Question 1

Margin requirements for futures contracts can be met by ________.

Accepted Answer

A) cash only 
B) cash or highly marketable securities such as Treasury bonds 
C) cash or any marketable securities 
D) cash or warehouse receipts for an equivalent quantity of the underlying commodity

Question 2

On Monday morning you sell one June T-bond futures contract at 97: 27 or for $97 843.75. The contract's face value is $100 000. The initial margin requirement is $2 700 and the maintenance margin requirement is $2 000 per contract. Use the following price data to answer the question.  After Monday's close the balance on your margin account will be ________.

Accepted Answer

A) $2 700.00 
B) $2 000.00 
C) $3 137.50 
D) $2 262.50

Question 3

On 25 February 2008 you could have purchased a futures contract from Intrade that would pay you $1 if Barack Obama wins the 2008 Democratic Party nomination. At a price of $0.81, the contract for Obama carried the highest price of any Democratic candidate. This tells you ________.

Accepted Answer

A) that the market believed that Obama had 81% chance of winning 
B) that the market believed that Obama had the least chance of winning 
C) nothing about the market's belief concerning the odds of Obama winning 
D) that the market believed Obama's chances of winning were about 19%

Question 4

A one-year gold futures contract is selling for $641. Spot gold prices are $600 and the one year risk free rate is 6%. Which of the following set of transactions will yield positive riskless arbitrage profits?

Accepted Answer

A) Buy gold in the spot with borrowed money and sell the futures contract. 
B) Buy the futures contract and sell the gold spot and invest the money earned. 
C) Buy gold spot with borrowed money and buy the futures contract. 
D) Buy the futures contract and buy the gold spot using borrowed money.

Question 5

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12 500 bushels of corn and sold futures contracts on 10 000 bushels of corn. What are the farmer's proceeds from the sale of corn?

Accepted Answer

A) $27 500 
B) $31 875 
C) $33 875 
D) $35 950

Question 6

The spot price for is $650. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 5%. The futures price for gold for a one year contract should be ________.

Accepted Answer

A) $658.58 
B) $675.43 
C) $682.50 
D) $666.25

Question 7

Which of the following provides the profit to a short position at contract maturity?

Accepted Answer

A) Original futures price - Spot price at maturity 
B) Spot price at maturity - Original futures price 
C) Zero 
D) Basis

Question 8

The Student Loan Marketing Association (SLMA) has short term student loans funded by long-term debt. To hedge out this interest rate risk SLMA could ________.
I. engage in a swap to pay fixed and receive variable interest payments II. engage in a swap to pay variable and receive fixed interest payments
III. buy T-bond futures
IV. sell T-bond futures

Accepted Answer

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

Question 9

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ________.

Accepted Answer

A) long call 
B) short call 
C) short stock position 
D) long stock position

Question 10

A hog farmer decides to sell hog futures. This is an example of ________ to limit its risk.

Accepted Answer

A) cross hedging 
B) short hedging 
C) spreading 
D) speculating

Question 11

A bank has made long-term fixed rate mortgages and has financed them with short-term deposits. To hedge out the bank's interest rate risk they could ________.

Accepted Answer

A) sell T-bond futures 
B) buy T-bond futures 
C) buy stock index futures 
D) sell stock index futures

Question 12

A hypothetical futures contract on a non-dividend-paying stock with current spot price of $100 has a maturity of four years. If the T-bond rate is 7% what should the futures price be?

Accepted Answer

A) $76.29 
B) $93.46 
C) $107.00 
D) $131.08

Question 13

You own a $15 million bond portfolio with a modified duration of 11 years and you want to limit your risk but institutional constraints prohibit trading the bond portfolio. T-bond futures are available with a modified duration of the deliverable instrument of 8 years. The futures are priced at $105 000. The proper hedge ratio to use is ________.

Accepted Answer

A) 104 
B) 143 
C) 196 
D) 213

Question 14

The current level of the S&P 500 is 1250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be ________.

Accepted Answer

A) 1274.33 
B) 1286.95 
C) 1268.61 
D) 1291.29

Question 15

Which one of the following is a true statement?

Accepted Answer

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.

Question 16

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

Accepted Answer

A) market 
B) credit 
C) interest rate 
D) basis

Question 17

An investor would want to ________ to hedge a long position in treasury bonds.

Accepted Answer

A) buy interest rate futures 
B) buy treasury bonds in the spot market 
C) sell interest rate futures 
D) sell S&P 500 futures

Question 18

At contract maturity the basis should equal ________.

Accepted Answer

A) 1 
B) 0 
C) risk-free interest rate 
D) -1

Question 19

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 ________.

Accepted Answer

A) a cross hedge 
B) a reversing trade 
C) a speculation 
D) marking to market

Question 20

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

Accepted Answer

A) long; long 
B) long; short 
C) short; long 
D) short; short

Exam 15: Futures and Risk Management