Chapter 13 Managing Your Own Portfolios & Chapter 15 Commodities and Financial Futures
Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is 21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating oil is $2.15 when the contract expires, Eric's profit or loss is ________
$2,100 profit.
8) A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels. If the contract is quoted at a settle price of 529, then the value of one wheat futures contract is
$26,450
Fred has just sold short 3 contracts of May wheat on the CBT. These are 5,000 bushel contracts. The initial deposit is $1,500 per contract with a maintenance margin of $1,200. (a) What is Fred's total initial margin? (b) How much of an increase in the price of wheat is necessary to cause a margin call?
(a) (3)($1,500) = $4,500 (b) ($1,500 - $1,200)/5,000 = $0.06 The value of a contract can rise by $300 before a margin call. On a 5,000 contract $300 is equivalent to a six-cent increase per bushel.
The return on a futures contract is calculated as
(selling price - purchase price)/margin deposit.
You short sell contract A at 428 and buy contract B at 333. After one month, you close contract A at 435 and contract B at 339. What is you net profit in points?
-1
George purchased a futures contract at 349. The contract is on 2500 units, requires a 10% margin deposit and is priced in cents per unit. George sold the contract at 278. What is George's return on invested capital?
-203.4%
What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.
123.5%
Assume the initial margin on a Swiss franc futures contract is $2,000. If an individual purchases a contract at $0.78 per franc and the contract involves 125,000 Swiss francs, what return on invested capital will the investor receive if the price per franc moves to $0.80?
125%
Briefly discuss futures options. What are they, and what advantage do they offer an investor?
A futures option is a listed put or call on actively traded futures contracts. They offer a very high degree of leverage and are available on commodities and financial futures. They trade just like other options. One advantage they offer an investor is that they limit loss exposure to the price of the option, while offering the potential for high returns.
Fixed weightings, flexible weightings, and tactical asset allocation are three approaches to asset allocation. Compare and contrast these three different approaches.
Answer: The fixed weightings approach assigns a fixed percentage of the portfolio to each asset category. This percentage is held constant over time. The flexible weightings approach assigns a percentage of a portfolio to each asset category but these weightings are changed periodically in response to changes in the overall market. Tactical asset allocation is a form of market timing that uses stock-index futures and bond futures to change a portfolio's asset allocation.
Which one of the following statements concerning financial futures is correct?
Except for short-term securities, interest rate futures are quoted based on a percentage of the par value of the underlying debt security.
A rational investor will require the same return from a corporate security as from a government security.
F
All futures contracts trade continuously between 7:30 a.m. and 2:00 p.m., Monday through Friday.
F
Each commodity quote identifies the product, the exchange on which the contract is traded, the size of the contract, the price of the contract, and the delivery month.
F
For individual investors to adequately hedge their personal portfolios, they should always use the S&P 500 Stock Index futures contract.
F
Futures contracts have two sources of return namely the capital gains that can be earned when prices move in a favorable fashion, and dividend income from the underlying asset.
F
Given that futures contracts on the Japanese yen are traded in units of 12.5 million yen and are quoted in cents per yen, it follows that a Japanese yen contract quoted at 01.171 would be worth $14,637,500.
F
Nearly all futures contracts traded in the United States are traded on the over-the-counter (OTC) market.
F
One of the advantages of speculating with stock-index futures is that they eliminate the need to predict the future course of the stock market.
F
Producers and industrial users of commodities who also buy and sell futures contracts are known as speculators.
F
Speculating originally provided the economic rational to create financial futures.
F
Stock Index futures can substitute for indexed mutual funds in conservative portfolios.
F
The high rates of returns, either positive or negative, on futures contracts are primarily due to the high initial margin requirement.
F
The holding period return measures only the capital appreciation of an investment.
F
The maximum loss on a futures contract is the price paid for the contract.
F
The owner of a futures contract has the right, but not the obligation, to buy or sell at the contracted price.
F
The seller of a stock-index future is obligated to deliver a specified number of shares of the underlying security.
F
With a futures contract, an investor cannot lose more than the price of the contract itself.
F
Fred purchased a futures contract on live hogs through Broker A. After purchasing the contract, Fred moved his investments to Broker B. During the transition, the contract on the hogs was forgotten. When the delivery date for the futures contract arrived,
Fred took delivery of live hogs.
The futures market contains two basic types of traders: hedgers and speculators. Define the role played by each of these types of traders.
Hedgers are commodities producers and processors who use futures as a way to protect their interest in the underlying commodity or financial interest. Hedgers provide the reason for the existence of futures contracts. Speculators trade futures in the hopes of earning a profit on expected price swings. Speculators are risk-takers who give the futures market its liquidity.
The holding period return (HPR) of one's portfolio should be compared to investment goals I. to assess whether the proper rate of return is being earned for the risk involved. II. to be sure one's portfolio is outperforming the S&P 500 Index. III. to isolate any problem investments. IV. to determine when to change benchmarks from the S&P 500 to the NASDAQ Composite Index.
I and III only
A futures contract I. obligates the buyer of the contract to buy a specified amount of a commodity. II. grants the buyer the right to either buy or sell a specified amount of a commodity. III. uses specified settle prices that vary with the type of commodity. IV. establishes the delivery price based on the selling price of the futures contract.
I and IV only
Which of the following characteristics apply to futures contracts? I. Futures contracts are an important tool to control risk. II. Futures contracts are highly risky and involve speculation. III. Futures contracts specify both the quantity and the quality of the item. IV. The buyer must hold the contract until maturity.
I, II and III only
Which of the following are advantages of using options for futures speculation? I. increased leverage II. potential losses are limited to the cost of the option III. options are available on a broad range of commodity, index, and currency futures IV. investors avoid the possibility of having to take delivery of the commodity.
I, II, III and IV
An moderate asset allocation alternative might include I. bonds. II. common stocks. III. foreign securities. IV. options and commodities futures.
I, II, and III only
The majority of trading in futures contracts takes place on I. the Chicago Mercantile Exchange II. the Chicago Board of Trade III. the American Exchange IV. the New York Mercantile Exchange
I, II, and IV only
Which of the following are specifically stated in futures contracts? I. the quantity of the commodity to be delivered. II. the quality of the commodity to be delivered. III. the exact price at which the commodity must be delivered V. the time and place at which the commodity must be delivered
I, II, and IV only
If an investor is going to participate in the commodities market by buying a contract, he/she should do which of the following? I. realize that making a profit is relatively easy II. be mentally prepared for an enormous loss III. be financially able to meet repeated margin calls IV. spend all of their available cash on margin deposits
II and III only
Which of the following is(are) correct statements about the buyer of a futures contract? I. The contract buyer is short on the position. II. The contract buyer wants the price of the item to increase. III. The buyer can liquidate the position with an offsetting transaction. IV. The majority of the buyers actually take delivery of the item.
II and III only
Which of the following statements concerning futures are correct? I. Investors in financial futures can earn both dividend income from the underlying security as well as the potential capital gain from the futures contract. II. The return on a futures contract is computed by dividing the net difference between the sale and the purchase price of the contract by the amount of the margin deposit. III. It is very easy to lose your entire investment in a futures contract in a very short period of time due to the volatility of the futures market and also the use of leverage. IV. Conservative investors tend to purchase one futures contract as a means of increasing the return on their portfolio while maintaining minimal risk.
II and III only
Which of the following trading strategies are correct? I. If you expect the British pound to appreciate in value, you should short the pound. II. If you expect interest rates to rise, you should go long on interest rate futures. III. If you expect the stock market to rise, you should go long on stock-index futures. IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short stock-index futures.
III and IV only
Which one of the following statements concerning financial futures is correct?
International trade often is accompanied by currency hedging via financial futures.
All futures contracts are traded on a margin basis. What does "margin" mean, and how does the use of margin affect the inherent risk-return nature of the futures market?
Margin refers to the amount of equity that goes into a purchase. The use of margin in the futures market means that there is a great deal of leverage involved, and therefore a great deal of risk. Consequently, the pay-offs can be tremendous, but so can the losses.
25) Calculate the return on invested capital on a platinum futures contract for 50 troy ounces when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The initial deposit is $2,500. (Show all work.)
Return = {($823.54)(50) - ($810.40)(50)}/$2,500 = 26.28%
A rational investor will require the same after-tax return from a corporate security as from a government security.
T
A successful hedge results in a guaranteed sales price to the producers of commodities.
T
All futures contracts are traded on a margin basis.
T
All trading in the futures market is done on a margin basis.
T
An investor's margin in a futures contract is checked each day under a procedure known as mark-to-the-market.
T
Because a futures contract deals with very large trading units, even a modest price change in the price of the underlying commodity can have a large impact on the market value of the contract.
T
Businesses engaged in foreign trade often invest in currency futures.
T
Businesses that engage in international trade can hedge their exchange rate risk with futures contracts.
T
Commodity prices react to a unique set of economic, political, and international pressures, as well as to the weather.
T
Failure to meet a margin call will cause an investor's futures contract to be sold.
T
For a commodities contract, the maximum daily price range is usually equal to twice the daily price limit.
T
Holding period return (HPR) captures total return performance by considering current income and capital gains and is most appropriate for holding periods of one year or less.
T
If the holding period return (HPR) of an investment is 20 percent before taxes for a nine month period, an investor in the 30 percent tax bracket would have an after-tax HPR of 14 percent.
T
Investors can trade futures on electricity and natural gas.
T
Returns for periods greater than one year should be measured using the internal rate of return.
T
Speculators are especially interested in financial futures because price volatility can lead to potentially highly profitable outcomes.
T
Speculators provide liquidity to the futures market.
T
The holding period return calculation for a portfolio time-weights portfolio additions and deletions in accordance with the number of months they were in the portfolio.
T
The normal initial margin requirement for commodities or financial futures ranges from about 2% to 10% of the value of the contract.
T
The open interest at the end of the trading day indicates the number of contracts in existence at that time.
T
The open interest at the end of the trading day indicates the volume of contracts traded during the day.
T
The owner of a currency future has a claim on a specified amount of a specified foreign currency.
T
The rate of return on a futures contract is based on the size of the initial margin deposit.
T
The seller of a futures contract in euros hopes that the dollar will strengthen against the euro.
T
The use of futures contracts for commodities is a key method of controlling risk.
T
There is no limit to the amount of loss than can occur with a futures contract.
T
Unlike stocks and bonds, futures contracts trade only at specific times during normal working hours.
T
The November 12, 2009 on-line edition of the Wall Street Journal listed the following information on oat futures. Based on this information, which one of the following statements is correct?
The cost of a March 2010 contract was $13,430 at the market close.
Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract?
The speculator expects to profit from a decline in the price of the contract.
One reason that commodities appeal to investors is because they
act as hedges against inflation during periods of rapidly rising consumer prices.
A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by
buying soy bean futures for delivery near the time of harvest.
Hedging in the commodities market is a strategy primarily used by
by producers and processors of commodities.
If the purchaser of a futures contract fails to meet a margin call,
his/her contract will be sold at the current market price.
The value of an interest-rate futures contract will go up when
interest rates go down.
The purchaser of a futures contract
is affected by the daily procedure known as mark-to-the-market.
The return on a futures contract
is highly related to the low margin requirement.
The seller of a futures contract
is legally bound to make delivery of the specified item on the specified day.
The amount paid at the time a futures contract is sold
is simply a refundable security deposit.
The margin deposit associated with the purchase of a futures contract
is used to cover any loss in market value of the contract resulting from adverse price fluctuations.
Mr. Lecourt sells short 200,000 euros for $280,000. The exchange rate moves from $1.40 per euro to $1.47. If Mr. Lecourt covers his short at this point, he
loses $14,000
A corn futures contract closed yesterday at a price of $3.90 a bushel. The maximum daily price range is $0.70 and the daily price limit is $0.35. Therefore, the
lowest closing price for today is $3.55 a bushel.
Joseph bought a contract for future delivery of 5000 bushels of corn at $2.80 per bushel and sold a later contract at $2.90 a bushel. A month later, corn prices were rising and Joseph sold his long contract for $3.10 per bushel and covered his short by purchasing the same contract for $3.25 per bushel. Ignoring trading costs, Joseph
made $750
The minimum amount of margin that must be kept in an account for futures contracts is known as the
maintenance deposit.
In the futures markets, gains and losses in a contract's value are calculated every day and added to or subtracted from the trader's account. This procedure is called
mark-to-the-market.
The basic reason why investors use spreading strategies when speculating in commodities is to
reduce risk
Interest rate futures are traded on all the following EXCEPT
savings bonds.
Midge feels that the price of gold is going to fall because inflation is on the decline. To profit from her prediction, assuming she is correct, Midge should
sell short a futures contract today.
Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to benefit from
selling a futures contract on corn for delivery at harvest time.
With futures contracts, the price at which the commodity must be delivered is
set when the futures contract is sold.
Assume an investor thinks the stock market is about to undergo a sharp retreat. Under these conditions, the investor's best course of action would be to
short sell stock-index futures contracts.
Some investors combine two or more different futures contracts into one investment position that offers the potential for generating a modest amount of profit while restricting exposure to loss. This practice is called
spreading.
The Chicago Mercantile Exchange recently merged with
the Chicago Board of Trade
The value of a euro futures contract will go up when
the dollar weakens against the euro
The maximum amount that the price of a futures contract can change during the day is referred to as
the maximum daily range.
In commodities trading, open interest at the end of a trading day is equal to
the number of contracts presently outstanding.
Every commodity contract specifies all the following EXCEPT
the settle price.
