cht 20

1. Spot markets are used by investors: a. to lock in a price against delivery in the future. b. for immediate delivery. c. solely to provide protection against downward movements. d. who are interested solely in speculation.

b

13. Stock-index futures can be used to hedge against which of the following types of risks? a. Diversifiable risk b. Market risk c. Unsystematic risk d. Company specific risk

b

12. Hedging in the futures markets is accomplished by: a. taking a position opposite to the one already held. b. taking a position identical to the one already held. c. taking a position in order to increase the profit potential. d. taking a position to increase the distribution of returns.

a

19. A major brewing company wants to ensure supply for its wheat beer at a favourable price. The company should use a: a. long hedge. b. short hedge. c. calendar spread. d. vertical spread.

a

21. The difference between the cash price and the futures price on the same asset or commodity is known as the: a. basis. b. spread. c. yield spread. d. premium.

a

14. Which essential function do speculators bring to the futures markets? a. They take liquidity out of the market. b. They absorb any excess supply or demand generated by hedgers. c. They create more variability in prices over time. d. They provide loans and the margin requirements for hedgers.

b

16. An investor who has accumulated a significant bond portfolio wishes to protect its value through the use of futures contracts. This investor should use a: a. long hedge. b. short hedge. c. time spread. d. money spread.

b

17. The cumulative number of futures contracts that are not offset at any point in time is called: a. trading volume. b. open interest. c. daily resettlement. d. marked to the market position.

b

18. Which of the following statements about basis risk is incorrect? a. The basis must be zero on the maturity date of the contract. b. The basis fluctuates in predictable patterns. c. The basis is calculated as the cash price minus the futures price. d. Due to basis risk, perfect hedging is very difficult.

b

24. An investor who buys a treasury bond futures contract is expecting to profit from: a. an decrease in the price of the treasury bond. b. a decrease in the underlying level of interest rates. c. interest rates remaining unchanged. d. an increase in the underlying level of interest rates.

b

8. The financial futures trading on the Montreal Exchange that has the largest trading volume is: a. S&P Canada 60 Index Futures b. 3-month Canadian BAs c. 10-year Government of Canada Bonds d. Sector Index Funds

b

10. A futures contract is: a. a nonnegotiable, nonmarketable instrument. b. a security, like stocks and bonds. c. a standardized transferable agreement providing for the deferred delivery of a specified traded quantity of a commodity. d. not a legal contract, and therefore its terms can be changed.

c

20. Which of the following features is not similar between stock and futures trading? a. Buying and selling mechanics. b. Existence of highly organized exchanges. c. The charging of interest on margin trades. d. The ability of only members to trade on the floor.

c

22. Futures contracts were first traded on: a. stock indexes. b. foreign currencies. c. commodities. d. government bonds.

c

23. Which of the following does not apply to a speculator in the futures markets? a. In contrast to hedgers, speculators buy or sell futures contracts in an attempt to earn a return. b. Speculators are willing to assume the risk of price fluctuations hoping to profit from them. c. Speculators transact in the commodity underlying the futures contract. d. Speculators contribute to the liquidity of the market and reduce the variability in prices over time.

c

28. An investor who purchases a futures contract as an alternative to buying the security now and then later purchases the security and sells the futures contract is undertaking: a. a long hedge. b. a short hedge. c. an anticipatory hedge. d. a synthetic hedge.

c

29. Which of the following does not have an options on futures not offered on it? a. Options on foreign exchange futures b. Options on interest rate futures c. Options on individual equities futures d. Options on commodities

c

3. In Canada financial futures trade on the: a. Toronto Stock Exchange (TSX). b. ICE Futures Canada (formerly the Winnipeg Commodity Exchange). c. Montréal Exchange (ME). d. the TSX Venture Exchange.

c

31. Which of the following statements about portfolio insurance is true? a. Only one method is available to insure a portfolio. b. It seeks to provide a maximum return offering the opportunity to participate in rising prices. c. Futures are used to hedge stock portfolios. d. Portfolio insurance opens up the potential of unlimited losses.

c

4. The vast majority of futures contracts are: a. settled by delivery of the commodity. b. cash settled at delivery with no exchange of the commodity. c. offset prior to delivery. d. equally settled in cash or delivery of the commodity.

c

6. In the futures market margin is: a. a down payment where money is borrowed from the broker to finance the total cost. b. is subject to weekly resettlement based on marked to market. c. is a good faith deposit made by both long and short positions to ensure the completion of the contract. d. is currently set at 75% of market value.

c

9. Which of the following is not a characteristic of futures trading? a. Open outcry involves offers to buy or sell and are communicated verbally and/or with hand signals to all traders in the pit. b. Open interest indicates all unliquidated contracts for a commodity at any time on a cumulative basis. c. The specialist is the primary trader in the futures markets. d. Trading follows an auction market process in which every bid and offer competes without priority as to time and size.

c

11. When trading futures, margin: a. is seldom used. b. indicates that credit is being extended. c. is a down payment. d. in effect, is a performance bond.

d

15. The initial margin required for futures trading: a. is only put up by the seller. b. is only put up by the buyer. c. can be put up by either party, whoever initiates the transaction. d. must be put up by both the buyer and the seller.

d

2. Which of the following is not a characteristic of forward contracts? a. Forward markets are for deferred delivery. b. The price at delivery is determined at the beginning of the contract. c. Forward contracts do not have standardized terms. d. The initial cash flow at the beginning of the forward contract consists of margin.

d

25. If an investor strongly believes that the stock market is going to have a sharp increase shortly, he or she could maximize profit by: a. shorting stock-index futures contracts. b. hedging current long positions. c. buying treasury bond futures contracts. d. buying stock-index futures contracts.

d

26. One difference between a hedger and a speculator is that the hedger: a. may have either a profit or a loss. b. may not close out his position by taking an opposite position. c. does not have to put up margin. d. faces a risk without the futures contract.

d

27. Which of the following is not a potential advantage of speculating in futures? a. Leverage b. Ease of transacting c. Low transaction costs d. All of the above are advantages to speculating in futures.

d

30. The key elements of an option on a particular futures are the: a. price of the underlying commodity and the exercise price. b. expiration date and the exercise price. c. price of the underlying commodity and the premium. d. exercise price and the premium.

d

5. On the other side of every futures transaction is: a. the dealer. b. the futures exchange. c. the commodity producer. d. the clearing house.

d

7. Which of the following characteristics is unique about futures trading? a. Long positions are undertaken by hedgers to make delivery. b. Margin is not allowed. c. Positions can remain open indefinitely. d. There are no specialists on futures exchanges.

d