Question 1

You are the financial manager of a company that plans to issue long-term bonds in 6 months' time.However,you are worried that interest rates may rise before then.How would you use financial futures to protect against a rise in interest rates?

Accepted Answer

The answer of You are the financial manager of a...

Question 2

Which of the following is not a major function of the clearing house:

Accepted Answer

A) establish and collect deposits. 
B) determine the price of all futures contracts. 
C) call in margins as required. 
D) apportion the gains and losses.

Question 3

Individuals and companies who enter into contracts in order to reduce risk are known as:

Accepted Answer

A) speculators. 
B) hedgers. 
C) dealers. 
D) scalpers.

Question 4

Calculate the price of a 10-year bond that has five years to maturity,with face value of $100 000,and coupon interest rate of 8.9% p.a.paid semi-annually,if the required rate of return is 9.9% p.a.(simple interest).

Accepted Answer

A) $96 130 
B) $90 992 
C) $95 752 
D) $93 193

Question 5

The process of adjusting traders account balances to reflect changes in market prices is known as:

Accepted Answer

A) margin call. 
B) marking to call. 
C) marking to market. 
D) spread.

Question 6

If an individual who has entered a futures contract to buy one ounce of gold for $553 decides to reverse their position when the futures price is $555,they will:

Accepted Answer

A) effectively now have two positions with the exchange. 
B) will still have one contract with the exchange. 
C) make a profit of $2. 
D) make a loss of $2.

Question 7

How can a hedging strategy lead to losses?

Accepted Answer

The answer of How can a hedging strategy lead to...

Question 8

A futures contract can be differentiated from a forward contract in that a futures contract:

Accepted Answer

A) is organised through an exchange. 
B) can be 'closed out' or 'reversed' at any time. 
C) is exactly the same as a forward contract. 
D) is organised through an exchange and can be 'closed out' or 'reversed' at any time.

Question 9

The prime function of a futures clearinghouse is to:

Accepted Answer

A) be the counterparty in each contract. 
B) bring together the buyer and seller in each contract. 
C) determine the futures price. 
D) check the creditworthiness of each party in a contract.

Question 10

The spot price of a commodity is:

Accepted Answer

A) the cost of holding a commodity for a specified period of time. 
B) the price that a commodity was traded for on the previous trading day. 
C) the agreed price that a commodity will be traded for at some point in time in the future. 
D) the price of the commodity when the buyer pays immediately and the seller delivers immediately.

Question 11

Basis risk occurs when the spot and futures prices do not move in perfect unison.

Accepted Answer

A) True 
 B)False

Question 12

The financial controller of Nointerest Ltd has planned that the company borrow using a 90-day bank bill facility with face value of $500 000 in four weeks.Interest rates on 90-day bank bills are currently 12% p.a.As a protection against possible interest rate increases,she has entered into a futures contract by selling one bank bill futures contract at a price of $88.50.After the four-week period,she reverses the futures position at $86.50 and issues a bank bill at a rate of 14% p.a.Calculate the gain/loss made on the futures contract.

Accepted Answer

A) $2321 gain. 
B) $2111 gain. 
C) $7902 loss. 
D) $3580 loss.

Question 13

A hedger is an individual or company who enters into financial contracts in order to profit from correctly anticipating price movements.

Accepted Answer

A) True 
 B)False

Question 14

Many companies prefer forward rate agreements (FRAs)to futures contracts as:

Accepted Answer

A) an FRA allows the company to close out the agreement before settlement. 
B) an FRA allows flexibility to reverse the contract. 
C) an FRA can be more closely tailored to the companies specific needs. 
D) None of the given answers.

Question 15

The face value of a 90-day bank bill is $ _______________.(Enter numbers only,no spaces or thousands separators. )

Accepted Answer

The answer of The face value of a 90-day bank...

Question 16

A farmer plans to sell 800 bales of greasy wool (21 micron)in four weeks time.The current spot price is 1300 for a contract of 20 bales and the eight week futures price is 1320 (20 bales per contract).If the farmer hedges how many futures contracts should be purchased?

Accepted Answer

A) 50 
B) 49 
C) 39 
D) 28

Question 17

A futures contract can be defined as:

Accepted Answer

A) a contract which provides something to be sold at a future date at a price decided today. 
B) a contract which provides something to be sold at a future date at a price decided upon expiry of the contract. 
C) a right given to a buyer to sell something at a price determined in advance. 
D) a contract that expires when the object of the transaction changes hands.

Question 18

If someone enters into a contract with the intention of taking delivery of a commodity set out in the contract for a price that was determined before delivery,they are likely to be:

Accepted Answer

A) a broker. 
B) a speculator. 
C) a hedger. 
D) a speculator or hedger.

Question 19

It is expected that the price of a futures contract with a term to maturity of zero be:

Accepted Answer

A) close to zero. 
B) less than the spot price. 
C) equal to the spot price. 
D) more than the spot price.

Question 20

The time period during which a scalper holds a futures contract is usually measured in:

Accepted Answer

A) hours. 
B) minutes. 
C) seconds. 
D) minutes or seconds.

Exam 17: Futures Contracts