FIN 3826 Chapter 17

A. 5%-15%

21. Initial margin is usually set in the region of ________ of the total value of a futures contract. A. 5%-15% B. 10%-20% C. 15%-25% D. 20%-30%

B. 1% to 3%

53. Approximately __________ of futures contracts result in actual delivery. A. 0% B. 1% to 3% C. 5% to 15% D. 60% to 80%

D. sell stock index futures and sell T-bond futures

86. A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues and he also believes that foreign investors will stop buying U.S. fixed income securities in such large quantities as they have in the past. One way the timer could take advantage of this forecast is to ________________. A. buy T-bond futures and sell stock index futures B. sell T-bond futures and but stock index futures C. buy stock index futures and buy T-bond futures D. sell stock index futures and sell T-bond futures

C. financial

1. Recently most of the growth in the number of contracts traded on the Chicago Board of Trade has come in the _______ contracts. A. metals B. agriculture C. financial D. commodity

B. cross-hedge

10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have a(n) _______. A. arbitrage B. cross-hedge C. over-hedge D. spread-hedge

A. all outstanding silver futures contracts

11. The open interest on silver futures at a particular time is the number of __________. A. all outstanding silver futures contracts B. long and short silver futures positions counted separately on a particular trading day C. silver futures contracts traded during the day D. silver futures contracts traded the previous day

B. pay; receive

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

C. receive; pay

13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. pay; pay B. pay; receive C. receive; pay D. receive; receive

A. liquidity; all traders must trade a small set of identical contracts

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. A. liquidity; all traders must trade a small set of identical contracts B. credit risk; all traders understand the risk of the contracts C. pricing; convergence is more likely to take place with fewer contracts D. trading cost; trading volume is reduced

B. credit

15. The fact that the exchange is the counter-party to every futures contract issued is important because it eliminates _________ risk. A. market B. credit C. interest rate D. basis

C. equal to

16. In the futures market the short position's loss is ___________ the long position's gain. A. greater than B. less than C. equal to D. sometimes less than and sometimes greater than

A. sell wheat futures

17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. A. sell wheat futures B. buy wheat futures C. buy a contract for delivery of wheat now, and sell a contract for delivery of wheat at harvest time D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

B. Spot price at maturity - Original futures price

18. Which of the following provides the profit to a long position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

C. a spread position

19. You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called __________. A. a cross hedge B. a reversing trade C. a spread position D. a straddle

B. increase substantially

2. A person with a long position in a commodity futures contract wants the price of the commodity to ______. A. decrease substantially B. increase substantially C. remain unchanged D. increase or decrease substantially

D. repurchase agreements

20. Interest rate futures contracts exist for all of the following except __________. A. Federal funds B. Eurodollars C. banker's acceptances D. repurchase agreements

C. both buyers and sellers of futures contracts

22. Margin must be posted by ________. A. buyers of futures contracts only B. sellers of futures contracts only C. both buyers and sellers of futures contracts D. speculators only

B. marking to market

23. The daily settlement of obligations on futures positions is called _____________. A. a margin call B. marking to market C. a variation margin check D. initial margin requirement

A. Original futures price - Spot price at maturity

24. Which of the following provides the profit to a short position at contract maturity? A. Original futures price - Spot price at maturity B. Spot price at maturity - Original futures price C. Zero D. Basis

B. cash or highly marketable securities such as Treasury bills

25. Margin requirements for futures contracts can be met by ______________. A. cash only B. cash or highly marketable securities such as Treasury bills C. cash or any marketable securities D. cash or warehouse receipts for an equivalent quantity of the underlying commodity

C. maintenance margin

26. An established value below which a trader's margin may not fall is called the ________. A. daily limit B. daily margin C. maintenance margin D. convergence limit

D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call

27. Which one of the following is a true statement? A. A margin deposit can only be met by cash B. All futures contracts require the same margin deposit C. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract D. The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call

B. the convergence property

28. At maturity of a future contract, the spot price and futures price must be approximately the same because of __________. A. marking to market B. the convergence property C. the open interest D. the triple witching hour

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

29. A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity 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. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future

C. long futures contract

3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss. A. long call option B. long put option C. long futures contract D. short futures contract

A. Index arbitrage

30. Which one of the following exploits differences between actual future prices and their theoretically correct parity values? A. Index arbitrage B. Marking to market C. Reversing trades D. Settlement transactions

A. Marking to market

31. Which one of the following refers to the daily settlement of obligations on future positions? A. Marking to market B. The convergence property C. The open interest D. The triple witching hour

D. foreign currencies

32. Probably the most active forward market is for _____________. A. agricultural commodities B. metals and minerals C. financial futures D. foreign currencies

A. a cash settled contract

33. The CME weather futures contract is an example of ______________. A. a cash settled contract B. an agricultural contract C. a financial future D. a commodity future

C. currently trading on OneChicago, a joint venture of several exchanges

34. Single stock futures, as opposed to stock index futures, are _______________. A. not yet being offered by any exchanges B. offered overseas but not in the U.S. C. currently trading on OneChicago, a joint venture of several exchanges D. scheduled to begin trading in 2010 at various exchanges

B. a reversing trade

35. You are currently long in a futures contract. You then instruct a broker to enter the short side of a futures contract to close your position. This is called __________. A. a cross hedge B. a reversing trade C. a speculation D. marking to market

A. cross hedging

36. A company which mines bauxite decides to short aluminum futures. This is an example of __________ to limit its risk. A. cross hedging B. long hedging C. spreading D. speculating

B. CFTC

37. Futures markets are regulated by the __________. A. AIMR B. CFTC C. CIA D. SEC

B. short hedging

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit its risk. A. cross hedging B. short hedging C. spreading D. speculating

A. that the market believed that Obama had 81% chance of winning

39. On February 25, 2008 you could have purchased a futures contract from Intrade that would pay you $1 if Barack Obama wins the 2008 Democratic Party nomination. At a price of $0.81, the contract for Obama carried the highest price of any Democratic candidate. This tells you _______________. A. that the market believed that Obama had 81% chance of winning B. that the market believed that Obama had the least chance of winning C. nothing about the markets' belief concerning the odds of Obama winning D. that the market believed Obama's chances of winning were about 19%

D. zero

4. The clearing corporation has a net position equal to ______. A. the open interest B. the open interest times two C. the open interest divided by two D. zero

C. buy treasury bond futures

40. An investor would want to __________ to exploit an expected fall in interest rates. A. sell S&P 500 index futures B. sell treasury bond futures C. buy treasury bond futures D. buy wheat futures

C. are not; are

41. Forward contracts _________ traded on an organized exchange and futures contracts __________ traded on an organized exchange. A. are; are B. are; are not C. are not; are D. are not; are not

C. sell S&P 500 index futures and buy all the stocks in the S&P 500

42. If the S&P 500 index futures contract is overpriced relative to the spot S&P 500 index, you should __________. A. buy all the stocks in the S&P 500 and write put options on the S&P 500 index B. sell all the stocks in the S&P 500 and buy call options on S&P 500 index C. sell S&P 500 index futures and buy all the stocks in the S&P 500 D. sell short all the stocks in the S&P 500 and buy S&P 500 index futures

C. short; long

43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

B. make; take

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity. A. make; make B. make; take C. take; make D. take; take

C. sell interest rate futures

45. An investor would want to __________ to hedge a long position in treasury bonds. A. buy interest rate futures B. buy treasury bonds in the spot market C. sell interest rate futures D. sell S&P 500 futures

C. price discrepancies would open arbitrage opportunities for investors who spot them

46. Futures contracts are said to exhibit the property of convergence because _______________. A. the profits from long positions and short positions must ultimately be equal B. the profits from long positions and short positions must ultimately net to zero C. price discrepancies would open arbitrage opportunities for investors who spot them D. the futures price and spot price of any asset must ultimately net to zero

A. the futures price minus the spot price

47. In the context of a futures contract, the basis is defined as ______________. A. the futures price minus the spot price B. the spot price minus the futures price C. the futures price minus the initial margin D. the profit on the futures contract

D. Eurex

48. The world's largest futures and options exchange is the _______. A. CBOE B. CBOT C. CME D. Eurex

B. arbitrage opportunities for investors who spot them

49. Violation of the spot-futures parity relationship results in _______________. A. fines and other penalties imposed by the SEC B. arbitrage opportunities for investors who spot them C. suspension of delivery privileges D. suspension of trading

B. cash; actual

5. The S&P500 index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract. A. cash; cash B. cash; actual C. actual; cash D. actual; actual

B. F0 = S0(1 + rf - d)T

50. When dividend paying assets are involved, the spot-futures parity relationship can be stated as _________________. A. F1 = S0(1 + rf) B. F0 = S0(1 + rf - d)T C. F0 = S0(1 + rf + d)T D. F0 = S0(1 + rf)T

C. FT - F0

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (Time T). The sum of all daily settlements will be __________. A. F0 - FT B. F0 - S0 C. FT - F0 D. FT - S0

B. long; short

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. long; long B. long; short C. short; long D. short; short

C. profit; be hurt

54. A long hedger will __________ from an increase in the basis a short hedger will __________. A. be hurt; be hurt B. be hurt; profit C. profit; be hurt D. profit; profit

C. must be paid regardless of whether the position has been closed out or not

55. At year end, taxes on a futures position _______________. A. must be paid if the position has been closed out B. must be paid if the position has not been closed out C. must be paid regardless of whether the position has been closed out or not D. need not be paid if the position supports a hedge

D. I, II and III

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because ____________. I. gains in futures contracts can be larger due to leverage II. transaction costs in futures are typically lower than in spot markets III. futures markets are often more liquid than the markets of the underlying commodities A. I and II only B. II and III only C. I and III only D. I, II and III

C. Forward contract

6. Which one of the following contracts requires no cash to change hands when initiated? A. Listed put option B. Short futures contract C. Forward contract D. Listed call option

B. sell stock index futures

60. If you expect a stock market downturn, one potential defensive strategy would be to __________. A. buy stock index futures B. sell stock index futures C. buy stock index options D. sell foreign exchange futures

B. 0

61. At contract maturity the basis should equal ___________. A. 1 B. 0 C. risk-free interest rate D. -1

B. sell the September contract and buy the June contract

62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this you should ______________. A. buy the September contract and sell the June contract B. sell the September contract and buy the June contract C. sell the September contract and sell the June contract D. buy the September contract and buy the June contract

A. market timers; lower transaction cost

7. Synthetic stock positions are commonly used by ______ because of their ______. A. market timers; lower transaction cost B. banks; lower risk C. wealthy investors; tax treatment D. money market funds; limited exposure

D. $200 trillion

71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today. A. $20 million B. $200 million C. $200 billion D. $200 trillion

A. the futures price will be higher as contract maturity increases

72. If rf is greater than d then we know that _______________. A. the futures price will be higher as contract maturity increases B. F0 < S0 C. FT > ST D. arbitrage profits are possible

D. net interest payments based on notional principal, but no exchange of principal

74. Interest rate swaps involve the exchange of ________________. A. fixed rate bonds for floating rate bonds B. floating rate bonds for fixed rate bonds C. net interest payments and an actual principal swap D. net interest payments based on notional principal, but no exchange of principal

D. long stock position

75. From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________. A. long call B. short call C. short stock position D. long stock position

A. S&P500

76. The _________ contract dominates trading in stock index futures. A. S&P500 B. DJIA C. Nasdaq 100 D. Russell 2000

A. Nasdaq Composite; Russell 2000

77. The ________ and the _______ have the lowest correlations with the large-cap indexes. A. Nasdaq Composite; Russell 2000 B. NYSE; DJIA C. S&P500; DJIA D. Russell 2000; S&P500

D. margin

78. The use of leverage is practiced in the futures markets due to the existence of _________. A. banks B. brokers C. clearinghouse D. margin

D. triple-witching hour

8. The time on Friday with simultaneous expirations of S&P index futures, S&P index options and options on some individual stocks is commonly called the _______. A. mad minute B. double-witching hour C. happy hour D. triple-witching hour

A. Convergence

81. The price of a corn futures contract is $2.65 per bushel when the contract is issued and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior? A. Convergence B. Margin C. Basis D. Volatility

B. sell T-bond futures

82. A corporation will be issuing bonds in 6 months and the Treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________. A. buy T-bond futures B. sell T-bond futures C. buy stock index futures D. sell stock index futures

A. sell T-bond futures

85. A bank has made long term fixed rate mortgages and has financed them with short term deposits. To hedge out the bank's interest rate risk they could ________. A. sell T-bond futures B. buy T-bond futures C. buy stock index futures D. sell stock index futures

C. II and III only

87. The Student Loan Marketing Association (SLMA) has short term student loans funded by long term debt. To hedge out this interest rate risk SLMA could ______________. I. engage in a swap to pay fixed and receive variable interest payments II. engage in a swap to pay variable and receive fixed interest payments III. buy T-bond futures IV. sell T-bond futures A. I and II only B. I and IV only C. II and III only D. II and IV only

B. futures contracts are tailored to the specific needs of the investor

9. Futures contracts have many advantages over forward contracts except that _________. A. futures positions are easier to trade B. futures contracts are tailored to the specific needs of the investor C. futures trading preserves the anonymity of the participants D. counterparty credit risk is not a concern on futures