Question 1

Which one of the following statements regarding "basis" is true?

Accepted Answer

A)  The basis is the difference between the futures price and the spot price. 
B)  The basis risk is borne by the hedger. 
C)  A short hedger suffers losses when the basis decreases. 
D)  The basis increases when the futures price increases by more than the spot price. 
E)  The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price. 
A)  The basis is the difference between the futures price and the spot price. 
B)  The basis risk is borne by the hedger. 
C)  A short hedger suffers losses when the basis decreases. 
D)  The basis increases when the futures price increases by more than the spot price. 
E)  The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price.

Question 2

Interest rate futures contracts are actively traded on the

Accepted Answer

A)  eurodollars. 
B)  euroyen. 
C)  sterling. 
D)  eurodollars and euroyen. 
E)  All of the options are correct. 
A)  eurodollars. 
B)  euroyen. 
C)  sterling. 
D)  eurodollars and euroyen. 
E)  All of the options are correct.

Question 3

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

Accepted Answer

A)  are; are 
B)  are not; are 
C)  are; are not 
D)  are not; are not 
E)  are; may or may not be 
A)  are; are 
B)  are not; are 
C)  are; are not 
D)  are not; are not 
E)  are; may or may not be

Question 4

Given a stock index with a value of $1,200, an anticipated dividend of $45, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

Accepted Answer

A)  $1,227.00 
B)  $1,070.00 
C)  $993.40 
D)  $995.09 
E)  $1,000.00 
A)  $1,227.00 
B)  $1,070.00 
C)  $993.40 
D)  $995.09 
E)  $1,000.00

Question 5

Which one of the following statements is true?

Accepted Answer

A)  The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. 
B)  If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. 
C)  A margin deposit can only be met with cash. 
D)  All futures contracts require the same margin deposit. 
E)  The maintenance margin is set by the producer of the underlying asset. 
A)  The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. 
B)  If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call. 
C)  A margin deposit can only be met with cash. 
D)  All futures contracts require the same margin deposit. 
E)  The maintenance margin is set by the producer of the underlying asset.

Question 6

You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

Accepted Answer

A)  $3.12 profit 
B)  $31.20 profit 
C)  $3.12 loss 
D)  $31.20 loss 
E)  None of the options are correct. 
A)  $3.12 profit 
B)  $31.20 profit 
C)  $3.12 loss 
D)  $31.20 loss 
E)  None of the options are correct.

Question 7

Which of the following items is not specified in a futures contract? I) The contract size
II. The maximum acceptable price range during the life of the contract
III. The acceptable grade of the commodity on which the contract is held
IV. The market price at expiration
V. The settlement price

Accepted Answer

A)  II and IV 
B)  I, III, and V 
C)  I and V 
D)  I, IV, and V 
E)  I, II, III, IV, and V 
A)  II and IV 
B)  I, III, and V 
C)  I and V 
D)  I, IV, and V 
E)  I, II, III, IV, and V

Question 8

You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Accepted Answer

A)  $30 profit 
B)  $300 profit 
C)  $300 loss 
D)  $30 loss 
A)  $30 profit 
B)  $300 profit 
C)  $300 loss 
D)  $30 loss

Question 9

Which of the following items is specified in a futures contract? I) The contract size
II. The maximum acceptable price range during the life of the contract
III. The acceptable grade of the commodity on which the contract is held
IV. The market price at expiration
V. The settlement price

Accepted Answer

A)  I, II, and IV 
B)  I, III, and V 
C)  I and V 
D)  I, IV, and V 
E)  I, II, III, IV, and V 
A)  I, II, and IV 
B)  I, III, and V 
C)  I and V 
D)  I, IV, and V 
E)  I, II, III, IV, and V

Question 10

The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are

Accepted Answer

A)  specified by the buyers and sellers. 
B)  specified only by the buyers. 
C)  specified by the futures exchanges. 
D)  specified by brokers and dealers. 
E)  None of the options are correct. 
A)  specified by the buyers and sellers. 
B)  specified only by the buyers. 
C)  specified by the futures exchanges. 
D)  specified by brokers and dealers. 
E)  None of the options are correct.

Question 11

Some of the newer futures contracts include I) fashion futures.
II) weather futures.
III) electricity futures.
IV) entertainment futures.

Accepted Answer

A)  I and II 
B)  II and III 
C)  III and IV 
D)  I, II, and III 
E)  I, III, and IV 
A)  I and II 
B)  II and III 
C)  III and IV 
D)  I, II, and III 
E)  I, III, and IV

Question 12

The expectations hypothesis of futures pricing

Accepted Answer

A)  is the simplest theory of futures pricing. 
B)  states that the futures price equals the expected value of the future spot price of the asset. 
C)  is not a zero-sum game. 
D)  is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset. 
E)  is the simplest theory of futures pricing and is not a zero-sum game. 
A)  is the simplest theory of futures pricing. 
B)  states that the futures price equals the expected value of the future spot price of the asset. 
C)  is not a zero-sum game. 
D)  is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset. 
E)  is the simplest theory of futures pricing and is not a zero-sum game.

Question 13

Futures contracts are regulated by

Accepted Answer

A)  the Commodities Futures Trading Corporation. 
B)  the Chicago Board of Trade. 
C)  the Chicago Mercantile Exchange. 
D)  the Federal Reserve. 
E)  the Securities and Exchange Commission. 
A)  the Commodities Futures Trading Corporation. 
B)  the Chicago Board of Trade. 
C)  the Chicago Mercantile Exchange. 
D)  the Federal Reserve. 
E)  the Securities and Exchange Commission.

Question 14

Given a stock index with a value of $1,125, an anticipated dividend of $33, and a risk-free rate of 4%, what should be the value of one futures contract on the index?

Accepted Answer

A)  $1137.00 
B)  $1070.00 
C)  $993.40 
D)  $995.09 
E)  $1000.00 
A)  $1137.00 
B)  $1070.00 
C)  $993.40 
D)  $995.09 
E)  $1000.00

Question 15

Delivery of stock index futures

Accepted Answer

A)  is never made. 
B)  is made by a cash settlement based on the index value. 
C)  requires delivery of 1 share of each stock in the index. 
D)  is made by delivering 100 shares of each stock in the index. 
E)  is made by delivering a value-weighted basket of stocks. 
A)  is never made. 
B)  is made by a cash settlement based on the index value. 
C)  requires delivery of 1 share of each stock in the index. 
D)  is made by delivering 100 shares of each stock in the index. 
E)  is made by delivering a value-weighted basket of stocks.

Question 16

Normal backwardation

Accepted Answer

A)  maintains that, for most commodities, there are natural hedgers who desire to shed risk. 
B)  maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price. 
C)  assumes that risk premiums in the futures markets are based on systematic risk. 
D)  maintains that, for most commodities, there are natural hedgers who desire to shed risk, and that speculators will enter the long side of the contract only if the futures price is below the expected spot price. 
E)  maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk. 
A)  maintains that, for most commodities, there are natural hedgers who desire to shed risk. 
B)  maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price. 
C)  assumes that risk premiums in the futures markets are based on systematic risk. 
D)  maintains that, for most commodities, there are natural hedgers who desire to shed risk, and that speculators will enter the long side of the contract only if the futures price is below the expected spot price. 
E)  maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk.

Question 17

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

Accepted Answer

A)  the offsetting short trader. 
B)  the corn farmer. 
C)  the clearinghouse. 
D)  the broker. 
E)  the commodities dealer. 
A)  the offsetting short trader. 
B)  the corn farmer. 
C)  the clearinghouse. 
D)  the broker. 
E)  the commodities dealer.

Question 18

Which one of the following statements regarding delivery is true?

Accepted Answer

A)  Most futures contracts result in actual delivery. 
B)  Only 1% to 3% of futures contracts result in actual delivery. 
C)  Only 15% of futures contracts result in actual delivery. 
D)  Approximately 50% of futures contracts result in actual delivery. 
E)  Futures contracts never result in actual delivery. 
A)  Most futures contracts result in actual delivery. 
B)  Only 1% to 3% of futures contracts result in actual delivery. 
C)  Only 15% of futures contracts result in actual delivery. 
D)  Approximately 50% of futures contracts result in actual delivery. 
E)  Futures contracts never result in actual delivery.

Question 19

An investor with a short position in Treasury notes futures will profit if

Accepted Answer

A)  interest rates decline. 
B)  interest rates increase. 
C)  the prices of Treasury notes increase. 
D)  the price of the long bond increases. 
E)  None of the options are correct. 
A)  interest rates decline. 
B)  interest rates increase. 
C)  the prices of Treasury notes increase. 
D)  the price of the long bond increases. 
E)  None of the options are correct.

Question 20

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

Accepted Answer

A)  Nothing-the seller understands that these things happen. 
B)  You would wake up to find the pork bellies on your front lawn. 
C)  Your broker would send you a nasty letter. 
D)  You would be notified that you owe the holder of the short position a certain amount of cash. 
E)  You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies. 
A)  Nothing-the seller understands that these things happen. 
B)  You would wake up to find the pork bellies on your front lawn. 
C)  Your broker would send you a nasty letter. 
D)  You would be notified that you owe the holder of the short position a certain amount of cash. 
E)  You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies.

Exam 22: Futures Markets

Which one of the following statements regarding "basis" is true?

Interest rate futures contracts are actively traded on the

The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized.

Given a stock index with a value of $1,200, an anticipated dividend of $45, and a risk-free rate of 6%, what should be the value of one futures contract on the index?

Which one of the following statements is true?

You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs.

Which of the following items is not specified in a futures contract? I) The contract size II. The maximum acceptable price range during the life of the contract III. The acceptable grade of the commodity on which the contract is held IV. The market price at expiration V. The settlement price

You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs.

Which of the following items is specified in a futures contract? I) The contract size II. The maximum acceptable price range during the life of the contract III. The acceptable grade of the commodity on which the contract is held IV. The market price at expiration V. The settlement price

The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are

Some of the newer futures contracts include I) fashion futures. II) weather futures. III) electricity futures. IV) entertainment futures.

The expectations hypothesis of futures pricing

Futures contracts are regulated by

Given a stock index with a value of $1,125, an anticipated dividend of $33, and a risk-free rate of 4%, what should be the value of one futures contract on the index?

Delivery of stock index futures

Normal backwardation

If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is

Which one of the following statements regarding delivery is true?

An investor with a short position in Treasury notes futures will profit if

If you took a long position in a pork bellies futures contract and then forgot about it, what would happen at the expiration of the contract?

The Investment Environment

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Risk, Return, and the Historical Record

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Optimal Risky Portfolios

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The terms of futures contracts standardized, and the terms of forward contracts standardized.