Question 1

When you buy a futures contract, your futures position is:
A)flat.
B)long.
C)short.
D)the same as the cash position.
E)a.and d.

Accepted Answer

When you buy a futures contract, you are taking a long position in the market. This means that you are betting on the price of the underlying asset increasing in the future.

Question 2

____________ of financial futures contracts require physical delivery.
A)Nearly 100%
B)Approximately 75%
C)Approximately 50%
D)Approximately 25%
E)Less than 1%

Accepted Answer

Financial futures contracts are primarily settled in cash rather than physical delivery. Therefore, less than 1% of financial futures contracts require physical delivery.

Question 3

Which of the following would generally not be considered a speculator?
A)Local
B)Day trader
C)Scalper
D)Position trader
E)Commission broker

Accepted Answer

A commission broker is someone who executes transactions on behalf of clients and charges a commission fee for their services. They are not necessarily engaging in speculation themselves, but instead facilitating transactions for others. The other options (local, day trader, scalper, and position trader) all involve buying and selling assets with the intention of making a profit, and are therefore considered speculators.

Question 4

Which of the following executes trades for other parties?
A)Local
B)Day trader
C)Scalper
D)Position trader
E)Commission broker

Accepted Answer

Commission brokers execute trades on behalf of other parties and earn a commission for doing so. The other options listed are types of traders who primarily trade for their own accounts, not for others.

Question 5

When an interest-bearing security is the underlying asset for a futures contract, it is called:
A)a forward contract.
B)an interest rate futures.
C)a commission futures.
D)a speculative futures.
E)an interest rate swap.

Accepted Answer

An interest-bearing security as the underlying asset for a futures contract is referred to as interest rate futures. This is because the value of the contract is determined by the interest rate that the security earns.

Question 6

Financial futures are:
A)a commitment between two parties to trade a financial instrument at a certain rate at a specified time in the future.
B)A call option on a standardized asset at a certain price at a specified time in the future.
C)A put option on a standardized asset at a certain price at a specified time in the future.
D)a commitment between two parties on the price of a standardized financial asset with the final settlement specified time in the future.
E)b.and c.

Accepted Answer

Financial futures are a commitment between two parties on the price of a standardized financial asset with the final settlement specified time in the future. Therefore, options (choices B and C) are not financial futures. Choice A is partially correct but does not specify that it must be at a specified price. Therefore, D is the most appropriate answer.

Question 7

Which of the following primarily takes futures positions that are outstanding for just minutes?
A)Scalper
B)Local
C)Day trader
D)Position trader
E)Commission broker

Accepted Answer

A scalper primarily takes futures positions that are outstanding for just minutes before closing them out for a small profit. Local, day trader, position trader, and commission broker may hold positions for longer periods of time.

Question 8

The "initial margin" on a futures contract:
A)is a cash deposit the buyer places with the seller as good faith money.
B)can be cash or U.S.government securities placed with an exchange member.
C)are U.S.government securities the buyer places with the seller for safekeeping.
D)are the first installment on the payment for a futures contract.
E)is the amount by which the futures contract is initially "in the money."

Accepted Answer

The initial margin on a futures contract can be cash or U.S. government securities placed with an exchange member as collateral for the contract. This serves as a guarantee that the buyer will fulfill their obligations under the contract. Option A is incorrect because the initial margin is not a cash deposit given to the seller. Option C is incorrect because the U.S. government securities are not placed with the seller but with an exchange member. Option D is incorrect because the initial margin is not a payment for the futures contract, but rather collateral. Option E is also incorrect because the initial margin is not related to whether the futures contract is "in the money" or not.

Question 9

When you sell a futures contract, your futures position is:
A)flat.
B)long.
C)short.
D)the same as the cash position.
E)b.and d.

Accepted Answer

When you sell a futures contract, you are taking a short position. This means that you are agreeing to sell the underlying asset at a specific price in the future. Therefore, the correct answer is option C, short.

Question 10

An instrument that derives its value from another underlying asset is known as a(n):
A)hedge.
B)derivative.
C)basis.
D)backdate agreement.
E)original document.

Accepted Answer

A derivative is a financial instrument whose value is based on the underlying asset such as stocks, bonds, commodities, etc. Derivatives are used to manage risk, speculate on market movements, and to gain exposure to the underlying asset without actually owning it. Examples of derivatives include futures, options, swaps, and forward contracts.

Question 11

The daily change in the value due to the marking-to-market process is know as the:
A)maintenance margin.
B)variation margin.
C)market margin.
D)initial margin.
E)marked margin.

Accepted Answer

The daily change in the value due to the marking-to-market process is known as the variation margin. This margin represents the amount of funds that a trader has to post to their account to cover any losses they may incur due to fluctuations in the market. As the value of the trade changes, the variation margin is adjusted to reflect this change, ensuring that both parties have enough money in their accounts to cover any losses that may occur.

Question 12

Banks use financial derivatives for all of the following except:
A)hedge asset yields.
B)adjust maturities by creating synthetic liabilities.
C)adjust the sensitivity of earnings to changes in interest rates.
D)lock-in the cost of liabilities.
E)Banks use financial derivatives for all of the above.

Accepted Answer

Financial derivatives are versatile tools that banks use for various purposes, including hedging asset yields, adjusting maturities through synthetic liabilities, managing the sensitivity of earnings to interest rate changes, and locking in the cost of liabilities. Therefore, all the options listed are correct uses of financial derivatives by banks.

Question 13

Which of the following is correct about futures contracts?
A)Buyers of futures contracts make a profit when prices fall.
B)Buyers of futures contracts make a profit when interest rates rise.
C)Sellers of futures contracts make a profit when prices fall.
D)Sellers of futures contracts make a profit when prices rise.
E)a.and d.

Accepted Answer

Sellers of futures contracts make a profit when prices fall. This is because they have agreed to sell the underlying asset at a fixed price in the future, and if the market price falls below that fixed price, they can buy the asset at the lower market price and sell it at the higher fixed price, realizing a profit. Buyers of futures contracts, on the other hand, make a profit when prices rise.

Question 14

Which of the following is correct about futures contracts?
A)Buyers of futures contracts make a profit when prices rise.
B)Buyers of futures contracts make a profit when interest rates rise.
C)Sellers of futures contracts make a profit when prices rise.
D)Sellers of futures contracts make a profit when prices interest rates fall.
E)b.and d.

Accepted Answer

Buyers of futures contracts are betting on the price of the underlying asset to rise in the future. Therefore, they make a profit when the price of the asset increases. Option B is incorrect because interest rates do not directly impact futures contracts. Option C and D are incorrect because sellers of futures contracts make a profit when the price of the underlying asset falls, not when the interest rates fall. Option E is also incorrect because only option B is false.

Question 15

The daily settlement process that credits gains or deducts losses from a futures customer's account is called:
A)the variation margin.
B)marking-to-market.
C)the initial margin.
D)the maintenance margin.
E)the gain/loss ratio.

Accepted Answer

The daily settlement process that credits gains or deducts losses from a futures customer's account is called marking-to-market. This process involves adjusting the account balance to reflect the current market value of the futures contract. The variation margin is the amount of money that may need to be added to or subtracted from the initial margin in order to maintain the required margin level. The initial margin is the amount of money that must be deposited by a customer when they open a futures position. The maintenance margin is the minimum amount of margin that must be maintained in a futures account in order for the position to be kept open. The gain/loss ratio is not a relevant term in the futures market.

Question 16

When you own the underlying security, your spot position is _______.
A)flat.
B)long.
C)short.
D)is also known as your cash position.
E)b.and d.

Accepted Answer

When you own the underlying security, you have a long position, which is also referred to as your cash position.

Question 17

To buy a futures contract, one must post a(n):
A)maintenance margin.
B)variation margin.
C)market margin.
D)initial margin.
E)marked margin.

Accepted Answer

To buy a futures contract, one must post an initial margin. This is the amount of money required to open or initiate a long or short position in a futures contract. The initial margin is typically a percentage of the total value of the contract and is set by the exchange on which the contract is traded. This margin serves as a performance bond or collateral to ensure that the buyer will fulfill their contractual obligations.

Question 18

Which of the following is not a difference between futures and forward contracts?
A)Futures contracts are marked-to-market daily, while futures contracts are not.
B)Buyers and sellers deal directly with each other on forward contracts but go through and exchange with futures contracts.
C)Futures contracts are standardized, forward contracts generally are not.
D)Delivery rarely occurs on futures contracts but generally occurs with forward contracts.
E)All of the above are differences between futures and forward contracts.

Accepted Answer

The answer of Which of the following is not a...

Question 19

Which of the following wishes to reduce risk?
A)Scalper
B)Local
C)Arbitrageur
D)Hedger
E)Day trader

Accepted Answer

A hedger is someone who takes a position in the market to reduce their risk. They will typically take an opposite position to the one they hold in the underlying asset to offset any potential losses. The other choices do not necessarily aim to reduce risk.

Question 20

When you wish to own the underlying security, your spot position is _______.
A)fat.
B)long.
C)short.
D)skinny.
E)a.and c.

Accepted Answer

The answer of When you wish to own the underlying...

Quiz 9: Using Derivatives to Manage Interest Rate Risk

When you buy a futures contract, your futures position is:

____________ of financial futures contracts require physical delivery.

Which of the following would generally not be considered a speculator?

Which of the following executes trades for other parties?

When an interest-bearing security is the underlying asset for a futures contract, it is called:

Financial futures are:

Which of the following primarily takes futures positions that are outstanding for just minutes?

The "initial margin" on a futures contract:

When you sell a futures contract, your futures position is:

An instrument that derives its value from another underlying asset is known as a(n) :

The daily change in the value due to the marking-to-market process is know as the:

Banks use financial derivatives for all of the following except:

Which of the following is correct about futures contracts?

Which of the following is correct about futures contracts?

The daily settlement process that credits gains or deducts losses from a futures customer's account is called:

When you own the underlying security, your spot position is _______.

To buy a futures contract, one must post a(n) :

Which of the following is not a difference between futures and forward contracts?

Which of the following wishes to reduce risk?

When you wish to own the underlying security, your spot position is _______.