract and a futures contract is the use of an organized exchange for futures contracts. Futures contracts are traded on organized exchanges, while forward contracts are private agreements between two parties. The time of delivery, time at which the price is determined, type of commodity being exchanged, and form of payment for delivery can be similar in both types of contracts.

Question 13

In Canada, who is responsible for standardizing a financial futures contract?

Accepted Answer

In Canada, the Montreal Exchange is responsible for standardizing financial futures contracts. While other exchanges, such as the Winnipeg Commodity Exchange, Toronto Stock Exchange, and Vancouver Exchange, may also offer futures contracts, they do not have the same standardization authority as the Montreal Exchange.

Question 14

A futures contract _________ a zero sum game. A forward contract __________ a zero sum game.

Accepted Answer

A futures contract is a zero-sum game because for every winner there is a loser, meaning that the gains of the winner are exactly offset by the losses of the loser. Similarly, a forward contract is also a zero-sum game because the parties have locked in a price at the outset, so any gain by one party is an equal loss to the other.

Question 15

A futures contracts I) is standardized when traded on an exchange
II) is a zero-sum game
III) has a net value of zero
IV) is a derivative security

Accepted Answer

The answer of A futures contracts I) is standardized when...

Question 16

You have decided to close out your futures position. To do this, you need to instruct your broker to:

Accepted Answer

The answer of You have decided to close out your...

Question 17

The motivation of hedgers in the futures market is to:

Accepted Answer

Hedgers use futures contracts to eliminate price risk by locking in a price for a commodity or financial asset they plan to buy or sell in the future. Their goal is not to seek trading profits or speculate on changes in basis, but rather to protect themselves from potential price fluctuations. Hedgers may also use futures contracts to secure a supply source, but this is secondary to their primary goal of risk management.

Question 18

All else the same, an increase in the risk of a portfolio as measured by beta will _________ the number of futures contracts needed to hedge the portfolio.

Accepted Answer

A higher beta implies more volatility in the portfolio, which translates to a higher risk. In order to hedge this increased risk, more futures contracts will be needed. Therefore, an increase in beta will increase the number of futures contracts needed to hedge the portfolio.

Question 19

Which of the following is false regarding futures and forward contracts?

Accepted Answer

Futures contracts have standardized terms and conditions, making them less flexible compared to forward contracts.

Question 20

Futures margin is defined as the deposit of funds into a futures trading account for which one of the following purposes?

Accepted Answer

Futures margin is a deposit of funds that serves as collateral to cover potential losses from outstanding positions. It is not used to purchase additional contracts or cover trading costs, and it is not intended to cover the future costs of reversing a position. While it can be used to take a hedge position, this is not the primary purpose of futures margin.

Quiz 16: Futures Contracts

Which of the following futures contracts is settled differently than the rest?

The initial margin for a futures contract varies, but generally ranges between _ of the contract value on .

Which of the following is incorrect about futures margin?

All else the same, a decrease in the dividend yield of a stock index will _________ the price of a futures contract in the index.

In the futures market, transfer price risk, and _ absorb price risk.

Assuming a futures contract is correctly price, according to the spot-futures parity relationship, an increase in the risk-free rate of interest will:

The two key considerations when determining the delivery mechanism for a futures contract are:

Suppose the cheapest-to-deliver bond deliverable against the Treasury bond futures contract changes. The new bond has a shorter duration than the previous bond. This will __________ the number of contracts needed to hedge a bond portfolio.

The required initial margin of a futures trading account can be viewed as

A speculator expecting interest rates to rise will

Which of the following is false regarding futures and forward contracts?

The primary difference between a forward contract and a futures contract is

In Canada, who is responsible for standardizing a financial futures contract?

A futures contract _ a zero sum game. A forward contract __ a zero sum game.

A futures contracts I) is standardized when traded on an exchange II) is a zero-sum game III) has a net value of zero IV) is a derivative security

You have decided to close out your futures position. To do this, you need to instruct your broker to:

The motivation of hedgers in the futures market is to:

All else the same, an increase in the risk of a portfolio as measured by beta will _________ the number of futures contracts needed to hedge the portfolio.

Which of the following is false regarding futures and forward contracts?

Futures margin is defined as the deposit of funds into a futures trading account for which one of the following purposes?