Question 1

Futures contracts are more likely to be cash-settled when

Accepted Answer

Futures contracts are more likely to be cash-settled when the asset underlying the contract is too costly to deliver physically. This is because it may be impractical or expensive to physically deliver large quantities of the underlying asset, leading to the use of cash settlements instead.

Question 2

When the futures-spot basis weakens

Accepted Answer

The weakening of the futures-spot basis means that the futures price is getting closer or converging towards the spot price. This results in a decrease in the difference between futures and spot prices.

Question 3

In the absence of arbitrage, the futures price at maturity should equal

Accepted Answer

In the absence of arbitrage, the futures price should equal the spot price of the underlying asset at maturity. This is because an investor would be able to purchase the underlying asset at the spot price and hold it until maturity, earning the return that the futures contract promised without having to enter into the contract. Therefore, the futures price should be equivalent to the spot price to ensure there are no arbitrage opportunities.

Question 4

For a futures contract on an asset to be successful compared to the alternative of forward contracts, which of the following features would help?

Accepted Answer

Counterparty credit risk is high in forward contracts because they are private agreements between two parties. Futures contracts, traded on exchanges, mitigate this risk through daily settlements and the use of a clearinghouse as an intermediary, making them more attractive in scenarios where counterparty credit risk is a concern.

Question 5

You go short oil 10 futures contracts on NYMEX when the futures price of oil is $79 a barrel and close out your position three days later at a futures price of $83 a barrel. One futures contract is for 1,000 barrels. Ignoring interest on the margin account, the futures trading has resulted in a

Accepted Answer

When you go short, you profit if the price decreases. Here, the price increased from $79 to $83, a $4 increase per barrel. With 10 contracts of 1,000 barrels each, the loss is 10 * 1,000 * $4 = $40,000.

Question 6

The level of margining in a futures contract takes as an important input

Accepted Answer

The level of margining in a futures contract takes into consideration the volatility of the asset underlying the futures contract. This is because high levels of volatility can lead to wider price fluctuations and increase the risk for the exchange or clearinghouse. Therefore, a higher margin is required to cover potential losses.

Question 7

Ignoring convenience yields, the theoretical futures price for a commodity with a positive cost of carry should typically exhibit

Accepted Answer

A positive cost of carry implies that the futures price is higher than the spot price. This typically results in a contango market where the futures price gradually decreases as the delivery date approaches.

Question 8

A price tick is

Accepted Answer

A price tick is the minimum amount by which the price can move. It is the smallest unit of price movement in a given market.

Question 9

When a counterparty to a futures contract fails to perform under the contract,

Accepted Answer

The answer of When a counterparty to a futures contract...

Question 10

The cheapest-to-deliver option

Accepted Answer

The cheapest-to-deliver option refers to the asset that is the most economical to deliver for the seller of a futures contract. This can hurt the holder of the long position in the futures contract if the cheapest-to-deliver option is of lower quality or value than the asset they were expecting to receive upon expiration.

Question 11

An investor enters into a long position in 10 gold futures contracts at a futures price of $1000/oz and closes out the position at a price of $1020/oz. If one gold futures contract is for 50 ounces, what are the investor's gains or losses?

Accepted Answer

The gain per contract is $1020 - $1000 = $20/oz. Since each contract is for 50 ounces, the gain per contract is $20 x 50 = $1000. The total gain for 10 contracts is $1000 x 10 = $10,000. Therefore, the investor's gain is $10,000.

Question 12

A calendar spread futures position comprises

Accepted Answer

A calendar spread futures position is a strategy where an investor buys a futures contract of one maturity (typically further out) and simultaneously sells a futures contract of a different maturity (typically nearer). This is done to profit from the difference in the prices of the two contracts. Therefore, choice A is the correct answer. The other choices are incorrect because a calendar spread position only involves two futures contracts of different maturities, not a portfolio of futures contracts or a contract on the difference between futures prices.

Question 13

September corn futures are currently trading at $3.80 a bushel while the spot price of corn is $3.65 a bushel, so the "basis" (the futures price minus the spot price) is $0.15 a bushel. If you expect the basis to weaken (i.e., to fall) significantly in the next few days, you can speculate on your view by

Accepted Answer

Going long spot corn and short September futures is the best choice in this scenario because if the basis weakens as expected, the spot price of corn would go down while the futures price remains the same, resulting in a profit. Going long the September futures contract (A) would only be profitable if the price of corn goes up, regardless of the basis. Going long spot corn (B) would not account for the potential change in basis and could lose money if the basis weakens. Going long September futures and short spot corn (D) would result in a loss if the basis weakens as expected because the short position in spot corn would lose value while the long position in futures remains the same.

Question 14

A "stack-and-roll" strategy makes profits from the "roll" part when

Accepted Answer

A "stack-and-roll" strategy involves buying futures contracts and selling them before their expiration date to buy longer-dated futures contracts, thus "rolling" the position forward. In a market in backwardation, longer-dated futures contracts are trading at a lower price compared to near-dated futures contracts, leading to a profit when rolling the position forward.

Question 15

The most widely traded futures are of the following type:

Accepted Answer

Interest rate futures are the most widely traded futures globally, as they are used extensively by financial institutions to hedge against changes in interest rates.

Question 16

If the market is in backwardation

Accepted Answer

Backwardation occurs when the current spot price is higher than the futures price, meaning none of the given options correctly describe backwardation.

Question 17

Plutonium is trading at a one-year futures price of $5,000 per gram. A futures contract comprises 100 grams. The initial margin is $100,000 and the maintenance margin is $80,000. You are short one futures contract. There is a margin call when the price per gram of plutonium changes to

Accepted Answer

A margin call occurs when the price increases to $5,250 per gram, causing a loss of $25,000 (100 grams x $250), reducing the margin below the maintenance level of $80,000.

Question 18

Which of the following types of orders does not involve specifying a price limit or trigger price as part of the order?

Accepted Answer

A spread order involves the purchase or sale of two or more related securities as a single transaction, and does not involve specifying a price limit or trigger price as part of the order. A stop order involves specifying a trigger price, a market-if-touched order involves specifying a trigger price and a limit or market order to execute when that trigger price is reached, and a fill-or-kill limit order involves specifying a price limit as well as a requirement that the order be filled immediately or cancelled.

Question 19

March what futures are trading at $4.20 a bushel and May wheat futures are trading at $4.35 a bushel. You expect the spread between May and March futures prices to widen. To speculate on this view, you would

Accepted Answer

The spread between May and March futures prices is expected to widen, meaning May futures will become more expensive compared to March futures. To profit on this view, one should go long May futures and short March futures, which is essentially betting that the price difference between the two will widen. Therefore, the correct choice is B.

Question 20

Which of the following features distinguish futures markets from forwards markets?

Accepted Answer

Futures markets differ from forwards markets in all three of the listed features. Futures contracts are standardized, whereas forwards are customized to meet the specific needs of the parties involved. Futures also utilize margin accounts to manage risk, which are not typically involved in forwards. Finally, futures enable easy reversal of positions through offsetting trades, while forwards are more difficult to unwind.

Quiz 2: Futures Markets