Futures Midterm

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The premise that makes a hedging possible is cash and futures prices: A) move in opposite directions B) move upward and downward by identical amounts C) generally change in the same direction by similar amounts D) are regulated by the exchange

What happens if a cash market price gains relative to a futures price over time? A) basis strengthens and benefits the long hedger B) basis strengthens and benefits the short hedger C) basis weakens and benefits the short hedger D) doesn't have an impact on basis

c) Could be either a hedger or a speculator

Who is on the other side of a hedger's position? a) speculator b) another hedger c) could be either a hedger or a speculator d) the exchange

You may receive a margin call if: A) you have a long (buy) futures position and prices increase B) you have a long (buy) futures position and prices decrease C) you have a short (sell) futures position and prices decrease D) none of the above

.Which of the following is true? A.The convenience yield is always positive or zero. B.The convenience yield is always positive for an investment asset. C.The convenience yield is always negative for a consumption asset. D.The convenience yield measures the average return earned by holding futures contracts

1. 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.

1.Which of the following is a consumption asset? A.The S&P 500 index B.The Canadian dollar C.Copper D.IBM stock

10. 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

10.Which of the following describes the way the forward price of a foreign currency is quoted? A.The number of U.S. dollars per unit of the foreign currency B.The number of the foreign currency per U.S. dollar C.Some forward prices are quoted as the number of U.S. dollars per unit of the foreign currency and some are quoted the other way round D.There are no quotation conventions for forward prices

11. Which of the following best describes the capital asset pricing model? A. Determines the amount of capital that is needed in particular situations B. Is used to determine the price of futures contracts C. Relates the return on an asset to the return on a stock index D. Is used to determine the volatility of a stock index

11. Which of the following is NOT a reason why a short position in a stock is closed out? A.The investor with the short position chooses to close out the position B.The lender of the shares issues instructions to close out the position C.The broker is no longer able to borrow shares from other clients D.The investor does not maintain margins required on his/her margin account

12. 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

12.Which of the following is NOT true? A.Gold and silver are investment assets B.Investment assets are held by significant numbers of investors for investment purposes C.Investment assets are never held for consumption D.The forward price of an investment asset can be obtained from the spot price, interest rates, and the income paid on the asset

13. 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

13.What should a trader do when the one-year forward price of an asset is too low? Assume that the asset provides no income. A.The trader should borrow the price of the asset, buy one unit of the asset and enter into a short forward contract to sell the asset in one year. B.The trader should borrow the price of the asset, buy one unit of the asset and enter into a long forward contract to buy the asset in one year. C.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a short forward contract to sell the asset in one year D.The trader should short the asset, invest the proceeds of the short sale at the risk-free rate, enter into a long forward contract to buy the asset in one year

14. 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

14.Which of the following is NOT true about forward and futures contracts? A.Forward contracts are more liquid than futures contracts B.The futures contracts are traded on exchanges while forward contracts are traded in the over-the-counter market C.In theory forward prices and futures prices are equal when there is no uncertainty about future interest rates D.Taxes and transaction costs can lead to forward and futures prices being different

15. Which of the following does NOT describe beta? A. A measure of the sensitivity of the return on an asset to the return on an index B. The slope of the best fit line when the return on an asset is regressed against the return on the market C. The hedge ratio necessary to remove market risk from a portfolio D. Measures correlation between futures prices and spot prices for a commodity

15.As the convenience yield increases, which of the following is true? A.The one-year futures price as a percentage of the spot price increases B.The one-year futures price as a percentage of the spot price decreases C.The one-year futures price as a percentage of the spot price stays the same D.Any of the above can happen

d) all of the above

Who are potential long livestock hedgers? a) Restaurants b) Packers c) Feedlots who buy feeder stock d) All of the above

16. Which of the following is true? A. Hedging can always be done more easily by a company's shareholders than by the company itself B. If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge C. If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging D. If all companies in an industry do not hedge, a company is liable increase its risk by hedging

16.As inventories of a commodity decline, which of the following is true? A.The one-year futures price as a percentage of the spot price increases B.The one-year futures price as a percentage of the spot price decreases C.The one-year futures price as a percentage of the spot price stays the same D.Any of the above can happen

17. Which of the following is necessary for tailing a hedge? A. Comparing the size in units of the position being hedged with the size in units of the futures contract B. Comparing the value of the position being hedged with the value of one futures contract C. Comparing the futures price of the asset being hedged to its forward price D. None of the above

17.Which of the following describes a known dividend yield on a stock? A.The size of the dividend payments each year is known B.Dividends per year as a percentage of today's stock price are known C.Dividends per year as a percentage of the stock price at the time when dividends are paid are known D.Dividends will yield a certain return to a person buying the stock today

18. 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 it shareholders want exposure to the price of gold D. Gold producers can hedge by buying gold in the forward market

18.Which of the following is an argument used by Keynes and Hicks? A.If hedgers hold long positions and speculators holds short positions, the futures price will tend to be higher than the expected future spot price B.If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than the expected future spot price C.If hedgers hold long positions and speculators holds short positions, the futures price will tend to be lower than today's spot price D.If hedgers hold long positions and speculators holds short positions, the futures price

19. 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

19.Which of the following describes contango? A.The futures price is below the expected future spot price B.The futures price is below today's spot price C.The futures price is a declining function of the time to maturity D.The futures price is above the expected future spot price

2. 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

2.An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain? A. $1,000 B. $400 C. $700 D. $300

20. A company will buy 1000 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

20.Which of the following is true for a consumption commodity? A.There is no limit to how high or low the futures price can be, except that the futures price cannot be negative B.There is a lower limit to the futures price but no upper limit C.There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative D.The futures price can be determined with reasonable accuracy from the spot price and interest rates

3. 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

3.The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price? A. $40.50 B. $22.22 C. $33.00 D.$33.16

4. 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

4.The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? A. $19.67 B. $35.84 C. $45.15 D. $40.50

Who is on the other side of a hedger's position? A)Speculator B)Another hedger )Could be either a hedger or a speculator D)The Exchange

5. 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

5.An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six-month forward rate? A. 0.7070 B. 0.7177 C. 0.7249 D. 0.6930

6. 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

6.Which of the following is true? A.The convenience yield is always positive or zero. B.The convenience yield is always positive for an investment asset. C.The convenience yield is always negative for a consumption asset. D.The convenience yield measures the average return earned by holding futures contracts

7. 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

7.A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A. +$2.00 B. −$2.00 C. +$1.96 D. −$1.96

8. 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 y-axis) 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).

8.The spot price of an asset is positively correlated with the market. Which of the following would you expect to be true? A.The forward price equals the expected future spot price. B.The forward price is greater than the expected future spot price. C.The forward price is less than the expected future spot price. D.The forward price is sometimes greater and sometimes less than the expected future spot price.

9. 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

9.Which of the following describes the way the futures price of a foreign currency is quoted by the CME group? A.The number of U.S. dollars per unit of the foreign currency B.The number of the foreign currency per U.S. dollar C.Some futures prices are always quoted as the number of U.S. dollars per unit of the foreign currency and some are always quoted the other way round D.There are no quotation conventions for futures prices

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 more predictable exchange rate being paid

A company due to pay a certain amount of a foreign currency n the future decides to hedge with a futures contracts. Which of the folowing 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) $62

A company enters into a long futures contact 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

A company enters into a long futures contract to buy 1000 units of a commodity for $60 per unit. The initial margin is $6000 and the maintenance margin is $4000. What futures price will allow $2000 to be withdrawn from the margin account? A) $58 B) $62 C) $64 D) $66

d) 72 cents

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

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 $4000 and the maintenance margin is $3000. 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

a) a forward contract can be used to lock in the exchange rate

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true a) A forward contract can be used to lock in the exchange rate b) A forward contract will always give a better outcome than an option c) An option will always give a better outcome than a forward contract d) An option can be used to lock in the exchange rate.

A company knows it will have to pay a certain amount of a foreign currency to one of its suppliers in the future. Which of the following is true? A) a forward contract can be used to lock in the exchange rate B) a forward contract will always give a better outcome than an option C) an option will always give a better outcome than a forward contract D) an option can be used to lock in the exchange rate

a) Long

A farmer's crop is still in the field, his cash market position is: a) Long b) Short c) neither, since the crop hasn't been harvested d) Neutral, because he has no position in the futures market

A farmer's crop is still in the field. His cash market position is: A)Long B)Short C)Neither, since the crop hasn't been harvested D)Neutral, because he has no position in the futures market

A farmer's crop is still in the field. His cash market position is: A) long B) short C) neither, since the crop hasn't been harvested D) neither, because he has no potion in the futures market

A futures market participant might receive a margin call if A)He is long futures contracts and prices rise B)He is long futures contracts and prices fall C)He is short futures contracts and prices fall D)Both A and C

d) 0.6

A futures price is currently 40 cents. It is expected to move up to 44 cents or down to 34 cents in the next six months. The risk-free interest rate is 6%. What is the probability of an up movement in a risk-neutral world? a) 0.4 b) 0.5 c) 0.72 d) 0.6

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) One side has the obligation to buy an asset for a certain price in one year's time.

A one year forward contract is an agreement where: A. One side has the right to buy an asset for a certain price in one year's time. B. One side has the obligation to buy an asset for a certain price in one year's time. C. One side has the obligation to buy an asset for a certain price at some time during the next year. D. One side has the obligation to buy an asset for the market price in one year's time.

A one-year forward contract is an agreement where A)One side has the right to buy an asset for a certain price in one year's time. B)One side has the obligation to buy an asset for a certain price in one year's time. C)One side has the right to buy an asset for the market price in one year's time. D)One side has the obligation to buy an asset for the market price in one year's time.

A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for the three month forward contract is is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? A) +$2.00 B) -$2.00 C) +$1.96 D) -$1.96

d) -$1.96

A short forward contract that was negotiated some time ago will expire in three months and has a delivery price of $40. The current forward price for three-month forward contract is $42. The three month risk-free interest rate (with continuous compounding) is 8%. What is the value of the short forward contract? a) +$2.00 b) -$2.00 c) +$1.96 d) -$1.96

An investor sells a futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of the following is true? A)The investor has made a gain of $4,000 B)The investor has made a loss of $4,000 C)The investor has made a gain of $2,000 D)The investor has made a loss of $2,000

An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay a dividend of $3 per share during the six months. How much does the investor gain? A) $1000 B) $400 C) $700 D) $300

b) $400

An investor shorts 100 shares when the share price is $50 and closes out the position six months later when the share price is $43. The shares pay dividends of $3 per share during the six months. How much does the investor gain? a) $1,000 b) $400 c) 700 d) $300

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

a) taking a futures position opposite to one's current cash market position

Hedging involves: a) taking a futures position opposite to one's current cash market position b) taking a futures position identical to one's current cash market position c) holding only a futures market position d) holding only a cash market position

What are the long hedger's initial positions? A)Short cash market and long futures market B)Short cash market and short futures market C)Long cash market and short futures market D)Long cash market and long futures market?

Who is on the other side of a hedger's position? A) Speculator B) Another hedger C) could be either a hedger or a speculator D) The Exchange

Assume you're a flour miller and decide to hedge your upcoming wheat purchase. At the time, CME Group Dec Wheat futures are trading at $6.50 a bushel and the expected local basis for delivery mid-November is 12 cents over December futures. If you hedge your position, what is your expected purchase price if the basis is 12 cents over? A)$6.50 B)$6.62 C)$6.40 D)$6.38

Assume your supplier's cash market price is generally quoted over the CME Group's futures price. If you hedge by purchasing a futures contract, a good time to purchase the physical product and lift the hedge would be: A) Once you have hedged, it makes no difference B) When the basis is relatively weak C) When the basis is relatively strong D) Whenever the cash market price is highest

b) When the basis is relatively weak

Assume your supplier's cash market price is generally quoted over the CME Group's futures price. If you hedge by purchasing a futures contract, a good time to purchase the physical product and lift the hedge would be: a) once you have hedge, it makes no difference b) when the basis is relatively weak c) when the basis is relatively strong d) Whenever the cash market price is highest.

Assume your supplier's cash market price is generally quoted over the CME Group's futures price. If you hedge by purchasing a futures contract, a good time to purchase the physical product and lift the hedge would be: A)once you have hedged, it makes no difference B)when the basis is relatively weak C)when the basis is relatively strong D)whenever the cash market price is highest

C) The January 2018 contract

Consider an asset with futures contracts trades every month as a delivery month and contracts expire at the end of each month. A company hedging the purchase of the underlying asset on Dec. 10, 2017. Which futures contract should the company use? A) The Dec 2017 B) The Dec 2018 C) The Jan 2018 D) The Nov 2017

For a hedge to be effective, what is necessary? A) Short cash and long futures B) Short cash and short futures C)Long cash and short futures D) Long cash and long futures

Futures contracts are: A) the same as forward contracts B) standardized contracts to make or take delivery of commodity at a predetermined place and time C) contracts with standardized price terms D) all of the above

b) standardized contracts to make or take delivery of commodity at a predetermined place and time

Futures contracts are: a) the same as forward contracts b)Standardized contracts to make or take delivery of commodity at a predetermined place and time c) contracts with standardized price terms d)all of the above

b) The July contract

Futures contracts trade with every month as a deliver 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

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) June contract B) July contract C) May contract D) August contract

Futures trading gains credited to a customer's margin account can be withdrawn by the customer: A) as soon as the funds are credited B) only after the futures position is liquidated C) only after the account is closed D) at the end of the year

a) As soon as the funds are credited

Futures trading gains credited to a customer's margin account can be withdrawn by the customer: a) as soon as the funds are credited b) only after the futures position is liquidated c) only after the account is closed d) at the end of the year.

b) each day after the close of trading

Gains and losses on futures positions are settled: a) by signing promissory notes b)each day after the close of trading c) within five business days d) directly between the buyer and seller

Gains and losses on futures positions are settled: A) by signing promissory notes B) each day after the close of trading C) within five business days D) directly between the buyer and seller

Gains and losses on futures positions are settled: A)By signing promissory notes B)Each day after the close of trading C)Within five business days D)Directly between the buyer and seller

Hedging involves: A)Taking a futures position opposite to one's current cash market position B)Taking a futures position identical to one's current cash market position C)Holding only a futures market position D)Holding only a cash market position

Hedging involves: A) taking a futures position opposite to one's current cash market position B) taking a futures position identical to one's current cash market position C) holding only a futures market position D) holding only a cash market position

If price levels go higher after a short hedge is initiated, what are the results? A)Gain in the cash market and gain in the futures market B)Loss in the cash market and loss in the futures market C)Gain in the cash market and loss in the futures market D)Loss in the cash market and gain in the futures market

If price levels go lower after a short hedge is initiated, what are the results? A) gain in the cash market and gain in the futures market B) loss in the cash market and loss in the futures market C) gain in the cash market and loss in the futures market D) loss in the cash market and gain in the futures market

d) loss in the cash market and gain in the futures market

If price levels go lower after a short hedge is initiated, what are the results? a) gain in the cash market and gain in the futures market b) loss in the cash market and loss in the futures market c) gain in the cash market and loss in the futures market d) loss in the cash market and gain in the futures market

c) $5.35

If you estimate the local cash price will be 15 under the March futures price at the time you deliver your corn, the approximate net selling price you can lock in b selling a march futures contract is $5.50 is: a) $5.65 b) $5.60 c) $5.35 d) non of the above

If you estimate the local cash price will be 15 under the March futures price at the time you deliver your corn, the approximate net selling price you can lock in by selling a March futures contract at $5.50 is: A) $5.65 B) $5.60 C) $5.35 D) none of the above

In which market does a livestock hedger usually deliver or accept delivery of the physical livestock? A)Futures market B)Option market C)Swap market D)Local cash market

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

a) $59.50

On March 1 a commodity's spot prices is $60 and its August futures price is $59. On July 1 the spot prices 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

d) $1,014

On March 1 the price of a commodity is $1,000 and the December futures price is $1015. 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 hedger 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) $ 1016 b) $1001 c) $981 d) 1014

On March 1, a commodity's spot price is $60 and its August futures price is $59. On July q, 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

On March 1, the price of a commodity is $1000 and the December futures price is $1015. 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 Nov 1. It closed out its position on Nov 1. What is the effective price (after taking account of hedging) received by the company? A) $1016 B) $1001 C) $981 D) $1014

b) the ceiling of a price range

Resistance is a) the sensitivity of prices b) the ceiling of a price range c) the floor of a price range d) the standard deviation of a price range

Speculators: A) assume market price risk while looking for profit opportunities B) add to market liquidity C) facilitate hedging D) all of the above

d) all of the above

Speculators: a)Assumes market price risk while looking for profit opportunities b) add to market liquidity c)facilitate hedging d) all of the above

c) the floor of a price range

Support is a) the sensitivity of prices b) the ceiling of a price range c) the floor of a price range d) the standard deviation of a price range

a) 0.60

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

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

B) The hedger's position worsens

The basis defines as spot minus futures. A trader is hedging the purchase of an asset with long futures position. The basis increase unexpectedly. Which of the following is true? A)Hedger's position improves B) Hedger's position worsens C) Can both improve and worsen D) Stays the same

What are the short hedger's initial positions? A)Short cash market and long futures market B)Short cash market and short futures market C)Long cash market and short futures market D)Long cash market and long futures market

c) generally change in the same direction by similar amounts

The premise that makes hedging possible is cash and futures prices: a) move in opposite direction b)move upward and downward by identical amount c)generally change in the same direction by similar amounts d) are regulated by the exchange

The spot price of an investment asset that provides no income is $30 and the risk-free rate for all maturities (with continuous compounding) is 10%. What is the three-year forward price? A) $40.50 B) $22.22 C) $33.00 D) $33.16

a) $40.50

The term basis is: A) the difference between cash market prices in different locations B) the difference between prices for different delivery months C) the difference between the local cash price and a futures price D) relevant only to speculation

c) The difference between the local cash price and a futures price

The term basis is: a) The difference between cash market prices in different locations b) the difference between prices for different deliver months c) the difference between the local cash price and a futures price d) relevant only to speculation

Who are potential long livestock hedgers? A) Restaurants B) Packers C) Feedlots who buy feeder stock D) All of the above

b) basis strengthens and benefits the short hedger

What happens if a cash market price gains relative to a futures price over time? a) basis strengthens and benefits the long hedger b) basis strengthens and benefits the short hedger c) basis weakens and benefits the short hedger d) doesn't have an impact on basis

What happens if a cash market price gains relative to a futures price over time? A)Basis strengthens and benefits the long hedger B)Basis strengthens and benefits the short hedger C)Basis weakens and benefits the short hedger' D)Doesn't have an impact on basis

What happens to the obligations of most futures contracts used in a hedge? A) they expire worthless B) they are physically delivered C) they are closed-out by an offsetting transaction D) they are converted into a swap contract

c) they are closed-out by an offsetting transaction

What happens to the obligations of most futures contracts used in a hedge? a) they expire worthless b) the are physically delivered c) they are closed-out by an offsetting transaction d) they are converted into a swap contract

What is basis? A)Relationship between two different futures contract prices B)Relationship between two different cash market prices C)Relationship between a cash market price and a futures market price D)Relationship between a margin level and the commission

What is the relationship between a cash market position and a futures market position in a hedge? A)The positions are identical B)Opposite of each other C)The futures position is always larger than the cash market position D)The futures position is always smaller than the cash market position

What is the relationship between a cash market position and a futures market position in a hedge? A) the positions are identical B) opposite of each other C) the futures position is always larger than the cash market position D) the futures position is always smaller than the cash market position

b) opposite of each other

What is the relationship between a cash market position and a futures market position in a hedge? a) the positions are identical b) opposite of each other c) the futures position is always larger than the cash market position d) the futures position is always smaller than the cash market position

What market condition is necessary for an effective long hedge? A) Simulation between the cash and futures market B) Integration between the cash and futures market C) Variation between the cash and futures market D) Correlation between the cash and futures market

What market condition is necessary for an effective long hedge? A)Simulation between the cash and futures market B)Integration between the cash and futures market C)Variation between the cash and futures market D)Correlation between the cash and futures market

d) Correlation beteen the cash and futures market

What market condition is necessary for an effective long hedge? a) Simulation between the cash and futures market b) Integration between the cash and futures market c) Variation between the cash and futures market d) Correlation between the cash and futures market

What type of potential hedger is a livestock producer? A)Only a short hedger B)A short hedger for the sale of their livestock C)A long hedger for the purchase of their feed D)Both B and C

What will benefit a long hedge after it is initiated? A) weaker basis B) stronger basis C) higher prices D) lower prices

a) weaker basis

What will benefit a long hedge after it is initiated? a) Weaker basis b) Stronger basis c) Higher prices d) Lower prices

When will a trader get a margin call on a short futures position? A)When a futures market increase causes the margin account balance to fall below the specified maintenance level B)Whenever the broker wants C)When the market settlement price remains steady A D)Every day regardless of what happens to the market settlement pr

c) prices are discovered through bids and offers between buyer and sellers

Where does a commodity's future price come from? a) the contract buyer sets the price b) The Exchange sets the price c) prices are discovered through bids and offers between buyer and sellers d) the contract seller dictates the price

Where does a commodity's futures price come from? A) the contract buyer sets the price B) the Exchange sets the price C) Prices are discovered through bids and offers between buyers and sellers D) the contract seller dictates the price

Which entity in the US 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)

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

Which market has an impact on the final net result of a long futures hedge? A) Cash B) Futures C) Options D) Both A and B

d) Both A and B

Which market has an impact on the final net result of a long futures hedge? a) cash market b) futures market c) option market d) Both A and B

Which of the following best describes the term "spot price" A) the price for immediate delivery B) the price for delivery at a future time C) the price of an asset that has been damaged D) the price of renting an asset

a) The price for immediate delivery

Which of the following best describes the term "spot price" a) the price for immediate delivery b)the price for delivery at a future time c) the price of an asset that has been damaged d) the price of renting an asset

Which of the following describes a hedging strategy for a cattle feeder? A) short live cattle futures, short corn futures, short feeder cattle futures B) short live cattle futures, long corn futures, long feeder cattle futures C) long live cattle futures, long corn futures, long feeder cattle futures D) long live cattle futures, short corn futures, short feeder cattle futures

b) Short live cattle futures, long corn futures, long feeder cattle

Which of the following describes a hedging strategy for a cattle feeder? a) short live cattle futures, short corn futures, short feeder cattle futures b) short live cattle futures, long corn futures, long feeder cattle futures c) long live catte futures, long corn futures, long feeder cattle futures d) long live cattle futures, short corn futures, short feeder cattle futures

Which of the following describes a hedging strategy for a soybean processor? A)Short soybean futures, short soybean oil futures, short soybean meal futures B)Long soybean futures, long soybean oil futures, long soybean meal futures C)Short soybean futures, long soybean oil futures, short soybean meal futures D)Long soybean futures, short soybean oil futures, short soybean meal futures

D) the futures price is about the expected future spot price

Which of the following describes contango? A.The futures price is below the expected future spot price B.The futures price is below today's spot price C.The futures price is a declining function of the time to maturity D.The futures price is above the expected future spot price

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

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 dedge 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 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 contract are used for hedging d) none of the above

Which of the following is NOT true A)A call option gives the holder the right to buy an asset by a certain date for a certain price B)A put option gives the holder the right to sell an asset by a certain date for a certain price C)The holder of a call or put option must exercise the right to sell or buy an asset D)The holder of a forward contract is obligated to buy or sell an asset

Which of the following is a consumption asset? A) The S&P 500 index B) The Canadian dollar C) Copper D) IBM stock

c) Copper

Which of the following is a consumption asset? a) The S&P 500 index b) the Canadian dollar c) Copper d) IBM stock

a) a long position in a futures contract

Which of the following is acquired (in addition to a cash payoff) when the holder of a call futures exercises? a) a long position in a futures contract b) a short position in a futures contract c) a long position in the underlying asset d) a short position in the underlying asset

b) a short position in a futures contract

Which of the following is acquired (in addition to a cash payoff) when the holder of a put futures exercises? a) a long position in a futures contract b) a short position in a futures contract c) a long position in the underlying asset d) a short position in the underlying asset

Which of the following is the only variable element of a standardized futures contract? A) quantity B) quality C) place of delivery D) price

d) price

Which of the following is the only variable element of a standardized futures contract? a) quantity b) quality c)price of delivery d) price

c) the delivery month of the underlying futures contract is September

Which of the following is true for a September futures option? a) the expiration month of option is September b) the option was first traded in September c) the delivery month of the underlying futures contract is September d) September is the first month when the option can be exercised

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 ratios the slope of the best fit line when the futures price (on the y-axis) 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 ration 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)

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 y-axis) 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)

b) you have a long (buy) futures position and prices decrease

You may receive a margin call if: a) you have a long (buy futures position and prices increase b) you have a long (buy) futures position and prices decrease c) you have a short (sell) futures position and prices decrease d) none of the above

You sell one December futures contracts when the futures contract when the futures price is $1010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2000. The maintenance margin per contract is $1500. During the next day, the futures price rises to $1012 per unit. What is the balance of your margin account at the end of the day? A) $1800 B) $3300 C) $2200 D)$3700

a) $1,800

You sell one December futures contracts when the futures price is $1,010 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $2,000. The maintenance margin per contract is $1,500. During the next day the futures price rises to $1012 per unit. What is the balance of your margin account at the end of the day? a) $1800 b) $3300 c) $2200 d) $3700

You sell one March futures contracts when the futures price is $657 per unit. Each contract is on 100 units and the initial margin per contract that you provide is $5,000. The maintenance margin per contract is $3,500. During the next day the futures price rises to $660 per unit. What is the balance of your margin account at the end of the day? A)$4,700 B)$5,300 C)$3,800 D)$3,200

Futures Midterm

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