FNCE 420 - Ch. 2 - Exam 1

A trader has a long position in a wheat contract. The initial margin is $5,000. The maintenance margin is $3,750. There are 5,000 bushels in each wheat contract. On July 10, the price is $2.00 per bushel. What is the price at which the trader will receive a maintenance margin call?

$1.75

A trader is long four July gold futures contracts, each with a contract size of 300 oz. If the price of July gold increases from $380.20 to $381.00 per ounce the change in the margin balance will be:

$960

Which of the following statements regarding forward contract dealers is NOT correct?

Dealers are compensated through up-front payments by the parties to forward contracts.

Which of the following statements regarding forward contracts is NOT correct?

Dealers make the majority of their profits by anticipating price moves in the underlying asset.

Which of the following statements about options is most accurate?

For call options, the lower the exercise price relative to the stock's underlying price, the more the call option is worth.

Which of the following statements about futures margin is least accurate?

Initial margin must be posted to a futures account within three days after the first trade.

Which of the following regarding a plain vanilla interest rate swap is most accurate?

Only the net interest payments are made.

What is the primary difference between an American and a European option?

The American option can be exercised at anytime on or before its expiration date.

Which of the following statements about put and call options at expiration is least accurate?

The maximum gain to the buyer is unlimited.--- The maximum loss to the writer is the premium.

If the margin balance in a futures account with a long position goes below the maintenance margin amount:

a deposit is required to return the account margin to the initial margin level.

Which of the following is an advantage of the swaps market over the futures markets? The:

ability to hedge over long time horizons.

The settlement price for a futures contract is:

an average of the trade prices during the closing period.

A futures contract is least likely:

an equity security.

Most deliverable futures contracts are settled by:

an offsetting trade.

Closing out a futures position prior to expiration:

can be done by entering into an offsetting trade at the current futures price.

An offsetting trade is used to:

close out a futures position prior to expiration.

Some forward contracts are termed cash settlement contracts. This means:

either the long or the short in the forward contract will make a cash payment at contract expiration and the asset is not delivered.

An American option is:

exercisable at any time up to its expiration date.

An investor can exit a forward position prior to contract expiration by all of the following methods EXCEPT:

exercising the early delivery option.

A standardized and exchange-traded agreement to buy or sell a particular asset on a specific date is best described as a:

futures contract

Which of the following statements about futures and the clearinghouse is least accurate? The clearinghouse:

has defaulted on one half of one percent of futures trades.

A futures contract is least likely to be:

illiquid

The short in a forward contract:

is obligated to deliver the asset upon expiration of the contract.

Default risk in a forward contract:

is the risk to either party that the other party will not fulfill their contractual obligation.

The party to a forward contract that is obligated to purchase the asset is called the:

long

The practice of adjusting the margin balance in a futures account for the daily change in the futures price is called:

marking to market.

An agreement that gives the holder the right, but not the obligation, to sell an asset at a specified price on a specific future date is a:

put option

The initiation of a futures position:

requires both a buyer and a seller.

The motivation for swap agreements would be:

the reduction of transactions costs.

All of the following are characteristics of futures contracts EXCEPT:

they trade in a dealer (over the counter) market.

If the balance in a trader's account falls below the maintenance margin level, the trader will have to deposit additional funds into the account. The additional funds required is called the:

variation margin