chapter 22 - investments

28. An investor with a long position in Treasury notes futures will profit if A. interest rates decline. B. interest rate increase. C. the prices of Treasury notes increase. D. the price of the long bond increases. E. None of these is correct.

A. interest rates decline.

8. A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. A. long; increase B. long; decrease C. short; increase D. long; stay the same E. short; stay the same

A. long; increase

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. A. long; short B. long; long C. short; short D. short; long E. margined; long

A. long; short

27. To exploit an expected increase in interest rates, an investor would most likely A. sell Treasury bond futures. B. take a long position in wheat futures. C. buy S&P 500 index futures. D. take a long position in Treasury bond futures. E. None of these is correct.

A. sell Treasury bond futures.

14. Which one of the following statements is true? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. The maintenance margin is set by the producer of the underlying asset.

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

11. Which one of the following statements regarding delivery is true? A. Most futures contracts result in actual delivery. B. Only one to three percent of futures contracts result in actual delivery. C. Only fifteen percent of futures contracts result in actual delivery. D. Approximately fifty percent of futures contracts result in actual delivery. E. Futures contracts never result in actual delivery

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

A futures contract A. is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C. gives the buyer the right, but not the obligation, to buy an asset some time in the future. D. is a contract to be signed in the future by the buyer and the seller of the commodity. E. None of these is correct.

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

9. A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. A. long; decrease B. short; decrease C. short; stay the same D. short; increase E. long; stay the same

B. short; decrease

6. 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. A. make delivery; take delivery B. take delivery; make delivery C. take delivery; take delivery D. make delivery; make delivery E. negotiate the price; pay the price

B. take delivery; make delivery

31. Which one of the following statements regarding "basis" is not true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price. E. None of these is true.

C. A short hedger suffers losses when the basis decreases.

2. The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A. are; are B. are not; are C. are; are not D. are not; are not E. are; may or may not be

C. are; are not

30. An increase in the basis will __________ a long hedger and __________ a short hedger. A. hurt; benefit B. hurt; hurt C. benefit; hurt D. benefit; benefit E. benefit; have no effect upon

C. benefit; hurt

4. In a futures contract the futures price is A. determined by the buyer and the seller when the delivery of the commodity takes place. B. determined by the futures exchange. C. determined by the buyer and the seller when they initiate the contract. D. determined independently by the provider of the underlying asset. E. None of these is correct.

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

29. To hedge a long position in Treasury bonds, an investor most likely would A. buy interest rate futures. B. sell S&P futures. C. sell interest rate futures. D. buy Treasury bonds in the spot market. E. None of these is correct.

C. sell interest rate futures.

13. You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date you must A. buy one May corn futures contract. B. buy two April corn futures contract. C. sell one April corn futures contract. D. sell one May corn futures contract. E. None of these is correct.

C. sell one April corn futures contract.

7. The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are A. specified by the buyers and sellers. B. specified only by the buyers. C. specified by the futures exchanges. D. specified by brokers and dealers. E. None of these is correct.

C. specified by the futures exchanges

22. Foreign currency futures contracts are actively traded on the A. Euro. B. British pound. C. Drachma. D. Euro and British pound. E. All of these are correct.

D. Euro and British pound.

3. Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange. A. are not; are B. are; are C. are not; are not D. are; are not E. are; may or may not be

D. are; are not

10. The open interest on silver futures at a particular time is the A. number of silver futures contracts traded during the day. B. number of outstanding silver futures contracts for delivery within the next month. C. number of silver futures contracts traded the previous day. D. number of all long or short silver futures contracts outstanding. E. None of these is correct.

D. number of all long or short silver futures contracts outstanding.

33. 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 A. buying all the stocks in the S&P 500 and selling put options on the S&P 500 index. B. selling short all the stocks in the S&P 500 and buying S&P Index futures. C. selling all the stocks in the S&P 500 and buying call options on the S&P 500 index. D. selling S&P 500 Index futures and buying all the stocks in the S&P 500. E. None of these is correct

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

17. Financial futures contracts are actively traded on the following indices A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All of these are correct.

E. All of these are correct.

16. Financial futures contracts are actively traded on the following indices except A. the S&P 500 Index. B. the New York Stock Exchange Index. C. the Nikkei Index. D. the Dow Jones Industrial Index. E. All of these indices have actively traded futures contracts

E. All of these indices have actively traded futures contracts

12. Which of the following statements regarding delivery is most false? A. Most futures contracts result in actual delivery. B. Only one to three percent of futures contracts result in actual delivery. C. Only fifteen percent of futures contracts result in actual delivery. D. Both most futures contracts result in actual delivery and only one to three percent of futures contracts result in actual delivery E. Both most futures contracts result in actual delivery and only fifteen percent of futures contracts result in actual delivery

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

32. Which of the following statements regarding "basis" is most true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price. E. 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

E. 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

15. Which of the following statements is most false? A. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. B. If the value of the margin account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. C. A margin deposit can only be met with cash. D. All futures contracts require the same margin deposit. E. 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

E. 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