Chapter 22

You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.

$5,500 profit

Which of the following items is specified in a futures contract?

1. the contract size 2. the acceptable grade of the commodity on which the contract is held 3. the settlement price

Which of the following items is not specified in a futures contract?

1. the maximum acceptable price range during the life of the contract 2. the market price at expiration

Which one of the following statements regarding "basis" is not true?

A short hedger suffers losses when the basis decreases.

Agricultural futures contracts are actively traded on

All of these are correct.

Financial futures contracts are actively traded on the following indices

All of these are correct.

Interest rate futures contracts are actively traded on the

All of these are correct.

Metals and energy currency futures contracts are actively traded on

All of these are correct.

Financial futures contracts are actively traded on the following indices except

All of these indices have actively traded futures contracts.

Which of the following statements regarding delivery is most false?

Both most futures contracts result in actual delivery and only fifteen percent of futures contracts result in actual delivery

Foreign currency futures contracts are actively traded on the

Euro and British pound.

Which one of the following statements is true?

If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call.

With regard to futures contracts, what does the word "margin" mean?

It is a good-faith deposit made at the time of the contract's purchase or sale.

Which one of the following statements regarding delivery is true?

Only one to three percent of futures contracts result in actual delivery.

Which of the following is true about profits from futures contracts?

The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

Which of the following statements regarding "basis" is most true?

The basis is the difference between the futures price and the spot price, the basis risk is borne by the hedger, and the basis increases when the futures price increases by more than the spot price

Which of the following statements is most false?

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract, a margin deposit can only be met with cash, and all futures contracts require the same margin deposit

Which of the following is false about profits from futures contracts?

The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made; it is possible for both the holder of the long position and the holder of the short position to earn a profit; and the clearinghouse makes most of the profit

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

You would be notified that you owe the holder of the short position a certain amount of cash.

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

are; are not

An increase in the basis will __________ a long hedger and __________ a short hedger

benefit; hurt

To exploit an expected decrease in interest rates, an investor would most likely

buy Treasury bond futures

To hedge a short position in Treasury bonds, an investor most likely would

buy interest rate futures.

If you determine that the DAX-30 index futures is under priced relative to the spot DAX-30 index you could make an arbitrage profit by

buying DAX-30 index futures and selling all the stocks in the DAX-30.

The establishment of a futures market in a commodity should not have a major impact on spot prices because

futures are a zero-sum game

A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future.

long; increase

A trader who has a __________ position in oil futures believes the price of oil will __________ in the future.

long; increase and short; decrease

The process of marking-to-market

posts gains or losses to each account daily and may result in margin calls.

The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are

specified by the futures exchanges.

Investors who take long positions in futures agree to __________ of the commodity on the delivery date, and those who take the short positions agree to __________ of the commodity.

take delivery; make delivery

Futures contracts in the U.S. are regulated by

the Commodities Futures Trading Corporation

Who guarantees that a futures contract will be fulfilled?

the clearinghouse

Given a stock index with a value of $1,000, an anticipated dividend of $30 and a risk-free rate of 6%, what should be the value of one futures contract on the index?

$1030.00

On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be

$125 loss.

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index?

$1524.25

Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange.

determined by the buyer and the seller when they initiate the contract.

In a futures contract the futures price is

determined by the buyer and the seller when they initiate the contract.

Contango

holds that the natural hedgers are the purchasers of a commodity, not the suppliers and is a hypothesis polar to backwardation.

A decrease in the basis will __________ a long hedger and __________ a short hedger.

hurt; benefit

An investor with a short position in Treasury notes futures will profit if

interest rate increase.

An investor with a long position in Treasury notes futures will profit if

interest rates decline.

. A futures contract

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.

Taxation of futures trading gains and losses

is based on cumulative year-end profits or losses.

Delivery of stock index futures

is made by a cash settlement based on the index value.

The expectations hypothesis of futures pricing

is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset.

The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures.

long; short

Normal backwardation

maintains that for most commodities, there are natural hedgers who desire to shed risk and maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.

The open interest on silver futures at a particular time is the

number of all long or short silver futures contracts outstanding.

Open interest includes

only long or short positions but not both.

To exploit an expected increase in interest rates, an investor would most likely

sell Treasury bond futures

To hedge a long position in Treasury bonds, an investor most likely would

sell interest rate futures.

You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must

sell one April corn futures contract.

You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date you must

sell one April oil futures contract.

If you determine that the DAX-30 index futures is overpriced relative to the spot DAX-30 index you could make an arbitrage profit by

selling DAX-30 index futures and buying all the stocks in the DAX-30.

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by

selling S&P 500 Index futures and buying all the stocks in the S&P 500.

A trader who has a __________ position in gold futures wants the price of gold to __________ in the future.

short; decrease

Which one of the following statements regarding "basis" is true?

the basis is the difference between the futures price and the spot price; the basis risk is borne by the hedger,; and the basis increases when the futures price increases by more than the spot price.

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

the clearinghouse.

Speculators may use futures markets rather than spot markets because

transactions costs are lower in futures markets and futures markets provide leverage.

Some of the newer futures contracts include

weather futures. electricity futures.