3399 quiz 6

A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? A. $58 B. $62 C. $64 D. $66

B. $62

A company will buy 1,000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. The spot price and the futures price are currently $100 and $90, respectively. The spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity? A. $92 B. $96 C. $102 D. $106

B. $96

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging? A. It leads to a better exchange rate being paid. B. It leads to a more predictable exchange rate being paid. C. It caps the exchange rate that will be paid. D. It provides a floor for the exchange rate that will be paid.

B. It leads to a more predictable exchange rate being paid.

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? A. The June contract B. The July contract C. The May contract D. The August contract

B. The July contract

Who initiates delivery in a corn futures contract? A. The party with the long position. B. The party with the short position. C. Either party D. The exchange

B. The party with the short position.

In the corn futures contract, a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true? A. This flexibility tends to increase the futures price. B. This flexibility tends to decrease the futures price. C. This flexibility may increase and may decrease the futures price. D. This flexibility has no effect on the futures price.

B. This flexibility tends to decrease the futures price.

A speculator takes a long position in a futures contract on a commodity on November 1, 2012, to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012, the futures price is $61. On March 1, 2013, it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1,000 units of the commodity. A. $0 B. $1,000 C. $3,000 D. $4,000

C. $3,000

Clearing houses are: A. Never used in futures markets and sometimes used in OTC markets. B. Used in OTC markets, but not in futures markets. C. Always used in futures markets and sometimes used in OTC markets. D. Always used in both futures markets and OTC markets.

C. Always used in futures markets and sometimes used in OTC markets.

Which of the following is true? A. Both forward and futures contracts are traded on exchanges. B. Forward contracts are traded on exchanges, but futures contracts are not. C. Futures contracts are traded on exchanges, but forward contracts are not. D. Neither futures contracts nor forward contracts are traded on exchanges.

C. Futures contracts are traded on exchanges, but forward contracts are not.

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8? A. Long 192 contracts B. Short 192 contracts C. Long 96 contracts D. Short 96 contracts

C. Long 96 contracts

Which of the following is true? A. Gold producers should always hedge the price they will receive for their production of gold over the next three years. B. Gold producers should always hedge the price they will receive for their production of gold over the next one year. C. The hedging strategies of a gold producer should depend on whether its shareholders want exposure to the price of gold. D. Gold producers can hedge by buying gold in the forward market

C. The hedging strategies of a gold producer should depend on whether its shareholders want exposure to the price of gold.

Which of the following is true? A. The optimal hedge ratio is the slope of the best fit line when the spot price (on the y-axis) is regressed against the futures price (on the x-axis). B. The optimal hedge ratio is the slope of the best fit line when the futures price (on the yaxis) is regressed against the spot price (on the x-axis). C. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis). D. The optimal hedge ratio is the slope of the best fit line when the change in the futures price (on the y-axis) is regressed against the change in the spot price (on the x-axis).

C. The optimal hedge ratio is the slope of the best fit line when the change in the spot price (on the y-axis) is regressed against the change in the futures price (on the x-axis).

On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1, the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity? A. $1,016 B. $1,001 C. $981 D. $1,014

D. $1,014

A hedger takes a long position in a futures contract on a commodity on November 1, 2012, to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012, the futures price is $61. On March 1, 2013, it is $64. The contract is closed out on March 1, 2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract is on 1,000 units of the commodity. A. $0 B. $1,000 C. $3,000 D. $4,000

D. $4,000

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? A. 78 cents B. 76 cents C. 74 cents D. 72 cents

D. 72 cents

Margin accounts have the effect of: A. Reducing the risk of one party regretting the deal and backing out. B. Ensuring funds are available to pay traders when they make a profit. C. Reducing systemic risk due to collapse of futures markets. D. All of the above

D. All of the above

Which of the following are cash settled? A. All futures contracts B. All option contracts C. Futures on commodities D. Futures on stock indices

D. Futures on stock indices

Which of the following describes tailing the hedge? A. A strategy where the hedge position is increased at the end of the life of the hedge. B. A strategy where the hedge position is increased at the end of the life of the futures contract. C. A more exact calculation of the hedge ratio when forward contracts are used for hedging. D. None of the above.

D. None of the above.

Which of the following best describes central counterparties? A. Help market participants to value derivative transactions. B. Must be used for all OTC derivative transactions. C. Are used for futures transactions. D. Perform a similar function to exchange clearing houses.

D. Perform a similar function to exchange clearing houses.

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? A. The hedger's position improves. B. The hedger's position worsens. C. The hedger's position sometimes worsens and sometimes improves. D. The hedger's position stays the same.

A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true? A. The hedger's position improves.

On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1, the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company? A. $59.50 B. $60.50 C. $61.50 D. $63.50

A. $59.50

Which of the following best describes "stack and roll"? A. Creates long-term hedges from short-term futures contracts. B. Can avoid losses on futures contracts by entering into further futures contracts. C. Involves buying a futures contract with one maturity and selling a futures contract with a different maturity. D. Involves two different exposures simultaneously.

A. Creates long-term hedges from short-term futures contracts.

The frequency with which futures margin accounts are adjusted for gains and losses is: A. Daily B. Weekly C. Monthly D. Quarterly

A. Daily

Which of the following is NOT true? A. Futures contracts nearly always last longer than forward contracts. B. Futures contracts are standardized; forward contracts are not. C. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts. D. Forward contracts usually have one specified delivery date; futures contracts often have a range of delivery dates.

A. Futures contracts nearly always last longer than forward contracts.

For a futures contract trading in April, the open interest for a June contract, when compared to the open interest for Sept contract, is usually: A. Higher B. Lower C. The same D. Equally likely to be higher or lower

A. Higher

Which of the following is a reason for hedging a portfolio with an index futures? A. The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market. B. The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well. C. The portfolio is not well diversified and so its return is uncertain. D. All of the above.

A. The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market.

Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one month exposure to the price of commodity A? A. 0.60 B. 0.67 C. 1.45 D. 0.90

A? A. 0.60

Which entity in the United States takes primary responsibility for regulating futures market? A. Federal Reserve Board B. Commodities Futures Trading Commission (CFTC) C. Security and Exchange Commission (SEC) D. US Treasury

B. Commodities Futures Trading Commission (CFTC)

One futures contract is traded where both the long and short parties are closing out existing positions. What is the resultant change in the open interest? A. No change B. Decrease by one C. Decrease by two D. Increase by one

B. Decrease by one

Which of the following increases basis risk? A. A large difference between the futures prices when the hedge is put in place and when it is closed out. B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure. C. A reduction in the time between the date when the futures contract is closed and its delivery month. D. None of the above.

B. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure.

A limit order: A. Is an order to trade up to a certain number of futures contracts at a certain price. B. Is an order that can be executed at a specified price or one more favorable to the investor. C. Is an order that must be executed within a specified period of time. D. None of the above.

B. Is an order that can be executed at a specified price or one more favorable to the investor.

A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true? A. It is liable to experience liquidity problems if the price of silver falls dramatically. B. It is liable to experience liquidity problems if the price of silver rises dramatically. C. It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically. D. The operation of futures markets protects it from liquidity problems.

B. It is liable to experience liquidity problems if the price of silver rises dramatically.

4. A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9? A. Long 192 contracts B. Short 192 contracts C. Long 48 contracts D. Short 48 contracts

D. Short 48 contracts