Futures Midterm
A.
.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
C
1.Which of the following is a consumption asset? A.The S&P 500 index B.The Canadian dollar C.Copper D.IBM stock
B
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
D
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
B
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
A
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
A
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
D
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
B
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
A
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
D
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
D
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
D
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
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
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) 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) 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
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
B
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
B
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.
B
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.
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
B
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
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
B
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
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.
B
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
A.
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
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
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
B
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
A
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
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
C
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
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
C
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
D
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
D
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
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
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
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
D
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
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
A
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
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
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
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
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
D
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
D
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 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
D
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
C
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
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
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
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
a) $40.50
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
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
A
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?
C
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
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
B
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) 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
C
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
B
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
D
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
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)
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
B
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
C
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
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
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
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
A
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
