Series 3

Sally Sweet sold 4 PIE security futures contracts at 485 and closed out her position 3 days later when the index was at 515. PIE is a narrow-based index covering the bakery industry, and the multiplier for the index's security futures contract is $250. Sally paid $28 round-turn commission on each spread. What was Sally's total loss?

4(485 - 515) x 250 - 4(28) Total loss = $30,122

The Federal Reserve Board sets initial and maintenance margins for stock transactions at 50 percent of the market value of the stock.

False (not maintenance margins)

Futures on single stocks are required by regulation to consist of 100 underlying shares.

False (not regulated to be 100 shares)

In March, a United States company has contracted to pay 375,000 euro for German doll houses from a German firm in June. The current spot euro price is $.97. The U.S. firm is concerned that the euro will appreciate in the interim and hedges when the June futures price of the euro is at $.96. (Contract size is 125,000 euro.) In June, when the U.S. company lifts its hedge and pays for the doll houses, the spot price of the euro is $.99 and its futures price is $.97. Had the U.S. company not hedged, it would have paid how much more or less for the doll houses?

$.01 gain from hedging. ($.97-$.96) $.01/euro x (375,000 euro) = $3,750

A feedlot operator decides that she should place a partial hedge against cash holdings and/or needs. The operator sells one contract of cattle futures and buys three corn futures contracts. Later the operator lifts the two hedges. The profit on the cattle hedge (excluding commissions) is $.10 per pound (40,000 lbs./contract) and the loss on the corn hedge (5,000 bu/contract) is $.20 per bushel. What was the overall profit or loss on the hedge transactions, excluding commissions?

$1,000 profit (40,000 x .10) - 3(5000 x .20) = $1,000 profit

Terry Trader bought 2 XYZ futures contracts (each contract covering 100 shares) at $25 per share. Terry's FCM charges $30 round-turn commission per contract and requires the minimum initial and maintenance margin for security futures. How much margin did Terry put up to open this position?

$1,000. (the required initial margin for an outright position in security futures is 20%. .2(2 contracts x 100 shares/contract x $25/share) = $1,000

On March 10, a hog farmer expecting to have an inventory of 120,000 pounds of hogs to bring to market in June is worried about falling prices. He hedges in the futures market when June hog futures (contract size = 40,000 lbs.) are trading at 48.10 cents per lb. and local cash is at 47.40 cents per lb. As he expected, prices do fall initially to 45.90. However, after some time prices begin to rise. To protect his unrealized gains, the hog farmer enters a stop order at 47.10. This order is filled at 47.20. With commissions of $25 per contract round turn, what is his profit/loss on the futures hedge?

$1,005 profit 120,000(.4810-.4720) -3(25) = $1,005 profit

A speculator bought three June copper futures (25,000 lbs. per contract) on February 10 at 80.20 cents/lb. As prices moved in his favor, the speculator decided to buy 2 more June copper futures contracts on February 20 at 81.00 cents/lb. The speculator offset all of his copper futures positions on May 5 when the June futures was trading at 81.80 cents/lb. If commissions were $30 per contract, how much did the speculator gain or lose on his copper futures trades?

$1,450 gain 3(.8180-.8020) x 25,000 = 1,200 2(.8180-.8100) x 25,000 = 400 $1,600 - 5(30) = $1,450 gain

5. A speculator sells two contracts of September Dow Jones Industrial Average futures (contract size = $10 x index) at 9214. Two weeks later he offsets his position at 9292. His commission costs are $25 per contract. What was his loss on the trade?

$1,610. 2(9292 - 9214) x $10 + 2($25) = $1,610

Betty Bull bought 3 WIN narrow-based index security futures contracts covering the casino sector at 1025. (The WIN index has a multiplier of $200.) If Betty offset her position the next day at 1028, how much did she gain if she paid a round-turn commission of $25 per contract?

$1,725. Gross gain = 3 contracts x $200/contract x (1028 - 1025) = $1,800. Net gain = $1,800 - 3($25) = $1,725.

31. One of you customers who expects interest rates to fall sells four March 104 T-bond calls at a premium of 3-40 and buys four March 100 T-bond calls at a premium of 6-24. Your customer wants to know what his maximum loss on this position could be, including commissions of $35 per option spread. Given a $100,000 contract value, T-bond options priced in 64ths of a percentage point, and a T-bond option point worth $15.625, what would you tell your customer?

$11,140 loss b. Max loss = # spreads x net premium paid per spread + # spreads x commission per spread c. = 4 (6-24 - 3-40)($15.625) + 4($35) d. = 4 (176)($15.625) +4($35) e. = $11,000 + $140 f. = $11,140

A speculator sells 3 heating oil futures contracts (42,000 gallons per contract) at $.6890 per gallon. He offsets this position when the market is at $.6760 per gallon. Assuming commissions of $50 per contract, what is the profit or loss per contract on this speculative trade?

$1488 3($.6890 - $.6760) x 42,000 - 3(50) = $1488

On August 1, a copper pipe fabricator contracts to sell pipe that it will fabricate in December and sell at a fixed price. To do so, the fabricator requires 200,000 pounds of copper in mid-November. On August 1, the fabricator can buy copper at 82 cents per pound, and the December futures price is 87 cents per pound. On November 25, he can buy cash copper at 84.20 cents, and the December future is 89 cents (contract size = 25,000 lbs). If the fabricator hedged, what would be his net cost of copper?

$168,400 Buy Dec futures @ 87 cents/lb on Aug 1 Sell Dec futures @ 89 cents/lb on Nov 25 Profit on hedge = 2 cents/lb x 200,000 lbs = $4,000 Cost of cash copper (Nov. 25) = 84.2 cents/lb x 200,000 lbs = $168,400 Net cost of copper = Cost of cash copper - Profit on hedge $168,400 - $4,000 = $164,400

A customer buys two live cattle futures contracts (40,000 lbs. per contract) at 75.85 cents per lb. with commissions of $25 per contract. The position is liquidated after the market has advanced to 76.15 cents per lb. What is the profit?

$190 gain 2(.7615 - .7585) x 40,000 - 2(25) = $190 gain

On November 10, the price of the December corn futures is $2.33 1/4, and the Chicago cash corn price is $2.30 1/4. A farmer's local basis is 10 cents under. The selling price for the farmer's cash corn on November 10 would be:

$2.23 1/4

A trader enters into a spread on October 1 by selling 10 December euro futures contracts at $.95 and buying 10 March euro futures at $.96. On December 3, when the trader unwinds his spread, December futures are trading at $.94 and March futures are trading at $.97. (Contract size = 125,000 euro) Excluding commissions, what is the profit or loss on this transaction?

$25,000 $.01 gain on December futures and $.01 gain on March futures $.02 gain on spread 10 contracts (.02 x 125,000) = $25,000

11. The contract size for 10-year treasury note futures is $100,000. If a trader buys one contract of December T-notes at 94-12 and sells it at 94-23, what is his profit?

$343.75 (The contract size is $100,000 and each percentage point is worth $1,000. The gain is 94 23/32 - 94 12/32 = 11/32 x $1,000 = $343.75)

It is summer. A buyer pays a premium of $7.20 for a December gold 370 call. December gold futures are trading at $365.80. Ignoring commission and any other transaction costs, the call buyer's break-even point at option expiration would be which of the following December gold futures prices?

$377.20 Call + premium = Break-even price $370.00 + $7.20 = $377.20

Benny Bear sold six DOG security futures contracts (each covering 100 shares of DOG) for $32 per share at the close of the market on Tuesday. If DOG closes on Wednesday at $38, how much will Benny's margin call be?

$4,320. Original margin = .2 x 6 contracts x 100 shares/contract x $32/share = $3,840 Mark-to-market loss = 6 contracts x ($32/share - $38/share) x 100 shares = $3,600 Equity = $3,840 - $3,600 = $240 Maintenance margin = .2 x 6 contracts x 100 shares/contract x $38/share = $4,560 Margin call = $4,560 - $240 (equity) = $4,320

10. A treasurer buys ten contracts of December Eurodollars five years out at 96.00 and later sells them at 94.00. The face value of the Eurodollars futures contract is $1 million, and the value of a Eurodollar point is $25. Ignoring commissions, what was his profit or loss on the futures transaction?

$50,000 loss (10 contracts x 200 points x $25/point)

It is January. A calculator manufacturer in Illinois has agreed to sell 100 calculators to a Swiss bank for 750 Swiss francs each. Payment will be made in three months. The U.S. manufacturer is concerned that the value of the Swiss franc will depreciate against the U.S. dollar in the interim, so the manufacturer decides to hedge. The present cash price for Swiss francs is $.7334/franc, and the December futures are trading at $.7441/franc. Three months later the manufacturer delivers the calculators and lifts the hedge. Cash francs are then $.7228/franc, and December futures are $.7335/franc. Ignoring transaction costs, what was the effective price the U.S. manufacturer received for each calculator?

$550.05 per calculator January Futures - Futures 3 months later = $.7441 - $.7335 = $.0106 Effective cash price of Swiss franc = $.7728 $.7728 + $.0106 = $.7334 Cash price x Swiss franc/calculator = $.7334 x 750 = $550.05

A speculator goes long 5 June Nasdaq 100 futures at 1155.50. The contract multiplier is $100. What would be the speculator's loss if the position is closed out by selling 5 June Nasdaq 100 futures at 1142.00?

$6,750

Assume September natural gas futures usually trade at a 5-cent per MMBtu discount to the December future. September has been trading at $4.605 with December at $4.655, but at one point September is quoted at $4.625 and December at $4.655. To take advantage of this latter situation, a speculator buys 5 December contracts and sells 5 September contracts. Excluding commissions, if September futures move to $4.645 and December futures to $4.660, what is the speculator's loss on this trade? (natural gas contract = 10,000 MMBtu)

$750 loss Buy 5 Dec contracts at $4.655 Sells 5 Sept contracts at $4.625 Sept futures at $4.645 Dec futures at $4.660 4.660-4.655 = .005 gain 4.625-4.645 = .020 loss Total loss = .015 x 5(10,000) = $750 loss

A meat packer sets up a buying hedge in hog futures for $49.95 per cwt. Cash hogs are $49.55 when the hedge is put on. He liquidates the hedge when futures are $50.45 and buys cash hogs for $50.35 per cwt. What is the net price per cwt. he pays for the hogs?

(50.45 - 49.95) = $.50 gain on hedge Cash - gain on hedge = net price $50.35 - $.50 = $49.85

The gross cracking margin:

1.) Requires the conversion of heating oil and gasoline prices to dollars per barrel. 2.) Is the relationship between the futures price of crude and the futures prices of gasoline and/or heating oil.

A corporation announces a 3-for-1 stock split. On the effective date of the split, which of the following indicates how the security futures contracts will be adjusted?

1.) The number of contracts outstanding will be tripled 2.) The number of shares per contract will remain at 100.

LMNO stock closes at 63 on the day before a 3-for-1 stock split becomes effective. The next day the stock opens at 21. Which is true?

1.) Those with long stock positions coming into the effective date have seen no change in market value of their positions due to the split. 2.) Those with long stock positions coming into the effective date of the split now own three times as many shares as before the split.

It is July. An American clothing manufacturer contracts to buy 250,000 British pounds worth of British woolens to be delivered and paid for in pounds in November. The British pound is at $1.6155, and the December pound future is at $1.6370. (One futures contract = 62,500 pounds sterling.) If the clothing manufacturer decided to hedge in British pound futures, he would take a position of.

250,000 / 62,500 = 4 contracts

"Regular-way" settlement of stock transactions occurs how many business days after the trade is made?

3 days. Known as T+3 for trade plus 3 days

If a trader purchases 3 gold futures calls (on 100 oz. of gold) for $10.00 per ounce and subsequently closes out his long call position at a premium of $7.00, what would his profit or loss be, before commissions?

3(7.00-10.00) x 100 = $900 loss

14. It is June. A soybean farmer plans to harvest 50,000 bushels of beans in October. He decides to use put options to hedge. Cash beans are now $5.17 per bushel and the November 520 soybean put has a premium of 28 cents/bu. The farmer buys 10 of the puts at 28 cents/bu. Each. Four months later he sells his cash beans for $4.88 per bushel and his 10 puts at a premium of 43 cents/bu. Ignoring transaction costs, what was the effective price the farmer received for his beans, per bushel?

5.03 (4.88 +15 cent gain on premium)

On December 1, a portfolio manager sells 50 March Dow Jones Industrial Average futures contracts at 9023 (contract value = $10 times the index). On February 29, the position is offset by a purchase of 50 March NYSE futures at 8974. Excluding transaction costs what was the gain or loss on the trade?

50(9023-8974) x $10 = $24,500 gain

27. March Eurodollar futures are trading at 95.00, and a trader buys two futures and writes two March 95 calls for 1.10 each. When the futures and options expire, at what value of the futures would the trader neither lose nor gain on the combined options and futures position?

93.90 (At expiration, the trader gains the entire premium of 1.10 as long as the Eurodollar futures price is 95 or lower. If the price of Eurodollar futures decline by 1.10 to 93.90, the trader's loss on his long futures position exactly matches his gain on his short options position.

7. A Treasury-bond price of 97-21 means:

97 and 21/32% of par

28. Which of the following options will yield a net profit to the purchaser?

A call option when the price of the underlying futures increases above the option's strike price by an amount greater than the premium paid for the option.

29. Writing a naked call futures option involves:

A call that is granted without a long position in the futures contract underlying the option.

8. An option's break-even price is:

A call's strike price plus the premium (or a put's strike price minus the premium)

16. If the buyer of a call option exercises the option, he receives:

A long futures position

4. Which of the following is an intramarket futures spread?

A long position in one contract month and a short position in another contract month in the same futures contract on the same exchange.

10. Which of the following describes a crush spread?

A long position in soybean against short positions in soybean oil and soybean meal futures (trader is trying to replicate the gross profit margin of a business that crushes soybeans, a raw material, to produce soybean oil and soybean meal)

15. A synthetic short futures position involves:

A long put and a short call

17. If a customer wants a broker to work an order, the customer could give the broker:

A not-held order b. A discretionary order

1. Which of the following futures positions will yield a profit?

A short position when the price decreases

4. A limit order to sell would be placed:

Above the present price level.

Who among the following would NOT be considered an insider of a company for purposes of complying with securities laws?

An associated person who owns 3 percent of the company's stock

In contrast to futures, stocks or equities:

Are not regulated by the CFTC.

4. The division of a portfolio among several asset classes is called:

Asset allocation

5. The mark-to-market system of futures margining:

Assures that the value of open accounts is kept current.

2. A common stock with a beta of 1 would be considered to have:

Average price volatility (beta measures volatility against that of the overall market. A beta of 1 indicates that the particular stock's volatility matches that of the market index.)

In October a jewelry fabricator must decide whether to inventory gold for use in two months or hedge her needs in the futures market. The October future is trading at $285.60/oz., the December future is at $299.90, and cash gold is at $285.45. If the fabricator's cost of carrying cash gold is $10 per ounce per month, the fabricator is:

Better off hedging her needs in the futures market. (the cost of buying cash gold in October ($285.45) and carrying it for two months ($20.00) exceeds the price of the December futures contract ($299.90)

Futures on which of the following would not be considered a security futures contract?

Broad-based stock index. (Common stock, ADRs and ETFs, and Narrow-based stock index are all security futures contracts)

On August 1, a copper pipe fabricator contracts to sell pipe that it will fabricate in December at a fixed price. To do so, it will require 200,000 pounds of copper in late November. To hedge its position (contract size = 25,000 lbs.), the fabricator would:

Buy 8 copper futures contracts

8. To hedge a planned purchase of $20 million of T-notes, an investment manager would:

Buy T-note call options

11. It is April. A hog farmer plans to sell live hogs in October and decides to use options to hedge. (The contract size is 40,000 pounds.) What should he do?

Buy a put

A hog farmer decides to use an option to hedge his growing pig crop. He would most likely:

Buy a put. (to protect against a price decline)

A customer owns platinum and is worried about a significant decline in platinum prices. Which would be the most profitable position if his expectations are correct?

Buy an in-the-money put.

A refiner with gasoline sold forward at a fixed price would hedge by:

Buying gasoline futures

1. A futures option that gives the buyer the right to buy the underlying futures contract is called:

Call

3. The contract size for T-bond futures is $100,000. If bond futures decline from 96-04 to 94-12, the change in equity in a one-contract short futures position would be:

Change in contract equity = $100,000 (.96 4/32 - .94 12/32) =$100,000 (.0175) =$1,750

Non-precious metals futures markets exhibit:

Contango or backwardation pricing, depending on supply and demand.

5. Hedging cash corporate bonds with T-bond futures is known as a:

Cross-hedge (involves using a futures market whose underlying instrument is related to but different from the cash instrument at risk)

Which of the following is true about customer margins for security futures?

Cross-margining between security futures positions in futures and securities accounts is not permitted.

6. Hedging cash corporate bonds with T-bond or T-note futures is known as a (an):

Crosshedge (a crosshedge involves using a futures market whose underlying instrument is related to but different from the cash instrument at risk)

13. In options trading, the amount by which an option premium is expected to change relative to the price change of the underlying futures contract is called the option's:

Delta

Which of the following is a distribution of the earnings of a corporation to its shareholders?

Dividend

Which of the following is NOT a characteristic of an American Depository Receipt (ADR)?

Each ADR represents 100 shares of foreign stock.

12. If the yield curve is upward sloping, the T-bond futures market would be expected to be a contango or carrying-charge market.

False

All security futures contracts must be fungible from the outset of trading.

False

Physical delivery against security futures contracts is permitted only if the contracts are held in a securities account.

False

There is no basis risk in hedging foreign currency risk with futures contracts.

False

10. An exporter who is "short the basis" (i.e., has made a fixed price sales commitment for a commodity not owned or purchased) would establish a short hedge.

False (an exporter who is "short the basis" would profit if the basis declines. Such a hedger would establish a long futures position, a long hedge)

Any stock index in which one stock comprises 25 percent or more of the weighting is considered a narrow-based index.

False (any stock index in which one stock comprises 30 percent or more of the weighting is considered a narrow-based index)

One of the two key accounting summaries made available by public companies is the balance sheet, which summarizes a company's revenues, expenses and net income or loss during a specified period.

False (balance sheet is a company's assets, liabilities, and shareholders' equity)

Block trades are prohibited in security futures.

False (but they must be approved by the CFTC and SEC and include particulars such as trade size, reporting, and pricing requirements)

As long as a stock index contains ten or more underlying securities it is considered a broad-based index.

False (can be 10 or more securities and still be narrow-based)

Some crack spreads involve natural gas.

False (natural gas futures are not a component of crack spreads; such products spreads combine crude oil with heating oil and/or gasoline futures, which are the refined products derived from crude oil)

Irwin Investor trades security futures in his futures account. He owns 500 shares of Carefree Campsite Corporation (CCC) common stock that he decides to hedge with 5 CCC security futures contracts, each of which covers 100 shares. Because this hedged position is one of the approved strategies for reduced security futures margin, Irwin's initial margin requirement is less than 20% of the value of his 5 CCC security futures contracts.

False (reduced margins are available only if both the securities and reduced margins are available only if both the securities and the security futures position are held in the same account)

5. A buying hedge is used to protect against a possible later price decrease in the actual commodity.

False (the purchase of a futures contract (long position) provides a hedge against price increases in the actual commodity)

A cattle rancher who is hedged can sell his cattle to a local feedlot where the cash market price is $67.10 per hundredweight. The futures price is at $68, and transportation is 50 cents (per hundredweight) to the feedlot where delivery against futures may be made at a $1.00 discount. Preparation costs for delivery against futures are 60 cents. In this situation, the rancher would deliver against futures rather than to the local feedlot.

False (would make less on futures deliver rather than selling to the local feedlot)

"Alpha" and "Beta" are equivalent statistical measure of a company's stock.

False. (different statistical measures of a stock's expected return)

When hedging with foreign currency futures, the hedger is able to lock in the spot foreign exchange rate prevailing at the time the futures contract is initiated.

False. (it is the prevailing futures price, not the spot price, that a hedger locks in when he or he initiates a futures position)

Any stock index in which one stock comprises 25 percent or more of the weighting is considered a narrow-based index:

False. Has to be 30%

The New York Stock Exchange, American Stock Exchange and Nasdaq Stock Market, which are known as agency auction markets, use a specialist system.

False. Nasdaq is an electronic dealer market which uses a system of multiple market makers for the stocks it trades.

A price equally weighted index takes into consideration both the price and the capitalization of the underlying stock.

False. Only takes into account the price.

10. An order which is cancelled if it cannot be executed immediately in whole or part is called a:

Fill or Kill Order

In early March a hedger purchased 5 May CBOT wheat futures to hedge his fixed price sales commitment of 25,000 bushels. At that time May futures were trading at 270 1/4 cents/bu., July futures at 280 1/2 cents/bu., and local cash wheat at 263 1/2 cents/bu. In late April the hedger, not wanting to accept delivery but needing to maintain the hedge, decided to roll over his position. At that time the following prices were prevailing: May futures, 276 1/2 cents/bu., July futures 284 3/4 cents/bu., Sept. futures 296 1/2 cents/bu., and local cash wheat at 272 1/4 cents/bu. If the hedger rolled over into the July future, how much did he gain or lose on the rollover (excluding transaction costs)?

Gain 2 cents/bu Sell May futures in April = 276 1/2 cents/bu Buy May futures in March = -270 1/4 cents/bu Gain per contract = 6 1/4 cents/bu Buy July futures in April = 284 3/4 cents/bu. Buy July futures in March = -280 1/2 cents/bu. Cost of buying in April rather than March = 4 1/4 cents bu. Net gain = 6 1/4 cents/bu. - 4 1/4 cents/bu. = 2 cents/bu.

9. On March 1, a trader enters a spread, going long 2 September Eurodollar futures and short 2 December Eurodollar futures. On June 1, the trader unwinds his spread. (Contract size = 1 million dollars face for three months) What is the profit or loss on this transaction?

Gain of $50 (2 contracts x $1,000,000 x 90/360 x .0001 spread)

3. When interest rates go up, the prices of fixed-income securities (e.g., Treasury bonds):

Go down (inverse relationship)

1. Futures and options positions that represent a substitute for transactions to be made at a later time in a physical marketing channel and that are economically appropriate for the reduction of risk are generally classified as:

Hedge positions

4. A selling or short hedge:

Helps a dealer with unsold inventory to remain competitive (a selling hedge protects an inventory against a decline in price)

14. How should an order written as Buy 1 March T-bond MKT be executed?

Immediately at the prevailing offer price

An exchange rate quote of 1.4992 dollars per British pound is:

In American terms (to quote in American terms means the U.S. dollar price of one unit of foreign currency)

2. A long futures position gains when the price of the underlying commodity, security, currency, or index:

Increases

If a new long buys from a new short, open interest:

Increases

The purchase of stock-index futures and call options:

Increases stock-market exposure.

The activity of speculators in futures markets:

Increases trading volume-----Provides needed liquidity-----Enables the filling of orders with a minimum of price disturbance

Which of the following refers to the process by which a company issues its shares to the public for the first time?

Initial public offering (IPO)

2. If short-term interest rates are higher than long-term rates, the yield curve is described as:

Inverted

Investor Jones is short 8 ZYX security futures contracts, each one covering 100 shares of ZYX. The company declares a 5-for-2 stock split. Which of the following is a possible outcome for Investor Jones' security futures position following the stock split?

Investor Jones now has 8 short ZYX futures contracts, each covering 250 shares of ZYX

7. Futures margin:

Is a good faith deposit or performance bond. (In stock performances, margin acts as a down payment)

4. Variation margin:

Is collected each day by a futures clearinghouse from clearing members who have losses on their futures contracts. b. Is paid each day by a futures clearinghouse to clearing members who have gains on their futures contracts.

9. A commodity trading advisor (CTA):

Is permitted to trade individually managed accounts.

Which of the following is true regarding Regulation T of the Federal Reserve Board (FRB)?

It sets the minimum initial deposit required for a purchase of stock on margin

10. The ability to control a sizable position in a financial market with a relatively small amount of capital is known as:

Leverage

The buyer of a futures contract is called the:

Long

11. Clearinghouses use guaranty deposits to:

Meet the financial obligations of a defaulting member to other clearing members.

Which of the following is not an advantage of stock index contracts?

Method to take ownership of stock certificates without trading on a stock exchange.

Similar or identical futures contracts can be traded on:

Multiple exchanges regardless of location

16. A stop-limit order:

Must be executed at the limit price or better.

In March, the cash market price of crude oil is $25.85 per barrel, and your customer chooses to go long 6 contracts in June crude oil futures at $26.05 per barrel. The contract size for crude oil is 1,000 barrels, and commissions are $50 per contract, round turn. Your customer closes out her futures position in June for $27.55 per barrel, when the cash price is $27.15. Under these conditions, which of the following statements would be true?

Net gain of $1,450 per futures contract Gross gain of $9,000 on the trade Gross gain = 6($27.55-$26.05) x 1000 = $9,000 Net gain = 6($27.55-$26.05) x 1000 - 6($50) = $1,450 per contract

A trader buys 2 March sugar #11 call options at a strike price of 6 cents/lb. for $280 each and sells 2 March 6 1/2 cents/lb. sugar #11 calls for $56 each. (The underlying futures contract covers 112,000 pounds of sugar.) What is the maximum net profit, before commissions, that can be achieved with this position?

Net profit = $672 2(.065-.060) x 112,000 = 1,120 2(280-56) = 448 1,120 - 448 = 672

In January, April heating oil futures are trading at $.7220 a gallon, April 72 calls are trading at $.0315 per gallon, April 72 puts are trading at .0110 per gallon, and cash heating oil costs $.7115 per gallon. (Note: A heating oil futures contract is 42,000 gallons.) A heating oil distributor decides to hedge his fixed-price commitment to deliver 420,000 gallons of heating oil on April 1 by purchasing heating oil options. In late March, he offsets his options position when the April 72 call is trading at $.0225, the April 72 put is at $.0010, April futures are at $.7390, and cash heating oil is $.7290 per gallon. What is the effective price the hedger has paid for a gallon of heating oil?

None of the above. (Options are $.5370, $.4400, $.4425, $.4380) Cost of the option hedge: Purchase price of Apr. 72 call = $.0315/gal Offset price of Apr 72 call = .0225/gal Gain (loss) on option = ($.0090/gal) Effective cost of heating oil per gallon = cash price + loss on option $.7290/gal + $.0090/gal = $.7380/gal

A U.S. petroleum refiner who purchased a cargo of crude oil on the high seas would hedge by:

None of the above. (a refiner who is long cash crude oil would hedge by selling (going short) crude oil futures or purchasing a put option)

An agricultural producer has hedged his crop in the futures market. As the harvest and futures expiration approach, the producer would:

Offset his short futures position and sell his crop to the local elevator. (only correct option, not necessary to do this)

13. Trade confirmations are required:

On both opening and closing a position.

1. The term "money market" generally refers to debt securities whose terms to maturity are:

One year or less

3. The price at which a futures contract is bought or sold is determined by:

Open bids and offers on the exchange floor or on the exchange's screen-based trading system.

Metal are generally classified as either precious or non-precious. Which of the following metals is a precious metal?

Palladium (precious metals include gold, silver, platinum, and palladium. Non-precious metals include aluminum, copper, lead, nickel, tin, and zinc.)

8. If cash cotton is 63.75 cents per pound and the nearby futures contract is 63.50, the basis is:

Plus .25 cents

A principal function of a futures exchange is to:

Provide a trading market for foreign exchange

SEC and CFTC regulations set initial and maintenance margins for security futures at 20 percent. As a result:

Required maintenance margin calls are not equal to mark-to-market losses

4. When 30-year Treasury-bond interest rates rise, prices for five-year Treasury note futures:

Rise b. Fall c. Remain the same d. (A change in one segment of the yield curve does not necessarily cause a corresponding change in other segments)

1. Which of the following contracts is cash settled?

S&P 500

Which of the following transactions always must take place in a margin account?

Sale of a put option on a common stock (the sale of stock options that are not covered must take place in a margin account)

A money manager has a conservative equity portfolio worth $6.4 million with a beta of .8 using the S&P 500 Index as the benchmark. The S&P 500 Index is at 1024.00, and the multiplier of the S&P Index contract is $250. For a complete hedge of the portfolio, the money manager would have to:

Sell 20 S&P Index contracts. $6,400,000/(1024.00 x $250) x .8 = 20

In September, the manager of a $150 million stock portfolio expects a temporary stock market decline. His portfolio tracks very closely the movements of the S&P 500 Stock Index. (the portfolio has a beta of 1 with respect to the S&P 500 index.) The cash S&P Index is at 1250.00, and December futures are trading at 1325.00. If the manager decides to hedge his portfolio fully, what should he do? (The S&P 500 contract multiplier is $250.)

Sell 480 S&P 500 contracts. Dollar Value of Portfolio/(Cash Price x Contract Multiplier) x Portfolio Beta $150,000,000/(1250.00 x $250) x 1 = 480 contracts

In June, August copper futures are trading at 1/2-cent per lb. premium to the October future. If a trader feels that the copper market is going to switch from backwardation to contango pricing, which of the following intramarket spreads should she place to profit from this relative price movement?

Sell August, Buy October. (Contango: market situation in which prices are progressively higher in the succeeding delivery months than in the nearest delivery month. Opposite of backwardation. Backwardation: market situation in which futures prices are progressively lower in the distant delivery months, also termed an inverted market.)

12. If a coffee grower wanted to hedge against lower coffee prices, he would:

Sell coffee futures, or b. Buy a put option on coffee futures

After making a covered interest-parity calculation, an American investor decides to sell dollar-denominated fixed-income securities and purchase fixed-income securities denominated in British pounds. To hedge against changes in the dollar/pound exchange rate, the investor would:

Sell sterling futures. (to hedge the exchange-rate risk of an investment in fixed-income securities denominated in a foreign currency, an investor would sell an equal amount of foreign currency futures)

Japanese yen are trading at 112 against the US dollar in the cash market. Inflation in Japan is expected to rise, and American exports to Japan have risen recently. As a result, a trader expects the differential between Japanese yen and the US dollar to change. Which position will allow the trader to profit on the expected change in the differential between these two currencies?

Sell yen futures

13. A borrower who plans in May to issue 10 million dollars in 90-day commercial paper in September wishes to protect himself against higher interest rates in the future. He can do so by taking which of the following T-bill futures positions? (The T-bill futures contract has a face value of $1,000,000.)

Selling 10 September 90-day T-bill contracts

6. A bond portfolio manager, fearing rising interest rates, would hedge by:

Selling T-bond futures

Which of the following would be a legitimate hedge by a petroleum refiner?

Short heating oil futures (a refiner buys crude oil and sells petroleum products. To hedge its cash market positions, the refiner would go long crude oil and/or short petroleum products. Therefore, of the choices listed, only short heating oil futures represents a legitimate hedge.)

Crude oil is classified based on what characteristics?

Sulfur content Field of origin Gravity (in some cases, pipeline streams or ports of shipment are used in place of the field of origin)

Which of the following is NOT a U.S. securities options exchange regulated by the SEC?

The New York Stock Exchange. (not a U.S securities options exchange)

The owner of a stock held in a securities account is usually protected against a failure of the brokerage house by which of the following?

The Securities Investors Protection Corporation (SPIC)

3. A hedge may not give complete price protection for changes in the spot price if:

The basis changes while the hedge is on b. The quantity hedged differs from the size of the futures contract c. The grade of the commodity hedged is different from the grade on which the futures contract is based

7. The cash futures basis is:

The difference between a commodity's cash and futures price.

Which of the following is the result of a 2-for-1 stock split?

The number of outstanding shares of the corporation increases

What securities prices are used to determine the cash settlement price for a security futures contract?

The opening prices on the business day after the last trading day

Which is following is NOT a requirement when selling stocks short?

The short sale must be effected in a cash account. (must be effected in a margin account)

Which of the following provisions for security futures margins are the same for both futures and securities accounts held by customers?

The types of acceptable collateral

Which of the following is NOT true regarding holders of common stock in a corporation?

They are creditors of the corporation.

Which of the following is true about "value" stocks?

They generally are expected to hold their value under adverse economic conditions. (low price/earnings ratio; less volatile than growth stocks)

2. A hedger's principal motivation for using futures markets is:

To transfer the risk of price changes

3. The risk represented by the difference between the price changes of a cash portfolio and the price changes of the selected stock index futures contract is known as:

Tracking error

The trading of FOG, a New York Stock Exchange stock, is halted pending a news announcement from corporate headquarters. As a result:

Trading in FOG single stock futures and FOG stock options is halted.

9. Which of the following is not a factor in determining the futures carrying costs in determining the futures carrying costs; i.e., the difference between cash and futures prices?

Transaction costs (carrying costs are a function of interest, insurance, and storage costs)

9. Which of the following is not a factor in determining the futures carrying costs; i.e., the difference between cash and futures prices?

Transaction costs (carrying costs are a function of interest, insurance, and storage costs)

A company's cash flow is defined as its earnings plus depreciation.

True

A foreign currency swap is a simultaneous spot and forward transaction.

True

Fungibility of U.S. stock options means that a stock option purchased on one exchange can be offset on another exchange that trades the identical stock option.

True

If all other things (including the level of a cash stock index) remain the same and the dividends on the stocks included in a stock index increase, the value of a futures contract on the index will decline.

True

Restricted stock cannot be delivered against a security futures contract.

True

The purchase of stock options, as well as the purchase of options on futures, requires the full payment of the option premium.

True

There may be market conditions under which a stock may not be sold short on an uptick.

True

Through arbitrage, it is possible to earn virtually riskless profits:

True

30. An option reverse conversion includes a long call, a short put, and a short futures position.

True (It involves the combination of a short futures position and two option positions that have the risk/return profile of a long futures position. A long call and a short put have the risk/return profile of a long futures position)

Ms. Jewel bought 7 calendar spreads on RUBIES, an exchange-traded fund whose security futures contract covers 100 shares of RUBIES. Each of the 7 bull spreads that she effected in her futures account involved the purchase of a June RUBIES contract at $66.45 and the sale of a September RUBIES contract at $66.80. She paid $28 round-turn commissions per spread. a. Initial and maintenance margin for a calendar spread of security futures is 5 percent of the value of the higher priced leg when both legs of the spread are kept in either a futures or securities account. What was Ms. Jewel's initial margin on her spread position? b. The next day June RUBIES closed at $65.95 and September RUBIES closed at $66.30. Did Ms. Jewel receive a margin call, and if so, for how much? c. On the third day Ms. Jewel closed out her RUBIES spread when the June contract was trading at $66.20 and the September contract was trading at $66.20. How much did Ms. Jewel gain or lose on her RUBIES security futures position, taking her round-turn commissions of $28 per spread into account?

a. $2,338 Initial margin = .05 x 7 contracts x 100 shares/contract x $66.80/share = $2,338 b. There is no margin call, because the initial margin exceeds the maintenance margin requirement. Initial margin = $2,338 Maintenance margin = .05 x 7 contracts x 100 share/contract x $66.30 = $2,320.50 c. $231 loss 7 x ($66.20 - $66.45) x 100 = -$175 7 x ($66.80 - $66.60) x 100 = $140 Total loss = -$175 + $140 - 7($28) = $231 = $231 loss

5. A trader established a short December/long March silver spread when December was at a 6-cent discount (per troy ounce) to March. He closed out the spread when December was at a 10-cent discount (per troy ounce) to March. Ignoring transaction costs, what were the results of the spread?

4 cent gain per troy ounce b. Sell spread = -6 cents/bu c. Repurchase spread = -10 cents/bu d. Gain on spread = 4 cents

24. Which of the following options from the table has the largest intrinsic value?

April 52 call

7. Assume December corn futures usually trade at an 8-cent per bushel discount to the March future during harvest time. December has been trading at 2.82 with March at 2.90, but at one point December is quoted at 2.83 and March at 2.90. If the trader believes that the spread will return to its former level, how should a spread trade be placed?

Buy March - Sell December (Take advantage of the 7 cent spread before it goes back to an 8 cent spread)

The speculator uses the futures markets to:

Earn trading profits

2. Someone new to the futures markets would be best off trading only spreads because they are not very risky.

False

6. A call option can be offset with a put option of the same strike price and expiration date:

False

8. A market-if-touched (MIT) order must be executed at the price specified in the order, or a better price.

False

13. Which of the following pieces of information is not required on an order ticket?

Margin cost of initiating the order

5. Which of the following prices does a clearinghouse use in paying or collecting variation margins?

Settlement price

9. The intrinsic value of a futures option is:

The amount the option is in the money

17. First notice day is:

The first day a short can issue a delivery notice.

Open interest is:

The number of outstanding long or short futures contracts.

11. If a customer enters the order, Cancel Buy 10 April Platinum MKT, Order #145 Entered Today, what will happen?

The order will be canceled if it has not already been executed.

7. An option is considered a limited-risk instrument because:

The purchaser's loss is limited to the premium (grantor's loss isn't limited to the premium)

6. Delivery against a futures position is initiated by:

The seller

Which of the following items in a futures contract is standardized?

The size - the amount of the underlying item covered by the contract.

12. Local traders:

Trade for their own accounts. b. May trade for customer accounts c. Need not be members of or hold trading privileges on the exchanges on which they trade

16. Limited liability is a key benefit of a commodity pool.

True

21. An option that is unprofitable may still be worth selling or exercising (rather than being left to expire) in order to recover some of its original premium.

True (could regain some of the premium)

14. A so-called synthetic long futures position can be established by buying a call and selling a put with the same maturity month and strike price. That produces:

Unlimited profit and unlimited loss potential

19. What term describes an option spread that is long a December put and short a December put at different strike prices?

Vertical

The number of futures contracts bought or sold over a specified period of time is called:

Volume.

25. Six December 3.20 gold futures puts are granted at a premium of $9 per ounce (futures contract = 100 oz. gold.) The maximum profit the grantor can realize on this transaction is:

$5,400

12. If the futures price increases by 6 units, what is the profit or loss on a short position?

6 unit loss

8. A trader established a long May/short July wheat spread when May was at a 3-cent premium (per bu.) to July. He closed out the spread when May was at a 10-cent premium (per bu.). Ignoring transaction costs, what were the results of the spread?

7-cent gain per bu.

6. A trade involving a long soybean futures position and short positions in soybean oil and meal futures is an example of:

A commodity-products spread. (Involves a position in the primary product (such as soybeans) and an opposite side of the market position in the corresponding number of futures contracts that represent the secondary or refined products (soybean oil and meal)

9. A customer enters a limit order to sell 5 eurodollar futures at 96.62. This order becomes a market order when the futures:

Are offered at 96.62 or above.

2. If the buyer of a put option wants to exercise the option, a put option seller will:

Be assigned a long position in the futures market. (the buyer will be assigned a short position in the market, so the seller will be assigned a long position, because he is essentially buying the grain)

6. A stop order to buy:

Becomes a market order when its price is hit. b. Would be placed above the current price in that market c. Does not guarantee receiving the stop price.

5. A limit order directs the broker to:

Execute a customer's trade at a specific price (or better)

1. All futures exchanges in the U.S. are membership organizations.

False

10. If an exchange member is "dual trading," under certain circumstances he or she can give priority to his/her own trades over customers' orders.

False

12. A put option is in the money when the underlying futures contract is priced above the strike price of the option.

False

2. If trading in a particular futures contract hits its upper or lower price limit, trading immediately halts and no future trading is permitted during the day.

False

8. Clearing member firms do not have to margin their proprietary accounts.

False

9. A margining system that bases requirements on a portfolio rather than a contract-by-contract approach is not permitted in U.S. futures markets.

False

26. If the price of a futures contract changes, the price of a deep-out-of-the-money option on that futures contract would be expected to change dollar for dollar with the futures' price change.

False (The price of a deep-out-of-the-money option normally changes only a small percentage of the change in the price of the underlying futures contract

5. A European-style option can be exercised any day before the option expires:

False (can only be exercised at the time the option expires)

6. Commissions on futures are required to be charged on a round-turn basis:

False (common but not required)

18. An omnibus account is the account of an individual customer that carries a variety of futures and options contracts.

False (futures commission merchant's customer or proprietary account that the FCM carries or clears through another FCM, called the carrying broker)

3. It is customary to quote an intramarket spread order that is not a market order in terms of the contract that is at a discount.

False (it is customary to quote an intramarket spread that is not a market order in terms of the contract that is at a premium)

15. CFTC regulations provide that customer funds generally, but not always, must be segregated from the firm's proprietary funds.

False (must always be segregated)

15. A bid indicates the price at which a trader is willing to sell a futures contract.

False (offer)

1. Which of the following is not a futures spread?

Long March Kansas City Board of Trade Value line, long March Chicago Board of Trade DJIA (has to involve a combination of long AND short positions in two or more related futures markets and/or two or more different expirations of the same futures market)

9. Margin requirements for spreads are usually:

Lower than for outright positions (relative value tends to be less volatile than outright price)

23. When the cash price of hogs is 52.60 per pound, which of the following options from the table has intrinsic value?

None of the above. (a call has intrinsic value when the futures price exceeds the strike price: a put has intrinsic value when the futures price is below the strike price. Neither the call nor the puts listed in the answer have intrinsic value. In this computation, the cash price of corn is irrelevant.)

22. The assignment of an option on a futures contract involves:

Notification of the seller of a put or call that the buyer has exercised the option.

The process by which a futures contract is terminated by a transaction that is equal and opposite from the one that initiated the position is called:

Offset

17. Which of the following describes a short option straddle position?

Position taken when the market is expected to remain flat (A short straddle position involves the sale of two options with the same strike price and expiration date. Profitable if the market remains the same. A short call and a short put on the same underlying with the same expiration month but different exercise prices is called a strangle)

4. A speculator initiates a long position in two contracts of Sugar #11 at 8.40cents/lb. and liquidates at 9.40cents/lb. The commission is $30 per contract. What is his net profit (contract size = 112,000 lbs.)?

Profit/loss = # contracts x (sale price - purchase price) x contract size +/- (# contracts x commission/contract) b. 2 x ($.094 - $.084) x 112,000 - (2 x $30) = $2,180 profit

20. Which of the following orders represents a limit order on options?

SELL calls 10 October lean hogs 660.30 (Limit orders state the worst price a trader will accept on a transaction. Although the word LIMIT is not written in the answer, it is understood that this is a limit order because a specific price (or better) is stated.

4. The buyer of a futures put option with an American-style exercise has the right - but not the obligation to:

Sell a futures contract at the put strike price at any time from the put's purchase to its expiration.

8. An introducing broker (IB) in the futures industry:

Services customer accounts

14. NFA Rule 2-30 (Customer Information and Risk Disclosure) requires members and associates to obtain from customers who are individuals:

The customer's true name, address, and principle occupation b. The customer's current estimated annual income and net worth c. The customer's approximate age d. An indication of the customer's previous investment and futures trading experience

Who determines the size, grades, delivery locations and deliver months of a futures contract?

The exchange on which the contract is traded.

11. Account equity is:

The net of deposits, withdrawals and realized profits and losses in a futures account. b. The net status of contracts currently open and marked to market. c. So it is the sum of both answers above.

11. An option's premium is affected by:

The option's strike price b. The volatility of the underlying futures contract c. The time left until expiration

3. The exercise or strike price of a futures option is:

The price at which the option purchaser may buy or sell the underlying futures contract

7. A customer enters a stop order to buy one contract of T-bond futures at 98-14. The stop is hit, but the market is moving up fast, and the stop order is filled at 98-20. In this situation:

There is no error.

12. Why are some futures transactions cleared a day late, "as of" the preceding day?

Trade records did not match so the exchange members involved in the transaction had to resolve the discrepancy before or on the opening of trading the next morning.

1. The purpose of expanded daily price limits is to allow trading to continue during periods of heightened market movement.

True

10. An option is called a "wasting" asset because, no matter what else happens, the option's time value will shrink as time passes.

True

13. Because the clearinghouse substitutes itself as the counterparty to every trade, individual traders can liquidate their positions without having to wait for the other party to the original contract to liquidate.

True

18. A call sold uncovered presents the seller with unlimited market risk.

True

2. Only persons who own or lease seats or trading rights on an exchange may execute futures contracts on the exchange's trading floor or via the exchange's electronic trading system.

True

3. The clearinghouse is the guarantor of the financial integrity of every futures contract open on its books.

True

7. At maturity, all futures contracts are settled by delivery or by cash settlement.

True

A futures contract is a legal agreement between a buyer and seller governing the future delivery of the specified commodity, financial instrument, index or other underlying instrument. a.

True

Futures markets can be used to defray the cost of carrying commodity inventories:

True

Which of the following is essential to the operation of a successful futures contract based on a physical commodity?

Viable cash or actuals market in the same or comparable cash commodities as those underlying the futures market----Competitive market conditions in both production and distribution channels of the cash market-----Access to inspection and grading facilities-----Active trade participation