Question 1

You sold one soybean future contract at $5.13 per bushel.What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel Assume the contract size is 5,000 ounces and there are no transactions costs.

Accepted Answer

A) $65 profit 
B) $650 profit 
C) $650 loss 
D) $65 loss

Question 2

You purchased 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 ounces and there are no transactions costs.

Accepted Answer

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

Question 3

Financial futures contracts are actively traded on the following indices except

Accepted Answer

A) the S&P 500 Index. 
B) the New York Stock Exchange Index. 
C) the Nikkei Index. 
D) the Dow Jones Industrial Index. 
E) All of the options

Question 4

To exploit an expected decrease in interest rates, an investor would most likely

Accepted Answer

A) buy Treasury bond futures. 
B) take a long position in wheat futures. 
C) buy S&P 500 Index futures. 
D) take a short position in Treasury bond futures. 
E) None of the options

Question 5

If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by

Accepted Answer

A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index. 
B) selling short all the stocks in the S&P 500 and buying S&P Index futures. 
C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index. 
D) selling S&P 500 Index futures and buying all the stocks in the S&P 500. 
E) None of the options

Question 6

Given a stock index with a value of $1,000, an anticipated dividend of $30, and a risk-free rate of 6%, what should be the value of one futures contract on the index

Accepted Answer

A) $943.40 
B) $970.00 
C) $1,030.00 
D) $915.09 
E) $1,000.00

Question 7

A futures contract

Accepted Answer

A) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. 
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) gives the buyer the right, but not the obligation, to buy an asset sometime in the future. 
D) is a contract to be signed in the future by the buyer and the seller of the commodity. 
E) None of the options

Question 8

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.

Question 9

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.

Question 10

Which one of the following statements regarding "basis" is not 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.

Question 11

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

Accepted Answer

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

Question 12

You purchased one silver future contract at $3 per ounce.What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce Assume the contract size is 5,000 ounces and there are no transactions costs.

Accepted Answer

A) $5.50 profit 
B) $5,500 profit 
C) $5.50 loss 
D) $5,500 loss

Question 13

On January 1, you bought one April S&P 500 index futures contract at a futures price of 1,420.If on February 1 the April futures price were 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)

Accepted Answer

A) $2,500 loss 
B) $10 loss 
C) $2,500 profit 
D) $10 profit

Question 14

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.

Question 15

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.

Question 16

Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free rate of 5.75%, what should be the value of one futures contract on the index

Accepted Answer

A) $1,343.40 
B) $62.00 
C) $1,418.44 
D) $1,524.25

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.

Question 18

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

Question 19

Which of the following is false about profits from futures contracts
I. The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made.
II. It is possible for both the holder of the long position and the holder of the short position to earn a profit.
III. The clearinghouse makes most of the profit.
IV. The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.

Accepted Answer

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

Question 20

Foreign currency futures contracts are actively traded on the

Accepted Answer

A) Japanese yen. 
B) Australian dollar. 
C) Brazilian real. 
D) Japanese yen and Australian dollar. 
E) All of the options

Exam 22: Futures Markets