Chapter 15 practice questions

Which one of the following statements concerning financial futures is correct? A) Except for short-term securities, interest rate futures are quoted based on a percentage of the par value of the underlying debt security. B) Stock-index futures are priced at an amount equal to the value of the index. C) Foreign currency futures are based on 100,000 units of the foreign currency. D) An investor who is long on a financial future losses money when the value of the future rises.

A) Except for short-term securities, interest rate futures are quoted based on a percentage of the par value of the underlying debt security.

Which one of the following statements is correct if a speculator short sells a commodity or financial futures contract? A) The speculator expects to profit from a decline in the price of the contract. B) The speculator stands to make an unlimited amount of profit since there is no limit to how high the price of the underlying commodity or financial instrument can rise. C) The speculator is hoping to gain some of the benefit derived from the volatile price while limiting his/her exposure to loss. D) The speculator may be hedging if the underlying commodity is not in the speculator's possession.

A) The speculator expects to profit from a decline in the price of the contract.

A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by A) buying soy bean futures for delivery near the time of harvest. B) selling soy bean futures for delivery near the time of harvest. C) buying contracts in alternative crops for delivery near the time of harvest. D) buying contracts in unrelated commodities for delivery near the time of harvest.

A) buying soy bean futures for delivery near the time of harvest.

If the purchaser of a futures contract fails to meet a margin call, A) his/her contract will be sold at the current market price. B) his/her contract will automatically be executed along with immediate delivery. C) their local broker can decide to waive the call. D) they will be given a 30-day grace period before payment is required.

A) his/her contract will be sold at the current market price.

With futures contracts, the price at which the commodity must be delivered is A) set when the futures contract is sold. B) set when the contract expires. C) is equivalent to the strike price for an options contract. D) changes frequently during the life of the contract.

A) set when the futures contract is sold.

) One of the biggest differences between a futures option and a futures contract is that A) the option limits the loss exposure to the price of the option. B) the futures contract limits the loss exposure to the price of the contract. C) an option can be traded on the secondary market, whereas a futures contract cannot. D) a futures contract can be traded on the secondary market, whereas an option cannot.

A) the option limits the loss exposure to the price of the option.

What percent of futures contracts are settled by deliver?

1%

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. A) I and III only B) I and IV only C) II and III only D) II and IV only

B) I and IV only

The major advantages of futures options over futures contracts include: I. positions can be hedged with a smaller commitment of capital. II. potential losses are limited to the size of the contract. III. greater leverage and the potential for higher percentage returns. IV. a greater variety of commodities is available for speculating or hedging purposes. A) II, III and IV only. B) I, II and III only. C) I, II and IV only. D) I, II, III and IV.

B) I, II and III only.

The value of an interest-rate futures contract will go up when A) interest rates go up. B) interest rates go down. C) gold prices rise. D) gold prices fall.

B) interest rates go down.

The seller of a futures contract A) has the option of canceling the contract the following day if the price is not acceptable to him/her. B) is legally bound to make delivery of the specified item on the specified day. C) receives the entire contract amount at the time the contract is made. D) must make delivery before receiving any monies on the contract.

B) is legally bound to make delivery of the specified item on the specified day.

The value of a futures option is defined as A) the difference between the option's strike price and its original purchase price. B) the difference between the option's strike price and the market price of the underlying futures contract. C) the strike price of the option multiplied by the mark-to-the-market value. D) the mark-to-the-market value divided by the strike price.

B) the difference between the option's strike price and the market price of the underlying futures contract.

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. A) I and II only B) II and IV only C) I, II and III only D) I, II, III and IV

C) I, II and III only

Logan sold a corn futures contract using the initial margin of $2,700. His maintenance margin is $2,000. The price of began to rise in early summer, but Logan wants to keep his contract. When his margin falls below $2,000 (minimum maintenance) A) his contract will be automatically sold or canceled. B) he does not need to do anything since the most he can lose is $2,700. C) he will need to deposit at least $700 with his broker to bring his margin back up to the initial deposit. D) he will need to deliver the corn immediately.

C) he will need to deposit at least $700 with his broker to bring his margin back up to the initial deposit.

The amount paid at the time a futures contract is sold A) represents the maximum loss for the buyer of the contract. B) represents the maximum profit for the buyer of the contract. C) is simply a refundable security deposit. D) is the total value of the goods being traded in the future.

C) is simply a refundable security deposit.

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 A) I and II only B) II and IV only C) I, II and III only D) I, II and IV only

D) I, II and IV only

22) 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. A) I and II only B) II and III only C) I, II and IV only D) I, II, III and IV

D) I, II, III and IV

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. A) II only B) I and II only C) I and IV only D) II and III only

D) II and III only

Which one of the following statements concerning financial futures is correct? A) Speculators in the currency markets are generally firms involved with international trading of goods and services. B) Portfolio managers wishing to provide downside protection to their portfolios are the primary speculators in the financial futures markets. C) Investors who simply play in the futures market with the hope of realizing capital gains are referred to as the hedgers. D) International trade often is accompanied by currency hedging via financial futures.

D) International trade often is accompanied by currency hedging via financial futures.

The margin deposit associated with the purchase of a futures contract A) is a partial payment on the contract with the amount of the payment equal to 10% or more of the contract value. B) represents the purchasers equity in the contract with the balance of the contract financed with borrowed funds at the margin rate of interest. C) is related to the value of the item underlying the contract. D) is used to cover any loss in market value of the contract resulting from adverse price fluctuations.

D) is used to cover any loss in market value of the contract resulting from adverse price fluctuations.

Thq rate of return on a futures contract is based on the size of the initial margin deposit.

True

The maximum loss on a futures contract is the price paid for the contract.

false

All trading in the futures market is done on a margin basis.

true

Failure to meet a margin call will cause an investor's futures contract to be sold.

true

Hedgers who buy futures contracts are protecting themselves from future price increases.

true

The normal initial margin requirement for commodities or financial futures ranges from about 2% to 10% of the value of the contract.

true

There is no limit to the amount of loss that can occur with a futures contract.

true