Question 1

Which of the below statements is FALSE?

Accepted Answer

A)  Maintenance margin is the minimum level (specified by the exchange) to which an investor's equity position may fall as a result of an unfavorable price movement before the investor is required to deposit additional margin. 
B)  Unlike initial margin, the variation margin must be in cash rather than interest-bearing instruments. 
C)  When securities are acquired on margin, the difference between the price of the security and the initial margin is loaned from the broker. 
D)  A party taking a position in a futures contract need not put up the entire amount of the investment. 
A)  Maintenance margin is the minimum level (specified by the exchange) to which an investor's equity position may fall as a result of an unfavorable price movement before the investor is required to deposit additional margin. 
B)  Unlike initial margin, the variation margin must be in cash rather than interest-bearing instruments. 
C)  When securities are acquired on margin, the difference between the price of the security and the initial margin is loaned from the broker. 
D)  A party taking a position in a futures contract need not put up the entire amount of the investment.

Question 2

To create a particular futures contract, ________ must obtain approval from the ________, a government regulatory agency.

Accepted Answer

A)  an exchange; Commodity Futures Trading Commission 
B)  a stock offering; U.S. Securities and Exchange Commission 
C)  a broker; Commodity ForwardTrading Commission 
D)  a dealer; U.S. Exchange and Futures Commission 
A)  an exchange; Commodity Futures Trading Commission 
B)  a stock offering; U.S. Securities and Exchange Commission 
C)  a broker; Commodity ForwardTrading Commission 
D)  a dealer; U.S. Exchange and Futures Commission

Question 3

An exchange has the right to impose a limit on the daily price movement of a futures contract from the previous day's closing price.Explain why such a right might be needed.

Accepted Answer

A daily price limit sets the minimum and

Question 4

A party to a futures contract cannot liquidate a position prior to the settlement date by taking an offsetting position in the same contract.

Accepted Answer

A) True 
 B)False

Question 5

In regards to the Treasury bond futures contract, which of the below statements is FALSE?

Accepted Answer

A)  The underlying for a Treasury bond futures contract is $100,000 par value of a hypothetical 20-year, 6% coupon bond. 
B)  To make delivery equitable to both parties, and to tie cash prices to futures prices, the CBOT has introduced conversion factors for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury bond futures contract. 
C)  In selecting the issue to be delivered, the short will select from all the deliverable issues the bond that is the most expensive to deliver. 
D)  The invoice price paid by the buyer of the Treasury bonds which the seller delivers is determined using the formula: Invoice price = Contract size × Future contract settlement price × Conversion factor. 
A)  The underlying for a Treasury bond futures contract is $100,000 par value of a hypothetical 20-year, 6% coupon bond. 
B)  To make delivery equitable to both parties, and to tie cash prices to futures prices, the CBOT has introduced conversion factors for determining the invoice price of each acceptable deliverable Treasury issue against the Treasury bond futures contract. 
C)  In selecting the issue to be delivered, the short will select from all the deliverable issues the bond that is the most expensive to deliver. 
D)  The invoice price paid by the buyer of the Treasury bonds which the seller delivers is determined using the formula: Invoice price = Contract size × Future contract settlement price × Conversion factor.

Question 6

In regards to the Treasury bill futures contract, which of the below statements is FALSE?

Accepted Answer

A)  The Treasury bill futures contract, which is traded on the IMM, is based on a 25-week (six-month) Treasury bill with a face value of $1,000. 
B)  The seller of a Treasury bill futures contract agrees to deliver to the buyer at the settlement date a Treasury bill that can be newly issued or seasoned. 
C)  Treasury bills are quoted in the cash market in terms of the annualized yield on a bank discount basis. 
D)  The Treasury bill futures contract is not quoted directly in terms of yield but is quoted on an index basis that is related to the yield on a bank discount basis as follows: Index price = 100 - (Yield on a bank discount basis × 100). 
A)  The Treasury bill futures contract, which is traded on the IMM, is based on a 25-week (six-month) Treasury bill with a face value of $1,000. 
B)  The seller of a Treasury bill futures contract agrees to deliver to the buyer at the settlement date a Treasury bill that can be newly issued or seasoned. 
C)  Treasury bills are quoted in the cash market in terms of the annualized yield on a bank discount basis. 
D)  The Treasury bill futures contract is not quoted directly in terms of yield but is quoted on an index basis that is related to the yield on a bank discount basis as follows: Index price = 100 - (Yield on a bank discount basis × 100).

Question 7

For interest rate futures contracts are cash settlement contracts whose underlying is a common stock index and the dollar value of a stock index futures contract is the product of the futures price and the contract's multiple.

Accepted Answer

A) True 
 B)False

Question 8

Futures contracts are leveraged instruments that can be used to control risk.

Accepted Answer

A) True 
 B)False

Question 9

In regards to the Treasury notes futures contract, which of the below statements is FALSE?

Accepted Answer

A)  There are three Treasury note futures contracts: 10-year, five-year, and two-year. 
B)  For the Treasury notes futures contract, the delivery options granted to the short position and the minimum price fluctuation are different from the Treasury bond futures contract. 
C)  For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: an original maturity of not more than five years and three months. 
D)  For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: a remaining maturity no greater than five years and three months. 
A)  There are three Treasury note futures contracts: 10-year, five-year, and two-year. 
B)  For the Treasury notes futures contract, the delivery options granted to the short position and the minimum price fluctuation are different from the Treasury bond futures contract. 
C)  For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: an original maturity of not more than five years and three months. 
D)  For the five-year Treasury note futures contract, the underlying is $100,000 par value of a 6% notional coupon U.S. Treasury note that satisfies the following condition: a remaining maturity no greater than five years and three months.

Question 10

When a position is first taken in a futures contract, the investor must deposit a ________ dollar amount per contract as specified by the exchange. This amount, called ________, is required as a deposit for the contract.

Accepted Answer

A)  maximum; maximum margin 
B)  minimum; minimum margin 
C)  maximum; initial margin 
D)  minimum; initial margin 
A)  maximum; maximum margin 
B)  minimum; minimum margin 
C)  maximum; initial margin 
D)  minimum; initial margin

Question 11

Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.

Accepted Answer

A Eurodollar futures contract represents

Question 12

Which of the below statements is FALSE?

Accepted Answer

A)  The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset. 
B)  A futures market will be the price discovery market when market participants prefer to use this market rather than the cash market to change their risk exposure to an asset. 
C)  The futures market and the cash market for an asset are drawn apart by an arbitrage process. 
D)  The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is not an undesirable attribute of a financial market. 
A)  The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset. 
B)  A futures market will be the price discovery market when market participants prefer to use this market rather than the cash market to change their risk exposure to an asset. 
C)  The futures market and the cash market for an asset are drawn apart by an arbitrage process. 
D)  The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is not an undesirable attribute of a financial market.

Question 13

In regards to single stock futures contracts, which of the below statements is FALSE?

Accepted Answer

A)  Single stock futures are equity futures in which the underlying is the stock of an individual company. 
B)  Single stock futures are traded on two exchanges: OneChicago and Nasdaq Liffe Markets (NQLX). 
C)  Single stock futures of only actively traded New York Stock Exchange and Nasdaq stocks are traded. 
D)  Futures exchanges have found that there are investors who want to take long and short positions in the futures market for a group of stocks and do so by paying for several trades. 
A)  Single stock futures are equity futures in which the underlying is the stock of an individual company. 
B)  Single stock futures are traded on two exchanges: OneChicago and Nasdaq Liffe Markets (NQLX). 
C)  Single stock futures of only actively traded New York Stock Exchange and Nasdaq stocks are traded. 
D)  Futures exchanges have found that there are investors who want to take long and short positions in the futures market for a group of stocks and do so by paying for several trades.

Question 14

The futures price for the S&P 500 is 1000 and the multiple is $150. What is the dollar value of the stock index futures contract?

Accepted Answer

A)  $125,000 
B)  $150,000 
C)  $175,000 
D)  None of these 
A)  $125,000 
B)  $150,000 
C)  $175,000 
D)  None of these

Question 15

Parties to a futures contract can ________ their position by taking an offsetting position in the same contract. For the ________ of a futures contract, this means selling the same number of identical futures contracts; for the ________ of a futures contract, this means buying the same number of identical futures contracts.

Accepted Answer

A)  liquidate; seller; buyer 
B)  deliver; seller; buyer 
C)  liquidate; buyer; seller 
D)  deliver; buyer; seller 
A)  liquidate; seller; buyer 
B)  deliver; seller; buyer 
C)  liquidate; buyer; seller 
D)  deliver; buyer; seller

Question 16

The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is an undesirable attribute of a financial market.

Accepted Answer

A) True 
 B)False

Question 17

Little of what we say about futures contracts applies equally to forward contracts.

Accepted Answer

A) True 
 B)False

Question 18

There is a public belief that commercial banks are creating OTC derivative products ________.

Accepted Answer

A)  that put them in a position that could result in favorable financial problems. 
B)  that could have a rippling effect on the U.S. financial system. 
C)  that have the proper risk-management systems in place to effectively monitor their risk exposure. 
D)  All of these 
A)  that put them in a position that could result in favorable financial problems. 
B)  that could have a rippling effect on the U.S. financial system. 
C)  that have the proper risk-management systems in place to effectively monitor their risk exposure. 
D)  All of these

Question 19

In the United States, the exchange that offers the most popular stock index futures contracts is the ________.

Accepted Answer

A)  Philadelphia Mercantile Exchange. 
B)  Kansas City Board of Trade. 
C)  New York Futures Exchange. 
D)  Chicago Mercantile Exchange. 
A)  Philadelphia Mercantile Exchange. 
B)  Kansas City Board of Trade. 
C)  New York Futures Exchange. 
D)  Chicago Mercantile Exchange.

Question 20

A forward contract is usually nonstandardized because the terms of each contract are negotiated individually between buyer and seller.

Accepted Answer

A) True 
 B)False

Exam 26: Financial Futures Markets

Which of the below statements is FALSE?

To create a particular futures contract, ________ must obtain approval from the ________, a government regulatory agency.

An exchange has the right to impose a limit on the daily price movement of a futures contract from the previous day's closing price.Explain why such a right might be needed.

A party to a futures contract cannot liquidate a position prior to the settlement date by taking an offsetting position in the same contract.

In regards to the Treasury bond futures contract, which of the below statements is FALSE?

In regards to the Treasury bill futures contract, which of the below statements is FALSE?

For interest rate futures contracts are cash settlement contracts whose underlying is a common stock index and the dollar value of a stock index futures contract is the product of the futures price and the contract's multiple.

Futures contracts are leveraged instruments that can be used to control risk.

In regards to the Treasury notes futures contract, which of the below statements is FALSE?

When a position is first taken in a futures contract, the investor must deposit a ________ dollar amount per contract as specified by the exchange. This amount, called ________, is required as a deposit for the contract.

Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.

Which of the below statements is FALSE?

In regards to single stock futures contracts, which of the below statements is FALSE?

The futures price for the S&P 500 is 1000 and the multiple is $150. What is the dollar value of the stock index futures contract?

The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is an undesirable attribute of a financial market.

Little of what we say about futures contracts applies equally to forward contracts.

There is a public belief that commercial banks are creating OTC derivative products ________.

In the United States, the exchange that offers the most popular stock index futures contracts is the ________.

A forward contract is usually nonstandardized because the terms of each contract are negotiated individually between buyer and seller.

Introduction

Financial Institutions, Financial Intermediaries, and Asset Management Firms

Depository Institutions: Activities and Characteristics

The U.S. Federal Reserve and the Creation of Money

Monetary Policy in the United States

Insurance Companies

Investment Companies and Exchange Traded Funds

Pension Funds

Properties and Pricing of Financial Assets

The Level and Structure of Interest Rates

The Term Structure of Interest Rates

Risk/Return and Asset Pricing Models

Primary Markets and the Underwriting of Securities

Secondary Markets

Treasury and Agency Securities Markets

Municipal Securities Markets

Markets for Common Stock: The Basic Characteristics

Markets for Common Stock: Structure and Organization

Markets for Corporate Senior Instruments: I

Markets for Corporate Senior Instruments: II

The Markets for Bank Obligations

The Residential Mortgage Market

Mortgage-Backed Securities Market

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

Market for Asset-Backed Securities

Options Markets

Pricing of Futures and Options Contracts

The Applications of Futures and Options Contracts

OTC Interest Rate Derivatives: Forward Rate Agreements, Swaps, Caps, and Floors

Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

The Market for Foreign Exchange and Risk Control Instruments

Filters

To create a particular futures contract, must obtain approval from the , a government regulatory agency.

When a position is first taken in a futures contract, the investor must deposit a dollar amount per contract as specified by the exchange. This amount, called , is required as a deposit for the contract.