Futures Markets

1. Over the last 15 years, most of the growth in the number of contracts traded on
the Chicago Board of Trade has come in the _______.

a.
metals

b.
agricultures

c.
financials

d.
commodities

2. A person with a long position in a commodity futures contract wants the price of
the commodity to ______.

a.
decrease substantially

b.
increase substantially

c.
remain unchanged

d.
increase or decrease substantially

3. If an asset price declines, the investor with a ___ is exposed to largest potential
loss.

a.
call option

b.
put option

c.
long futures contract

d.
short futures contract

4. The clearing corporation has a net position equal to ______.

a.
the open interest

b.
the open interest times two

c.
the open interest divided by two

d.
zero

5. The S&P500 index futures contract is an example of a(n) ______ delivery

contract. The pork bellies contract is an example of a(n) ______ delivery
contract.

a.
cash, cash

b.
cash, actual

c.
actual, cash

d.
actual, actual

6. The CME weather derivatives have payoffs that depend on ____ .

a.
the number of cloudy days for a specific city in a given month

b.
the number of inches of rain for a specific city in a given month

c.
the number of degree-days by which the temperature in a region differs
from 65 degrees Fahrenheit

d.
none of the above

7. Synthetic stock positions are commonly used by ______ because of their ______.

a.
market timers, lower transaction cost

b.
banks, lower risk

c.
wealthy investors, tax treatment

d.
all of the above

8. The Fridays with simultaneous expiration of S&P index futures, S&P index
options and options on some individual stocks are commonly called the _______.

a.
mad minutes

b.
trifectas

c.
happy hours

d.
triple-witching hours

9. A ______ contract calls for future delivery of an asset at a currently agreed-upon

price.

a.
forward

b.
futures

c.
both a and b

d.
none of the above

10. An investor who is hedging a corporate bond portfolio using a T-bond futures
contract is said to have a(n) _______.

a.
arbitrage

b.
cross-hedge

c.
over-hedge

d.
spread-hedge

11. The open interest on silver futures at a particular time is the number of
__________.

a.
all silver futures outstanding contracts

b.
outstanding silver futures contracts for a particular delivery month

c.
silver futures contracts traded during the day

d.
silver futures contracts traded the previous day

12. Futures and options are similar in all of the following ways except
_______________.

a.
expiration dates are standardized

b.
deliverable quantities are standardized

c.
the owner is not obligated to proceed with the transaction

d.
All of the above are similarities between futures and options

13. Futures and forward contracts differ in all of the following ways except
_______________.

a.
futures expiration dates are standardized

b.
forwards may have non-standard deliverable quantities

c.
forwards are generally not "marked to market"

d.
All of the above are differences between futures and options

14. Futures are widely used for _____________.

a.
hedging the purchase price of assets

b.
hedging the sale price of assets

c.
speculation

d.
All of the above

15. The fact that the exchange is the counter-party to every futures contract issued
is important because it eliminates _________ risk.

a.
market

b.

credit

c.
interest rate

d.
basis

16. Which of the following is not a category in which futures are actively traded?

a.
metals and minerals

b.
agricultural commodities

c.
foreign currencies

d.
Futures are traded in all of the above categories

17. A wheat farmer should __________ in order to reduce his exposure to risk
associated with fluctuations in wheat prices.

a.
sell wheat futures

b.
buy wheat futures

c.
buy a contract for delivery of wheat now, and sell a contract for delivery of
wheat at harvest time

d.
sell wheat futures if the basis is currently positive and buy wheat futures if
the basis is currently negative

18. Exchange trading of financial futures first took place in ________.

a.
1955

b.
1965

c.
1975

d.
1985

19. You take a long position in a futures contract of one maturity and a short
position in a contract of a different maturity, both on the same commodity. This
is called __________.

a.
a cross hedge

b.
a reversing trade

c.
a spread position

d.
none of the above

20. Interest rate futures contracts exist for all of the following except __________.

a.
Federal funds

b.
Euro-marks

c.
banker's acceptances

d.
repurchase agreements

21. Initial margin is usually set in the region of ________ of the total value of a
futures contract.

a.
5%-15%

b.
10%-20%

c.
15%-25%

d.
20%-30%

22. Margin must be posted by ________.

a.
buyers of futures contracts

b.
sellers of futures contracts

c.

both buyers and sellers of futures contracts

d.
speculators only

23. The daily settlement of obligations on futures positions is called _____________.

a.
a margin call

b.
marking to market

c.
a variation margin check

d.
None of the above

24. The maintenance margin is ________________________.

a.
an established value below which a trader's margin may not fall

b.
the same as variation margin

c.
the point at which a margin call will be triggered

d.
All of the above

25. Margin requirements for futures contracts can be met by ______________.

a.
cash only

b.
cash or highly marketable securities such as Treasury bills

c.
cash or marketable securities

d.
cash or warehouse receipts for an equivalent quantity of the underlying
commodity

26. An established value below which a trader's margin may not fall is called the ___
.

a.
daily limit

b.
daily margin

c.
maintenance margin

d.
convergence limit

27. __________ is a true statement.

a.
A margin deposit can only be met by cash

b.
All futures contracts require the same margin deposit

c.
The maintenance margin is the amount of money you post with your broker
when you buy or sell a futures contract

d.
The maintenance margin is the value of the margin account below which
the holder of a futures contract receives a margin call

28. At maturity of a future contract, the spot price and futures price must be
approximately the same because of __________.

a.
marking to market

b.
the convergence property

c.
the open interest

d.
the triple witching hour

29. A futures contract __________.

a.
is a contract to be signed in the future by the buyer and the seller of a
commodity

b.
is an agreement to buy or sell a specified amount of an asset at a
predetermined price on the expiration date of the contract

c.
is an agreement to buy or sell a specified amount of an asset at the spot price
on the expiration date of the contract

d.

gives the buyer the right, but not the obligation, to buy an asset some time in
the future

30. __________ which exploits differences between actual future prices and their
theoretically correct parity values.

a.
Index arbitrage is a strategy which exploits

b.
Marking to market is a strategy which exploits

c.
Reversing trades is a strategy which exploits

d.
None of the above are strategies which exploit

31. __________ refers to the daily settlement of obligations on future positions.

a.
Marking to market

b.
The convergence property

c.

The open interest

d.
The triple witching hour

32. Financial futures contracts are not traded on the __________.

a.
Major Market index

b.
New York Stock Exchange Composite index

c.
S&P 500 index

d.
none of the above

33. The CME weather futures contract is an example of ___ .

a.
a cash delivery contract

b.
an agricultural contract

c.
both A and B above

d.
none of the above

34. The ___ and the ___ have a correlation of less than .90.

a.
S&P index, NYSE index

b.
DJIA, Nasdaq index

c.
DJIA, NYSE index

d.
None of the above

35. You are currently long in a futures contract. You then instruct a broker to enter
the short side of a futures contract to close your position. This is called
__________.

a.
a cross hedge

b.
a reversing trade

c.
a speculation

d.
marking to market

36. A company which mines bauxite decides to short aluminum futures. This is an
example of __________.

a.
cross hedging

b.
long hedging

c.
short hedging

d.
speculating

37. Futures markets are regulated by the __________.

a.
AIMR

b.
CFTC

c.
CIA

d.
SEC

38. The triple witching hour is __________.

a.
the time that S&P 500 future contracts expire

b.
the time that S&P 100 index option contracts expire

c.
the time that option contracts on individual securities expire

d.
the time that all of the above happen simultaneously

39. An investor would want to __________ to exploit an expected fall in interest

rates.

a.
buy S&P 500 index futures

b.
sell treasury bond futures

c.
take a long position in treasury bond futures

d.
take a long position in wheat futures

40. Forward contracts _________ traded on an organized exchange and futures

contracts __________ traded on an organized exchange.

a.
are, are

b.
are; are not

c.
are not, are

d.
are not , are not

41. If the S&P 500 index futures is overpriced relative to the spot S&P 500 index,
you should __________.

a.
buy all the stocks in the S&P 500 and write put options on the S&P 500 index

b.
sell all the stocks in the S&P 500 and buy call options on S&P 500 index

c.
sell S&P 500 index futures and buy all the stocks in the S&P 500

d.
sell short all the stocks in the S&P 500 and buy S&P 500 index futures

42. A long hedge is a simultaneous __________ position in the spot market and a
__________ position in the futures market.

a.
long, long

b.
long, short

c.
short, long

d.
short, short

43. Investors who take short positions in futures contract agree to ___________
delivery of the commodity on the delivery date, and those who take long
positions agree to __________ delivery of the commodity.

a.
make, make

b.
make, take

c.
take, make

d.
take, take

44. An investor would want to __________ to hedge a long position in treasury

bonds.

a.
buy interest rate futures

b.
buy treasury bonds in the spot market

c.
sell interest rate futures

d.
sell S&P 500 futures

45. Futures contracts are said to exhibit the property of convergence because
_______________.

a.
the profits from long positions and short positions must ultimately be equal

b.
the profits from long positions and short positions must ultimately net to zero

c.
the futures price and spot price of any asset must ultimately be equal

d.
the futures price and spot price of any asset must ultimately net to zero

46. In the context of a futures contract, the basis is defined as ______________.

a.

the futures price minus the spot price

b.
the spot price minus the futures price

c.
the futures price minus the initial margin

d.
None of the above

47. Hedgers will be exposed to basis risk _______________.

a.
if the futures price and the spot price of the underlying asset are imperfectly
correlated

b.
if the futures contract and the underlying asset must be liquidated before the
delivery date

c.
only if both of the above conditions are met

d.
None of the above

48. Violation of the spot-futures parity relationship results in _______________.

a.
fines and other penalties imposed by the SEC

b.
arbitrage opportunities

c.
systematic losses for investors

d.
None of the above

49. When dividend paying assets are involved, the spot-futures parity relationship
can be stated as _________________.

a.
F1=S0(1+rf )

b.
F0=S0(1+rf -d)T

c.
F0=S0(1+rf +d)T

d.

F0=S0(1+rf )T

50. A trader who has a short position in wheat futures want the price of wheat to
__________ while a trader who has a long position in wheat futures wants the
price of wheat to __________.

a.
decrease, decrease

b.
decrease, increase

c.
increase, decrease

d.
increase, increase

51. A short hedge is a simultaneous __________ position in the spot market and a
__________ position in the futures market.

a.
long, long

b.
long, short

c.

short, long

d.
short, short

52. Approximately __________ of futures contracts result in actual delivery.

a.
0%

b.
1.5%

c.
15.0%

d.
80.0%

53. A long hedger will __________ from an increase in the basis a short hedger will
__________.

a.
be hurt, be hurt

b.
be hurt, profit

c.
profit, be hurt

d.
profit, profit

54. An investor with a short position in treasury notes futures will profit if
__________.

a.
interest rates decrease

b.
interest rates increase

c.
both a and b

d.
neither a nor b

55. __________ of future markets.

a.
Hedging is a use

b.
Speculation is a use

c.
Hedging and speculation are both uses

d.
Neither hedging nor speculation are uses

56. On January 1, you sold one April S&P 500 index futures contract at a futures
price of 450. If the April futures price is 420 on February 1, your profit would be
__________ if you close your position.

a.
$130

b.
$4,200

c.
$15,000

d.
none of the above

57. The current level of the S&P 500 is 550. The dividend yield on the S&P 500 is
3%. The risk-free interest rate is 6%. The futures price for a contract on the
S&P 500 due to expire 6 months from now should be __________.

a.
$541.69

b.
$558.19

c.
$566.50

d.
$583.00

58. The futures price for a contract on gold due to expire a year from now is $430.
The dividend yield on the S&P 500 is 4%. The risk-free interest rate is 8%. The
spot price of gold should be __________.

a.
$398.15

b.
$413.46

c.
$447.20

d.

$464.40

59. If you expect a market downturn, one potential defensive strategy would be to
__________.

a.
buy stock index futures

b.
sell stock index futures

c.
buy stock index options

d.
sell foreign exchange futures

60. Which of the following constitute acceptable means of making delivery on a

stock index futures contract?

a.
cash

b.
treasury bills

c.

Both of the above answers are correct

d.
None of the above answers are correct

61. Stock index futures are favored by many professional money managers because
they provide a means of _____________.

a.
capitalizing on global market movements

b.
avoiding high commissions

c.
insulating portfolios from market down swings

d.
All of the above

62. Program trading activity is usually motivated by ______________.

a.
speculative trading opportunities

b.
index arbitrage opportunities

c.
quasi-arbitrage trading of individual stocks or industry sectors

d.
All of the above

63. Foreign exchange futures contracts mature ____________.

a.
at approximately 2 week intervals

b.
each month

c.
in March, June, September and December

d.
in April , August and December

64. A hypothetical Futures contract on a nondividend-paying stock with current

price $100 has a maturity of one year. If the T-bill rate is 5% what should the
futures price be?

a.
$95.24

b.
$100

c.
$105

d.
None of the above

65. A hypothetical Futures contract on a nondividend-paying stock with current

price $100 has a maturity of four years. If the T-bill rate is 7% what should the
futures price be?

a.
$76.29

b.
$93.46

c.
$107.00

d.
$131.08

66. The Chicago Board of Trade has just introduced a new futures contract on the
stock of Hands, a company that currently pays no dividends. Each contract calls

for delivery of 100 shares of stock in one year. The T-bill rate is 7% per year.
Margin on the contract is $750.
Reference: Ref. 18-1

If Hands stock now sells at $75 per share, what should the futures price be?

a.
$70.09

b.
75

c.
$78.75

d.
$7009.00

67. The Chicago Board of Trade has just introduced a new futures contract on the
stock of Hands, a company that currently pays no dividends. Each contract calls
for delivery of 100 shares of stock in one year. The T-bill rate is 7% per year.
Margin on the contract is $750.
Reference: Ref. 18-1

If Hands stock price drops by 5%, what will be the change in the futures price?

a.
falls by 2.51

b.
falls by 3.75

c.
increases by 3.75

d.
increases by 2.51

68. The Chicago Board of Trade has just introduced a new futures contract on the
stock of Hands, a company that currently pays no dividends. Each contract calls
for delivery of 100 shares of stock in one year. The T-bill rate is 7% per year.
Margin on the contract is $750.
Reference: Ref. 18-1

If Hands stock price drops by 5%, what will be the gain or loss to the investor?

a.
$251 gain

b.
$375 gain

c.
$251 loss

d.

$375 loss

69. The Chicago Board of Trade has just introduced a new futures contract on the
stock of Hands, a company that currently pays no dividends. Each contract calls
for delivery of 100 shares of stock in one year. The T-bill rate is 7% per year.
Margin on the contract is $750.
Reference: Ref. 18-1

If Hands stock price drops by 5%, what will be the percentage return on the
investors position?

a.
33% gain

b.
50% gain

c.
33% loss

d.
50% loss