Chapter 22
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Johns Hopkins University *
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Course
180.367
Subject
Finance
Date
Jan 9, 2024
Type
Pages
42
Uploaded by 77MIAO
1.
Award: 10.00
points
Problems? Adjust credit for all students.
Are the following statements true or false?
Required:
a.
All else equal, the futures price on a stock index with a high dividend yield should be higher than the futures price on an index with a low dividend yield.
False
b.
All else equal, the futures price on a high-beta stock should be higher than the futures price on a low-beta stock.
False
c.
The beta of a short position in the S&P 500 futures contract is negative.
True
Explanation:
a. False. For any given level of the stock index, the futures price will be lower when the dividend yield is higher. This follows from spot-futures parity:
F
0
= S
0
(1 + r
f
− d
)
T
b. False. The parity relationship tells us that the futures price is determined by the stock price, the interest rate, and the dividend yield; it is not a function of beta.
c. True. The short futures position will profit when the S&P 500 Index falls. This is a negative beta position.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
2.
Award: 10.00
points
Problems? Adjust credit for all students.
Refer to the Mini-S&P contract in Figure 22.1
. Assume the closing price for this day.
Required:
a. If the margin requirement is 10% of the futures price times the contract multiplier of $50, how much must you deposit with your broker to trade the December maturity contract?
b. If the December futures price increases to $4,400, what percentage return will you earn on your investment if you entered the long side of the contract at the price shown in the figure?
c. If the December futures price falls by 1%, what is your percentage return?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If the margin requirement is 10% of the futures price times the contract multiplier of $50, how much must you deposit with
your broker to trade the December maturity contract?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Required margin deposit
21,718.75
Explanation:
a. The closing futures price for the December contract was $4,343.75, which has a dollar value of:
$50 × $4,343.75 = $217,187.50
Therefore, the required margin deposit is: $217,187.50 × 0.10 = $21,718.75
b. The futures price increases by: $4,400.00 − $4,343.75 = 56.25
The credit to your margin account would be: $56.25 × $50 = $2,812.50
This is a percent gain of: $2,812.50 ÷ $21,718.75 = 0.1295 = 12.95%
Note that the futures price itself increased by only $56.25 ÷ $4,343.75 = 1.29%.
c. Following the reasoning in part (b), any change in F is magnified by a ratio of (l ÷ margin requirement). This is the leverage effect. The return will be −10%.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
2.
Award: 10.00
points
Problems? Adjust credit for all students.
Refer to the Mini-S&P contract in Figure 22.1
. Assume the closing price for this day.
Required:
a. If the margin requirement is 10% of the futures price times the contract multiplier of $50, how much must you deposit with your broker to trade the December maturity contract?
b. If the December futures price increases to $4,400, what percentage return will you earn on your investment if you entered the long side of the contract at the price shown in the figure?
c. If the December futures price falls by 1%, what is your percentage return?
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the December futures price increases to 4,400, what percentage return will you earn on your investment if you entered the
long side of the contract at the price shown in the figure?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
Required C
Percentage return on net investment
12.95
%
Explanation:
a. The closing futures price for the December contract was $4,343.75, which has a dollar value of:
$50 × $4,343.75 = $217,187.50
Therefore, the required margin deposit is: $217,187.50 × 0.10 = $21,718.75
b. The futures price increases by: $4,400.00 − $4,343.75 = 56.25
The credit to your margin account would be: $56.25 × $50 = $2,812.50
This is a percent gain of: $2,812.50 ÷ $21,718.75 = 0.1295 = 12.95%
Note that the futures price itself increased by only $56.25 ÷ $4,343.75 = 1.29%.
c. Following the reasoning in part (b), any change in F is magnified by a ratio of (l ÷ margin requirement). This is the leverage effect. The return will be −10%.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
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2.
Award: 10.00
points
Problems? Adjust credit for all students.
Refer to the Mini-S&P contract in Figure 22.1
. Assume the closing price for this day.
Required:
a. If the margin requirement is 10% of the futures price times the contract multiplier of $50, how much must you deposit with your broker to trade the December maturity contract?
b. If the December futures price increases to $4,400, what percentage return will you earn on your investment if you entered the long side of the contract at the price shown in the figure?
c. If the December futures price falls by 1%, what is your percentage return?
Required B
Required C
Complete this question by entering your answers in the tabs below.
If the December futures price falls by 1%, what is your percentage return?
Note: Negative value should be indicated by a minus sign.
Required A
Required B
Required C
Percentage return on net investment
(10)
%
Explanation:
a. The closing futures price for the December contract was $4,343.75, which has a dollar value of:
$50 × $4,343.75 = $217,187.50
Therefore, the required margin deposit is: $217,187.50 × 0.10 = $21,718.75
b. The futures price increases by: $4,400.00 − $4,343.75 = 56.25
The credit to your margin account would be: $56.25 × $50 = $2,812.50
This is a percent gain of: $2,812.50 ÷ $21,718.75 = 0.1295 = 12.95%
Note that the futures price itself increased by only $56.25 ÷ $4,343.75 = 1.29%.
c. Following the reasoning in part (b), any change in F is magnified by a ratio of (l ÷ margin requirement). This is the leverage effect. The return will be −10%.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
3.
Award: 10.00
points
Problems? Adjust credit for all students.
Required:
a. A futures contract on a non-dividend-paying stock index with current value $150 has a maturity of one year. If the T-bill rate is 3%, what should the futures price be?
b. What should the futures price be if the maturity of the contract is three years?
c. What if the interest rate is 6% and the maturity of the contract is three years?
Required A
Required B
Complete this question by entering your answers in the tabs below.
A futures contract on a non-dividend-paying stock index with current value $150 has a maturity of one year. If the T-bill rate
is 3%, what should the futures price be?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Futures price
154.50
Explanation:
a. F
0
= S
0
× (1 + r
f
) = $150 × 1.03 = $154.50
b. F
0
= S
0
× (1 + r
f
)
3
= $150 × 1.03
3
= $163.91
c. F
0
= $150 × 1.06
3
= $178.65
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
3.
Award: 10.00
points
Problems? Adjust credit for all students.
Required:
a. A futures contract on a non-dividend-paying stock index with current value $150 has a maturity of one year. If the T-bill rate is 3%, what should the futures price be?
b. What should the futures price be if the maturity of the contract is three years?
c. What if the interest rate is 6% and the maturity of the contract is three years?
Required A
Required C
Complete this question by entering your answers in the tabs below.
What should the futures price be if the maturity of the contract is three years?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Futures price
163.91
Explanation:
a. F
0
= S
0
× (1 + r
f
) = $150 × 1.03 = $154.50
b. F
0
= S
0
× (1 + r
f
)
3
= $150 × 1.03
3
= $163.91
c. F
0
= $150 × 1.06
3
= $178.65
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
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3.
Award: 10.00
points
Problems? Adjust credit for all students.
Required:
a. A futures contract on a non-dividend-paying stock index with current value $150 has a maturity of one year. If the T-bill rate is 3%, what should the futures price be?
b. What should the futures price be if the maturity of the contract is three years?
c. What if the interest rate is 6% and the maturity of the contract is three years?
Required B
Required C
Complete this question by entering your answers in the tabs below.
What if the interest rate is 6% and the maturity of the contract is three years?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Futures price
178.65
Explanation:
a. F
0
= S
0
× (1 + r
f
) = $150 × 1.03 = $154.50
b. F
0
= S
0
× (1 + r
f
)
3
= $150 × 1.03
3
= $163.91
c. F
0
= $150 × 1.06
3
= $178.65
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
4.
Award: 10.00
points
Problems? Adjust credit for all students.
Suppose the value of the S&P 500 stock index is currently $4,000.
Required:
a. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what should the 1-year maturity futures price be?
b. What if the T-bill rate is less than the dividend yield, for example, 1%?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what should the 1-year maturity futures
price be?
Required A
Required B
$
Futures price
4,040
Explanation:
a. F
0
= S
0
× (1 + r
f
− d
) = $4,000 × (1 + 0.03 − 0.02) = $4,040
b. If the T-bill rate is less than the dividend yield, then the futures price should be less than the spot price.
F
0
= S
0
× (1 + r
f
− d
) = $4,000 × (1 + 0.01 − 0.02) = $3,960
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
4.
Award: 10.00
points
Problems? Adjust credit for all students.
Suppose the value of the S&P 500 stock index is currently $4,000.
Required:
a. If the 1-year T-bill rate is 3% and the expected dividend yield on the S&P 500 is 2%, what should the 1-year maturity futures price be?
b. What if the T-bill rate is less than the dividend yield, for example, 1%?
Required A
Required B
Complete this question by entering your answers in the tabs below.
What if the T-bill rate is less than the dividend yield, for example, 1%?
Required A
Required B
The T-bill rate is less than the dividend yield, then the futures price should be
less than the spot price.
Explanation:
a. F
0
= S
0
× (1 + r
f
− d
) = $4,000 × (1 + 0.03 − 0.02) = $4,040
b. If the T-bill rate is less than the dividend yield, then the futures price should be less than the spot price.
F
0
= S
0
× (1 + r
f
− d
) = $4,000 × (1 + 0.01 − 0.02) = $3,960
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
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5.
Award: 10.00
points
Problems? Adjust credit for all students.
FinTrade has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 6% per year.
Required:
a. If Brandex stock now sells at $120 per share, what should the futures price be?
b. If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin account?
c. If the margin on the contract is $12,000, what is the percentage return on the investor’s position?
Required A
Required B
Complete this question by entering your answers in the tabs below.
If Brandex stock now sells at $120 per share, what should the futures price be?
Note: Round your answer to 2 decimal places.
Required A
Required B
Required C
$
Futures price
127.20
Explanation:
a. Futures price: $120 × 1.06 = $127.20
b. The stock price falls to: $120 × (1 − 0.03) = $116.40
The futures price falls to: $116.40 × 1.06 = $123.384
The investor loses: ($127.20 − 123.384) × 1,000 = $3,816
c. The percentage loss is: $3,816 ÷ $12,000 = 0.318 = 31.8%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
5.
Award: 10.00
points
Problems? Adjust credit for all students.
FinTrade has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 6% per year.
Required:
a. If Brandex stock now sells at $120 per share, what should the futures price be?
b. If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin account?
c. If the margin on the contract is $12,000, what is the percentage return on the investor’s position?
Required A
Required C
Complete this question by entering your answers in the tabs below.
If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin
account?
Note: Round "Futures price (new)" answer to 3 decimal places and other answer to the nearest dollar amount. Negative
amount should be indicated by a minus sign.
Required A
Required B
Required C
Show less
$
$
Futures price (new)
123.384
Change in the investor’s margin account
(3,816)
Explanation:
a. Futures price: $120 × 1.06 = $127.20
b. The stock price falls to: $120 × (1 − 0.03) = $116.40
The futures price falls to: $116.40 × 1.06 = $123.384
The investor loses: ($127.20 − 123.384) × 1,000 = $3,816
c. The percentage loss is: $3,816 ÷ $12,000 = 0.318 = 31.8%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
5.
Award: 10.00
points
Problems? Adjust credit for all students.
FinTrade has just introduced a single-stock futures contract on Brandex stock, a company that currently pays no dividends. Each contract calls for delivery of 1,000 shares of stock in one year. The T-bill rate is 6% per year.
Required:
a. If Brandex stock now sells at $120 per share, what should the futures price be?
b. If the Brandex price drops by 3%, what will be the change in the futures price and the change in the investor’s margin account?
c. If the margin on the contract is $12,000, what is the percentage return on the investor’s position?
Required B
Required C
Complete this question by entering your answers in the tabs below.
If the margin on the contract is $12,000, what is the percentage return on the investor’s position?
Note: Round your answer to 1 decimal place. Negative amount should be indicated by a minus sign.
Required A
Required B
Required C
Percentage return on the investor’s position
(31.8)
%
Explanation:
a. Futures price: $120 × 1.06 = $127.20
b. The stock price falls to: $120 × (1 − 0.03) = $116.40
The futures price falls to: $116.40 × 1.06 = $123.384
The investor loses: ($127.20 − 123.384) × 1,000 = $3,816
c. The percentage loss is: $3,816 ÷ $12,000 = 0.318 = 31.8%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
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6.
Award: 10.00
points
Problems? Adjust credit for all students.
The multiplier for a futures contract on a stock market index is $50. The maturity of the contract is one year, the current level of the index is $4,500, and the risk-free interest rate is 0.5% per month. The dividend yield on the
index is 0.2% per month. Suppose that after one month, the stock index is at 4,550.
Required:
a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.
b. Find the holding-period return if the initial margin on the contract is $10,000.
Required A
Required B
Complete this question by entering your answers in the tabs below.
Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
$
Cash flow
1,886.13
Explanation:
a. The initial futures price is
F
0
= $4,500 × (1 + 0.005 − 0.002)
12
= $4,664.70
In one month, the futures price will be:
F
0
= $4,550 × (1 + 0.005 − 0.002)
11
= $4,702.42
The increase in the futures price is $37.72, so the cash flow will be:
$37.72 × $50 = $1,886.13
b. The holding period return is: $1886.13 ÷ $10,000 = 0.1886 = 18.86%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
6.
Award: 10.00
points
Problems? Adjust credit for all students.
The multiplier for a futures contract on a stock market index is $50. The maturity of the contract is one year, the current level of the index is $4,500, and the risk-free interest rate is 0.5% per month. The dividend yield on the
index is 0.2% per month. Suppose that after one month, the stock index is at 4,550.
Required:
a. Find the cash flow from the mark-to-market proceeds on the contract. Assume that the parity condition always holds exactly.
b. Find the holding-period return if the initial margin on the contract is $10,000.
Required A
Required B
Complete this question by entering your answers in the tabs below.
Find the holding-period return if the initial margin on the contract is $10,000.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Required A
Required B
Holding period return
18.86
%
Explanation:
a. The initial futures price is
F
0
= $4,500 × (1 + 0.005 − 0.002)
12
= $4,664.70
In one month, the futures price will be:
F
0
= $4,550 × (1 + 0.005 − 0.002)
11
= $4,702.42
The increase in the futures price is $37.72, so the cash flow will be:
$37.72 × $50 = $1,886.13
b. The holding period return is: $1886.13 ÷ $10,000 = 0.1886 = 18.86%
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
7.
Award: 10.00
points
Problems? Adjust credit for all students.
You are a corporate treasurer who will purchase $1 million of bonds for the sinking fund in 3 months. You believe rates will soon fall, and you would like to repurchase the company’s sinking fund bonds (which currently are
selling below par) in advance of requirements. Unfortunately, you must obtain approval from the board of directors for such a purchase, and this can take up to 2 months. What action can you take in the futures market to hedge
any adverse movements in bond yields and prices until you can actually buy the bonds?
Action taken by treasurer
T-bond futures contracts can be purchased.
Explanation:
The treasurer would like to buy the bonds today but cannot. As a proxy for this purchase, T-bond futures contracts can be purchased. If rates do in fact fall, the treasurer will have to buy back the bonds for the sinking fund at
prices higher than the prices at which they could be purchased today. However, the gains on the futures contracts will offset this higher cost to some extent.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Problems - Algorithmic & Static
References
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8.
Award: 10.00
points
Problems? Adjust credit for all students.
You purchased one silver futures contract at $3.15 per ounce. Assume the contract size is 5,000 ounces and there are no transactions costs.
What would be your profit or loss at maturity if the silver spot price at that time is $2.80 per ounce?
Note: Use a minus sign to indicate a loss. Round your answer to 2 decimal places.
$
Profit or loss
(1,750.00)
Explanation:
You are obligated to buy the silver for $3.15 per ounce and can sell it in the market for $2.80 per oz. The profit is the difference between the selling and buying prices times the number of units, or ($2.80 − $3.15)(5,000) = −
$1,750.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Additional Algorithmic Problems
References
9.
Award: 10.00
points
Problems? Adjust credit for all students.
You sold one silver futures contract at $3.20 per ounce. Assume the contract size is 5,000 ounces and there are no transactions costs.
What would be your profit or loss at maturity if the silver spot price at that time is $3.21 per ounce?
Note: Use a minus sign to indicate a loss. Round your answer to 2 decimal places.
$
Profit or loss
(50.00)
Explanation:
You are obligated to sell the silver for $3.20 per ounce and can buy it in the market for $3.21 per ounce. The profit is the difference between the selling and buying prices times the number of units, or ($3.20 − $3.21)(5,000) = −
$50.
Worksheet
Difficulty: 1 Basic
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Additional Algorithmic Problems
References
10.
Award: 10.00
points
Problems? Adjust credit for all students.
A stock index has a value of 1,200, an anticipated dividend of $36.50, and a risk-free rate of 3%. What should be the value of one futures contract on the index?
Note: Round your answer to 2 decimal places.
$
Value
1,199.50
Explanation:
The value of the futures contract should be the value of the stock index divided by (1 + r
f
) minus the dividend, or F
= [1,200 × (1 + 0.03)] − 36.50 = $1,199.50.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Additional Algorithmic Problems
References
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11.
Award: 10.00
points
Problems? Adjust credit for all students.
You purchased the following futures contract today at the settlement price listed in The Wall Street Journal
.
Corn (CBT) 5,000 bushel; cents per bushel
Change
Lifetime
Open Interest
Revenue
Open
High
Low
Settle
High
Low
November
204.5
206.75
204
204
+3.5
268.5
182
2,095
If there is a 15.00% margin requirement, how much do you have to deposit?
Note: Round your answer to 2 decimal places.
$
Margin deposit
1,530.00
Explanation:
First, calculate the total value of the futures contract.
The total value of the futures contract is the price times the number of units. The listed settle price is 204.5 cents per bushel, or $2.04 per bushel. So the contract’s value is ($2.04)(5,000) = $10,200.
The initial margin deposit is the margin percentage times the value of the contract, or (0.150) ($10,200) = $1,530.00.
Worksheet
Difficulty: 2 Intermediate
Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 22: Futures Markets > Chapter 22 Additional Algorithmic Problems
References
1.
Award: 10.00 points
2.
Award: 10.00 points
3.
Award: 10.00 points
4.
Award: 10.00 points
A futures contract:
is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract.
is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.
gives the buyer the right, but not the obligation, to buy an asset sometime in the future.
is a contract to be signed in the future by the buyer and the seller of the commodity.
None of the options are correct.
A futures contract locks in the price of a commodity to be delivered at some future date. Both the buyer and seller of the contract are committed.
References
Multiple Choice
Difficulty: 1 Basic
The terms of futures contracts _________ standardized, and the terms of forward contracts _________ standardized.
are; are
are not; are
are; are not
are not; are not
are; may or may not be
Futures contracts are standardized and are traded on organized exchanges; forward contracts are not traded on organized exchanges, the participant negotiates for the delivery of any quantity of goods, and banks and brokers
negotiate contracts as needed.
References
Multiple Choice
Difficulty: 1 Basic
Futures contracts _________ traded on an organized exchange, and forward contracts _________ traded on an organized exchange.
are not; are
are; are
are not; are not
are; are not
are; may or may not be
Futures contracts are traded on an organized exchange, and forward contracts are not traded on an organized exchange.
References
Multiple Choice
Difficulty: 1 Basic
In a futures contract, the futures price is:
determined by the buyer and the seller when the delivery of the commodity takes place.
determined by the futures exchange.
determined by the buyer and the seller when they initiate the contract.
determined independently by the provider of the underlying asset.
None of the options are correct.
The futures exchanges specify all the terms of the contracts except the price; as a result, the traders bargain over the futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
5.
Award: 10.00 points
6.
Award: 10.00 points
7.
Award: 10.00 points
8.
Award: 10.00 points
The buyer of a futures contract is said to have a _________ position, and the seller of a futures contract is said to have a _________ position in futures.
long; short
long; long
short; short
short; long
margined; long
The trader taking the long position commits to purchase the commodity on the delivery date. The trader taking the short position commits to delivering the commodity at contract maturity. The trader in the long position is said to
"buy" the contract; the trader in the short position is said to "sell" the contract. However, no money changes hands at this time.
References
Multiple Choice
Difficulty: 2 Intermediate
Investors who take long positions in futures agree to _________ of the commodity on the delivery date, and those who take the short positions agree to _________ of the commodity.
make delivery; take delivery
take delivery; make delivery
take delivery; take delivery
make delivery; make delivery
negotiate the price; pay the price
The trader taking the long position commits to purchase the commodity on the delivery date. The trader taking the short position commits to delivering the commodity at contract maturity. The trader in the long position is said to
"buy" the contract; the trader in the short position is said to "sell" the contract. However, no money changes hands at this time.
References
Multiple Choice
Difficulty: 2 Intermediate
The terms of futures contracts, such as the quality and quantity of the commodity and the delivery date, are:
specified by the buyers and sellers.
specified only by the buyers.
specified by the futures exchanges.
specified by brokers and dealers.
None of the options are correct.
The futures exchanges specify all the terms of the contracts except the price; as a result, the traders bargain over the futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
A trader who has a _________ position in wheat futures believes the price of wheat will _________ in the future.
long; increase
long; decrease
short; increase
long; stay the same
short; stay the same
The trader holding the long position (the person who will purchase the goods) will profit from a price increase. Profit to long position = Spot price at maturity −
Original futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
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9.
Award: 10.00 points
10.
Award: 10.00 points
11.
Award: 10.00 points
12.
Award: 10.00 points
A trader who has a _________ position in gold futures wants the price of gold to _________ in the future.
long; decrease
short; decrease
short; stay the same
short; increase
long; stay the same
Profit to short position = Original futures price −
Spot price at maturity. Thus, the person in the short position profits if the price of the commodity declines in the future.
References
Multiple Choice
Difficulty: 2 Intermediate
The open interest on silver futures at a particular time is the:
number of silver futures contracts traded during the day.
number of outstanding silver futures contracts for delivery within the next month.
number of silver futures contracts traded the previous day.
number of all long or short silver futures contracts outstanding.
Open interest is the number of contracts outstanding. When contracts begin trading, open interest is zero; as time passes, more contracts are entered. Most contracts are liquidated before the maturity date.
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Multiple Choice
Difficulty: 2 Intermediate
Which one of the following statements regarding delivery is true?
Most futures contracts result in actual delivery.
Only less than 1% to 3% of futures contracts result in actual delivery.
Only 15% of futures contracts result in actual delivery.
Approximately 50% of futures contracts result in actual delivery.
Futures contracts never result in actual delivery.
Virtually all traders enter reversing trades to cancel their original positions, thereby realizing profits or losses on the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following statements regarding delivery is false?
I. Most futures contracts result in actual delivery.
II. Only less than 1% to 3% of futures contracts result in actual delivery.
III. Only 15% of futures contracts result in actual delivery.
I only
II only
III only
I and II
I and III
Virtually all traders enter reversing trades to cancel their original positions, thereby realizing profits or losses on the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
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13.
Award: 10.00 points
14.
Award: 10.00 points
15.
Award: 10.00 points
16.
Award: 10.00 points
You hold one long corn futures contract that expires in April. To close your position in corn futures before the delivery date, you must:
buy one May corn futures contract.
buy two April corn futures contract.
sell one April corn futures contract.
sell one May corn futures contract.
The long position is considered the buyer; to close out the position one must take a reversing position or sell the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
Which one of the following statements is true?
The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call.
A margin deposit can only be met with cash.
All futures contracts require the same margin deposit.
The maintenance margin is set by the producer of the underlying asset.
The maintenance margin applies to the value of the account after the account is opened; if the value of this account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. A margin
deposit can be made with cash or interest-earning securities; the margin deposit amounts depend on the volatility of the underlying asset.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following statements is false?
I. The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.
II. If the value of the margin account falls below the maintenance-margin requirement, the holder of the contract will receive a margin call.
III. A margin deposit can only be met with cash.
IV. All futures contracts require the same margin deposit.
I only
II only
III only
IV only
I, III, and IV
The maintenance margin applies to the value of the account after the account is opened; if the value of this account falls below the maintenance margin requirement, the holder of the contract will receive a margin call. A margin
deposit can be made with cash or interest-earning securities; the margin deposit amounts depend on the volatility of the underlying asset.
References
Multiple Choice
Difficulty: 2 Intermediate
Financial futures contracts are actively traded on the following indices except:
the S&P 500 Index.
the New York Stock Exchange Index.
the Nikkei Index.
the Dow Jones Industrial Index.
All are actively traded.
The indices are listed in Table 22.1
.
References
Multiple Choice
Difficulty: 2 Intermediate
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18.
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19.
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20.
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Financial futures contracts are actively traded on which of the following indices?
The S&P 500 Index
The New York Stock Exchange Index
The Nikkei Index
The Dow Jones Industrial Index
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Agricultural futures contracts are actively traded on:
corn, only.
oats, only.
pork bellies, only.
corn and oats, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Agricultural futures contracts are actively traded on:
soybeans, only.
oats, only.
wheat, only.
soybeans and oats, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Agricultural futures contracts are actively traded on:
milk, only.
orange juice, only.
lumber, only.
milk and orange juice, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
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21.
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22.
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23.
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24.
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Agricultural futures contracts are actively traded on:
rice, only.
sugar, only.
cotton, only.
rice and sugar, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Foreign currency futures contracts are actively traded on the:
euro, only.
British pound, only.
drachma, only.
euro and British pound.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Foreign currency futures contracts are actively traded on the:
Japanese yen, only.
Australian dollar, only.
Brazilian real, only.
Japanese yen and Australian dollar, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Metals and energy currency futures contracts are actively traded on:
gold, only.
silver, only.
propane, only.
gold and silver, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
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25.
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26.
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27.
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Metals and energy currency futures contracts are actively traded on:
copper, only.
platinum, only.
weather, only.
copper and platinum, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Interest rate futures contracts are actively traded on the:
eurodollars, only.
euroyen, only.
sterling, only.
Eurodollars and euro yen, only.
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
To exploit an expected increase in interest rates, an investor would most likely:
sell Treasury bond futures.
take a long position in wheat futures.
buy S&P 500 Index futures.
take a long position in Treasury bond futures.
None of the options are correct.
If interest rates rise, bond prices decrease. As bond prices decrease, the short position gains. Thus, if you are bearish about bond prices, you might speculate by selling T-bond futures contracts.
References
Multiple Choice
Difficulty: 3 Challenge
An investor with a long position in Treasury notes futures will profit if:
interest rates decline.
interest rates increase.
the prices of Treasury notes decrease.
the price of the S&P 500 Index increases.
None of the options are correct.
Profit to long position = Spot price at maturity −
Original futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
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29.
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30.
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31.
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32.
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To hedge a long position in Treasury bonds, an investor would most likely:
buy interest rate futures.
sell S&P futures.
sell interest rate futures.
buy Treasury bonds in the spot market.
None of the options are correct.
By taking the short position, the hedger is obligated to deliver T-bonds at the contract maturity date for the current futures price, which locks in the sales price for the bonds and guarantees that the total value of the bond-plus-
futures position at the maturity date is the futures price.
References
Multiple Choice
Difficulty: 3 Challenge
An increase in the basis will _________ a long hedger and _________ a short hedger.
hurt; benefit
hurt; hurt
benefit; hurt
benefit; benefit
benefit; have no effect upon
If a contract and an asset are to be liquidated early, basis risk exists and futures price and spot price need not move in lockstep before the delivery date. An increase in the basis will hurt the short hedger and benefit the long
hedger.
References
Multiple Choice
Difficulty: 3 Challenge
Which one of the following statements regarding "basis" is not true?
The basis is the difference between the futures price and the spot price.
The basis risk is borne by the hedger.
A short hedger suffers losses when the basis decreases.
The basis increases when the futures price increases by more than the spot price.
If you think one asset is overpriced relative to another, you sell the overpriced asset and buy the other one.
References
Multiple Choice
Difficulty: 3 Challenge
Which one of the following statements regarding "basis" is true
?
The basis is the difference between the futures price and the spot price, only.
The basis risk is borne by the hedger, only.
A short hedger suffers losses when the basis decreases, only.
The basis increases when the futures price increases by more than the spot price.
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.
The basis is the difference between the futures price and the spot price and is borne by the hedger. The basis increases when the futures price increases by more than the spot price.
References
Multiple Choice
Difficulty: 3 Challenge
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33.
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34.
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35.
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36.
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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:
buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index.
selling short all the stocks in the S&P 500 and buying S&P Index futures.
selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index.
selling S&P 500 Index futures and buying all the stocks in the S&P 500.
None of the options are correct.
If you think one asset is overpriced relative to another, you sell the overpriced asset and buy the other one.
References
Multiple Choice
Difficulty: 2 Intermediate
On January 1, the listed spot and futures prices of a Treasury bond were 93.80 and 93.25. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and
futures prices were 94 and 94.50, respectively. If you were to liquidate your position, your profits would be a:
$1,050 loss.
$1,050 profit.
$1,250 loss.
$1,250 gain.
None of the options are correct.
On Bonds: $94,000 −
$93,800 = $200
On Futures: $93,250 −
$94,500 = −
$1,250
Net Profits: $200 −
$1,250 = −
$1,050
References
Multiple Choice
Difficulty: 3 Challenge
You purchased one silver future contract at $2 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $3.50 per ounce? Assume the contract size is 5,000 ounces and there are no transactions
costs.
$5,500 profit
$7,500 profit
$7,500 loss
$5,500 loss
None of the options are correct.
$3.50 −
$2.00 = $1.50; $1.50 × 5,000 = $7,500.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold one silver future contract at $2 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $3.50 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs.
$5,500 profit
$7,500 profit
$7,500 loss
$5,500 loss
None of the options are correct.
$2.00 −
$3.50 = −
$1.50; −
$1.50 × 5,000 = −
$7,500.
References
Multiple Choice
Difficulty: 2 Intermediate
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37.
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38.
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39.
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40.
Award: 10.00 points
You purchased one corn future contract at $5.30 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $5.10 per bushel? Assume the contract size is 5,000 bushels and there are no
transactions costs.
$1,000 profit
$20 profit
$1,000 loss
$20 loss
None of the options are correct.
$5.10 −
$5.30 = −
$0.20;
−
$0.20 × 5,000 = −
$1,000.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold one corn future contract at $6.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $6.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions
costs.
$950 profit
$95 profit
$950 loss
$95 loss
None of the options are correct.
$6.29 −
$6.10 = $0.19; $0.19 × 5,000 = $950.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold one wheat future contract at $6.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.98 per bushel? Assume the contract size is 5,000 bushels and there are no
transactions costs.
$30 profit
$300 profit
$300 loss
$30 loss
None of the options are correct.
$6.04 −
$5.98 = $0.06; $0.06 × 5,000 = $300.
References
Multiple Choice
Difficulty: 2 Intermediate
You purchased one wheat future contract at $5.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $4.98 per bushel? Assume the contract size is 5,000 bushels and there are no
transactions costs.
$30 profit
$300 profit
$300 loss
$30 loss
None of the options are correct.
$4.98 −
$5.04 = −
$0.06;
−
$0.06 × 5,000 = −
$300.
References
Multiple Choice
Difficulty: 2 Intermediate
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41.
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42.
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43.
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44.
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On January 1, you sold one April S&P 500 Index futures contract at a futures price of 3,420. If, on February 1, the April futures price was 3,430, what would be your profit (loss) if you closed your position (without considering
transactions costs)?
$2,500 loss
$10 loss
$2,500 profit
$10 profit
None of the options are correct.
$3,420
−
$3,430 = −
$10;
−
$10 × 250 = −
$2,500.
References
Multiple Choice
Difficulty: 3 Challenge
On January 1, you bought one April S&P 500 index futures contract at a futures price of 3,420. If, on February 1, the April futures price was 3,430, what would be your profit (loss) if you closed your position (without considering
transactions costs)?
$2,500 loss
$10 loss
$2,500 profit
$10 profit
None of the options are correct.
$3,430 −
$3,420 = $10; $10 × 250 = $2,500.
References
Multiple Choice
Difficulty: 3 Challenge
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 bushels and there are no
transactions costs.
$65 profit
$650 profit
$650 loss
$65 loss
None of the options are correct.
$5.13 −
$5.26 = −
$0.13; −
$0.13 × 5,000 = −
$650.
References
Multiple Choice
Difficulty: 2 Intermediate
You bought 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 bushels and there are no
transactions costs.
$65 profit
$650 profit
$650 loss
$65 loss
None of the options are correct.
$5.26 −
$5.13 = $0.13; $0.13 × 5,000 = $650.
References
Multiple Choice
Difficulty: 2 Intermediate
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45.
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46.
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47.
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48.
Award: 10.00 points
On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?
$1,550 loss
$15,500 loss
$15,500 profit
$1,550 profit
None of the options are correct.
$1,612
−
$1,550 = $62; $62 × 250 = $15,500.
References
Multiple Choice
Difficulty: 3 Challenge
On April 1, you sold one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)?
$1,550 loss
$15,500 loss
$15,500 profit
$1,550 profit
None of the options are correct.
$1550 −
$1612 = −
$62;
−
$62 × 250 = −
$15,500.
References
Multiple Choice
Difficulty: 3 Challenge
The expectations hypothesis of futures pricing:
is the simplest theory of futures pricing, only.
states that the futures price equals the expected value of the future spot price of the asset, only.
is not a zero-sum game, only.
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.
is the simplest theory of futures pricing and is not a zero-sum game.
The expectations hypothesis relies on the concept of risk neutrality; i.e., if all market participants are risk neutral, they should agree on a futures price that provides an expected profit of zero to all parties.
References
Multiple Choice
Difficulty: 1 Basic
Normal backwardation:
maintains that, for most commodities, there are natural hedgers who desire to shed risk, only.
maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price, only.
assumes that risk premiums in the futures markets are based on systematic risk, only.
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.
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.
Risk premiums in this theory are based on total variability.
References
Multiple Choice
Difficulty: 1 Basic
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49.
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51.
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52.
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Contango:
holds that the natural hedgers are the purchasers of a commodity, not the suppliers.
is a hypothesis polar opposite to backwardation.
holds that F
O
must be less than (
P
T
)
.
holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and holds that F
O
must be less than (
P
T
)
.
holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and is a hypothesis polar opposite to backwardation.
Contango holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and is a hypothesis polar opposite to backwardation.
References
Multiple Choice
Difficulty: 1 Basic
Delivery of stock index futures:
is never made.
is made by a cash settlement based on the index value.
requires delivery of 1 share of each stock in the index.
is made by delivering 100 shares of each stock in the index.
is made by delivering a value-weighted basket of stocks.
Stock index futures are cash-settled, similar to the procedure used for index options.
References
Multiple Choice
Difficulty: 2 Intermediate
The establishment of a futures market in a commodity should not have a major impact on spot prices because:
the futures market is small relative to the spot market.
the futures market is illiquid.
futures are a zero-sum game.
the futures market is large relative to the spot market.
most futures contracts do not take delivery.
Losses and gains to futures contracts net to zero and thus should not impact spot prices.
References
Multiple Choice
Difficulty: 2 Intermediate
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?
$1,343.40
$62.00
$1,418.44
$1,524.25
None of the options are correct.
V
Futures
= V
Index
× (1 + r
f
) − Dividend
= $1,500 × (1.0575) − $62 = $1,524.25
References
Multiple Choice
Difficulty: 3 Challenge
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53.
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54.
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55.
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56.
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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:
the offsetting short trader.
the corn farmer.
the clearinghouse.
the broker.
the commodities dealer.
The clearinghouse acts as a middle party to every transaction and bears any losses arising from failure to meet contractual obligations.
References
Multiple Choice
Difficulty: 2 Intermediate
Open interest includes:
only contracts with a specified delivery date.
the sum of short and long positions.
the sum of short, long, and clearinghouse positions.
the sum of long or short positions and clearinghouse positions.
only long or short positions but not both.
Open interest is the number of contracts outstanding across all delivery dates for a given contract. Long and short positions are not counted separately, and the clearinghouse position is not counted because it nets to zero.
References
Multiple Choice
Difficulty: 2 Intermediate
The process of marking to market:
posts gains or losses to each account daily, only.
may result in margin calls, only.
impacts only long positions, only.
posts gains or losses to each account daily and may result in margin calls.
All of the options are correct.
Marking-to-market effectively puts futures contracts on a "pay as you go" basis.
References
Multiple Choice
Difficulty: 1 Basic
Futures contracts are regulated by:
the Commodities Futures Trading Corporation.
the Chicago Board of Trade.
the Chicago Mercantile Exchange.
the Federal Reserve.
the Securities and Exchange Commission.
The Commodities Futures Trading Corporation, a federal agency, sets rules and requirements for futures trading.
References
Multiple Choice
Difficulty: 1 Basic
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57.
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Taxation of futures trading gains and losses:
is based on cumulative year-end profits or losses.
occurs based on the date contracts are sold or closed.
can be timed to offset stock-portfolio gains and losses.
is based on the contract holding period.
None of the options are correct.
Futures profits and losses are taxed based on cumulative year-end value due to marking-to-market procedures.
References
Multiple Choice
Difficulty: 2 Intermediate
Speculators may use futures markets rather than spot markets because:
transaction costs are lower in futures markets, only.
futures markets provide leverage, only.
spot markets are less efficient, only.
futures markets are less efficient, only.
transaction costs are lower in futures markets, and futures markets provide leverage.
Futures markets allow speculators to benefit from leverage and minimize transactions costs. Both markets should be equally price efficient.
References
Multiple Choice
Difficulty: 2 Intermediate
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?
$943.40
$970.00
$1,030.00
$915.09
$1,000.00
V
Futures
= V
Index
× (1 + r
f
) − Dividend
= $1,000 ×
(1.06)
− $30 = $1,030.00
References
Multiple Choice
Difficulty: 3 Challenge
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?
$1,137.00
$1,070.00
$993.40
$995.09
$1,000.00
V
Futures
= V
Index
× (1 + r
f
) − Dividend
= $1,125 × (1.04)
− $33 = $1,137.00
References
Multiple Choice
Difficulty: 3 Challenge
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Given a stock index with a value of $1,100, an anticipated dividend of $27, and a risk-free rate of 3%, what should be the value of one futures contract on the index?
$943.40
$970.00
$913.40
$1,106.00
$1,000.00
V
Futures
= V
Index
× (1 + r
f
) − Dividend
= $1,100 ×
(1.03)
− $27 = $1,106.00
References
Multiple Choice
Difficulty: 3 Challenge
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?
$1,227.00
$1,070.00
$993.40
$995.09
$1,000.00
V
Futures
= V
Index
× (1 + r
f
) − Dividend
= $1,200 × (1.06)
− $45 = $1,227.00
References
Multiple Choice
Difficulty: 3 Challenge
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
I, II, and IV
I, III, and V
I and V
I, IV, and V
I, II, III, IV, and V
The maximum price range and the market price at expiration will be determined by the market rather than specified in the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
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
II and IV
I, III, and V
I and V
I, IV, and V
I, II, III, IV, and V
The maximum price range and the market price at expiration will be determined by the market rather than specified in the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
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65.
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Regarding futures contracts, what does the word "margin" mean?
It is the amount of the money borrowed from the broker when you buy the contract.
It is the maximum percentage that the price of the contract can change before it is marked to market.
It is the maximum percentage that the price of the underlying asset can change before it is marked to market.
It is a good-faith deposit made at the time of the contract's purchase or sale.
It is the amount by which the contract is marked to market.
The exchange guarantees the performance of each party, so it requires a good-faith deposit. This helps avoid the cost of credit checks.
References
Multiple Choice
Difficulty: 1 Basic
Which of the following is true about profits from futures contracts?
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.
It is possible for both the holder of the long position and the holder of the short position to earn a profit.
The clearinghouse makes most of the profit.
The amount that the holder of the long position gains must equal the amount that the holder of the short position loses.
Holders of short positions can recognize profits by making delivery early.
The net profit on the contract is zero—it is a zero-sum game.
References
Multiple Choice
Difficulty: 2 Intermediate
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.
I only
II only
III only
IV only
I, II, and III
The net profit on the contract is zero—it is a zero-sum game.
References
Multiple Choice
Difficulty: 2 Intermediate
Some of the newer futures contracts include
I. fashion futures.
II. weather futures.
III. electricity futures.
IV. entertainment futures.
I and II
II and III
III and IV
I, II, and III
I, III, and IV
Weather and electricity futures are mentioned in the textbook as recent innovations.
References
Multiple Choice
Difficulty: 1 Basic
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69.
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Who guarantees that a futures contract will be fulfilled?
The buyer
The seller
The broker
The clearinghouse
Nobody
Once two parties have agreed to enter the transaction, the clearinghouse becomes the buyer and seller of the contract and guarantees its completion.
References
Multiple Choice
Difficulty: 1 Basic
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?
Nothing—the seller understands that these things happen.
You would wake up to find the pork bellies on your front lawn.
Your broker would send you a nasty letter.
You would be notified that you owe the holder of the short position a certain amount of cash.
You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies.
The item is usually not delivered, but cash settlement can be made through the use of warehouse receipts. You are still obligated to fulfill the contract and give the holder of the short position the value of the pork bellies.
References
Multiple Choice
Difficulty: 1 Basic
If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is:
the offsetting short trader.
the oil producer.
the clearinghouse.
the broker.
the commodities dealer.
The clearinghouse acts as a middle party to every transaction and bears any losses arising from failure to meet contractual obligations.
References
Multiple Choice
Difficulty: 2 Intermediate
A trader who has a _________ position in oil futures believes the price of oil will _________ in the future.
short; increase
long; increase
short; stay the same
long; stay the same
None of the options are correct.
The trader holding the long position (the person who will purchase the goods) will profit from a price increase.
Profit to long position = Spot price at maturity −
Original futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
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73.
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74.
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75.
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A trader who has a _________ position in gold futures wants the price of gold to _________ in the future.
long; decrease
short; decrease
short; stay the same
short; increase
long; stay the same
Profit to short position = Original futures price −
Spot price at maturity. Thus, the person in the short position profits if the price of the commodity declines in the future.
References
Multiple Choice
Difficulty: 2 Intermediate
You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date, you must:
buy one May oil futures contract.
buy two April oil futures contracts.
sell one April oil futures contract.
sell one May oil futures contract.
None of the options are correct.
The long position is considered the buyer; to close out the position one must take a reversing position, or sell the contract.
References
Multiple Choice
Difficulty: 2 Intermediate
Financial futures contracts are actively traded on the following indices except:
the All ordinary index, only.
the DAX 30 Index, only.
the CAC 40 Index, only.
the Toronto 35 Index, only.
All Indices above actively trade futures.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
Financial futures contracts are actively traded on which of the following indices?
The All ordinary index, only
The DAX 30 Index, only
The CAC 40 Index, only
The Toronto 35 Index, only
All of the options are correct.
The indices are listed in Table 22.1.
References
Multiple Choice
Difficulty: 2 Intermediate
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77.
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78.
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79.
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80.
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To exploit an expected decrease in interest rates, an investor would most likely:
buy Treasury bond futures.
take a long position in wheat futures.
buy S&P 500 Index futures.
take a short position in Treasury bond futures.
None of the options are correct.
If interest rates decrease, bond prices increase. As bond prices increase, the long position gains. Thus, if you are bullish about bond prices, you might speculate by buying T-bond futures contracts.
References
Multiple Choice
Difficulty: 3 Challenge
An investor with a short position in Treasury notes futures will profit if:
interest rates decline.
interest rates increase.
the prices of Treasury notes increase.
the price of the long bond increases.
None of the options are correct.
Profit to long position = Spot price at maturity −
Original futures price.
References
Multiple Choice
Difficulty: 2 Intermediate
To hedge a short position in Treasury bonds, an investor would most likely:
ignore interest rate futures.
buy S&P futures.
buy interest rate futures.
sell Treasury bonds in the spot market.
None of the options are correct.
By taking the long position, the hedger is obligated to accept delivery of T-bonds at the contract maturity date for the current futures price, which locks in the sales price for the bonds and guarantees that the total value of the
bond-plus-futures position at the maturity date is the futures price.
References
Multiple Choice
Difficulty: 3 Challenge
A decrease in the basis will _________ a long hedger and _________ a short hedger.
hurt; benefit
hurt; hurt
benefit; hurt
benefit; benefit
benefit; have no effect upon
If a contract and an asset are to be liquidated early, basis risk exists and futures price and spot price need not move in lockstep before the delivery date. A decrease in the basis will benefit the short hedger and hurt the long
hedger.
References
Multiple Choice
Difficulty: 2 Intermediate
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Which one of the following statements regarding "basis" is true?
I. The basis is the difference between the futures price and the spot price.
II. The basis risk is borne by the hedger.
III. A short hedger suffers losses when the basis decreases.
IV. The basis increases when the futures price increases by more than the spot price.
I only
II only
III only
IV only
I, II, and IV
A decrease in the basis will benefit the short hedger.
References
Multiple Choice
Difficulty: 2 Intermediate
If you determine that the DAX-30 Index futures is overpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by:
buying all the stocks in the DAX-30 and selling put options on the DAX-30 Index.
selling short all the stocks in the DAX-30 and buying DAX-30 futures.
selling all the stocks in the DAX-30 and buying call options on the DAX-30 Index.
selling DAX-30 Index futures and buying all the stocks in the DAX-30.
None of the options are correct.
If you think one asset is overpriced relative to another, you sell the overpriced asset and buy the other one.
References
Multiple Choice
Difficulty: 2 Intermediate
If you determine that the DAX-30 Index futures is underpriced relative to the spot DAX-30 Index, you could make an arbitrage profit by:
buying all the stocks in the DAX-30 and selling put options on the DAX-30 Index.
selling short all the stocks in the DAX-30 and buying DAX-30 futures.
selling all the stocks in the DAX-30 and buying call options on the DAX-30 Index.
buying DAX-30 Index futures and selling all the stocks in the DAX-30.
None of the options are correct.
If you think one asset is overpriced relative to another, you sell the overpriced asset and buy the other one.
References
Multiple Choice
Difficulty: 2 Intermediate
On January 1, the listed spot and futures prices of a Treasury bond were 95.4 and 95.6. You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures contract. One month later, the listed spot price and
futures prices were 95 and 94.4, respectively. If you were to liquidate your position, your profits would be a:
$125 loss.
$125 profit.
$1,060.50 loss.
$1,062.50 profit.
None of the options are correct.
On Bonds: $95,400
−
$95,000 = $400
On Futures: $94,400
−
$95,600 = −
$1,200
Net Profits: $400
−
$1,200; = −
$800
References
Multiple Choice
Difficulty: 3 Challenge
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86.
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87.
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88.
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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.
$3.12 profit
$31.20 profit
$3.12 loss
$31.20 loss
None of the options are correct.
$73.12
−
$70.00 = $3.12; $3.12 × 1,000 = $3,120.
References
Multiple Choice
Difficulty: 2 Intermediate
You sold 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.
$3.12 profit
$31.20 profit
$3.12 loss
$31.20 loss
None of the options are correct.
$70.00
−
$73.12 = −
$3.12;
−
$3.12 × 1,000 = −
$3,120.
References
Multiple Choice
Difficulty: 2 Intermediate
Which of the following is a hedge strategy?
An airline going short oil futures
A cereal company purchasing corn in the spot market
An auto manufacturer longing steel futures
A hedge fund shorting index futures
None of the options are correct.
An auto manufacturer is naturally short steel, so a long futures would create a hedge.
References
Multiple Choice
Difficulty: 1 Basic
Which of the following is a speculation strategy?
An airline going long oil futures
A cereal company purchasing corn in the spot market
An auto manufacturer longing steal futures
A hedge fund shorting index futures
None of the options are correct.
A hedge fund has no natural position to hedge, so any futures contract would be considered speculation.
References
Multiple Choice
Difficulty: 1 Basic
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90.
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91.
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Which of the following is a hedge strategy?
A farmer going short corn futures.
A cereal company purchasing corn in the spot market.
An auto manufacturer shorting steal futures.
A bank shorting index futures.
None of the options are correct.
A farmer owns corn and is thus long. To hedge the farmer must do the opposite, which is short futures contracts and would be hedged.
References
Multiple Choice
Difficulty: 1 Basic
What concept prevents investors from having control over the tax year in which they realize gains and losses?
Mark-to-market
Volatility
Market timing
Tax code changes
Conservation principle
Because of the mark-to-market procedure, investors do not have control over the tax year in which they realize gains or losses. Instead, price changes are realized gradually, with each daily settlement.
References
Multiple Choice
Difficulty: 2 Intermediate
VM Industries imports numerous parts from India for assembly in the USA. What category of futures contract will likely be used to hedge this transaction?
Foreign currency
Metals and energy
Interest rates
Equity indexes
None of the options are correct.
The type of futures contracts are listed in Table 22.1. Currency is the risk described in this transaction.
References
Multiple Choice
Difficulty: 2 Intermediate
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Related Questions
Assume the expected return on the market is 7
percent and the risk-free rate is 4 percent.
a. What is the expected return for a stock with
a beta equal to 1.10? (Enter your answers in
decimals. Do not enter percent values.)
b. What is the market risk premium? (Enter
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Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two
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O Yes
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b. What is the required rate of return on a stock with a beta of 2.4? Round your answer to two decimal places. __________ %
2. An individual has $50,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places._______
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answer each part correctly PLEASE.
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ANSWER EACH PART PLEASE!
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ANSWER QUESTION 5 ONLY.
#5: Can you tell from the data below which stock's return has the highest correlation with the return of the market portfolio? CLUE: Involves how beta is calculated and Covariance.
#1 answer: Expected Return on Risk Free Asset(RF)= 0.02 OR 2%
#2 answer: Expected Return for the market portfolio = 10%
#3 answer: Expected Return of Stock E = 0.1400 Expected Return of Stock F=0.1888 Expected Return of Stock G=0.220
#4 Answer: EXpected Return of Stock H = 22.8%
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PLEASE ANSWER EACH PART CORRECTLY PLEASE!! go over
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QUESTIONS:
1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6%
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2) Compute the value of each investment based on your required rate of return and interpret
the results comparing with the market values.
3) Which investment would you select? Explain why using appropriate financial jargon
(language).
4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting
increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3?
5) AACSB Critical Thinking Questions:
A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and
the costs can be substantial. However, companies are not required to have their
bonds rated in the first place; doing so is strictly voluntary. Why do you think they do
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Security
Pete Corporation
Repete Company
Beta
1.70
1.39
a. Expected return on market
b. Risk-free rate
Expected
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.180
.153
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your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
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%
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If Stock Z is correctly priced, you can infer that the expected market return is ____%.
Do not round any intermediate work, but round your final answer to 2 decimal places (example: enter 12.34 for 12.34%). Do not enter the % sign.
Margin of error for correct responses: +/- .05
expected return
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Beta
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Start with A-C and I will submit seperately for D! Thank you :)
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Ο
A stock has a required return of 16%, the risk-free
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b. If the market risk premium increased to 7%, what
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I. If the stock's beta is greater than 1.0, then the
change in required rate of return will be greater
than the change in the market risk premium.
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than the change in the market risk premium.
III. If the stock's beta is greater than 1.0, then the
change in required rate of return will be less
than the change in the market risk premium.
IV. If the stock's beta is equal to 1.0, then the
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Already have answers for A-C, just need D. Thank you! :)
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Scenario 2: The following table shows the returns for the market index (Market - M) and the returns for two stocks (Asset X & Y) under three scenarios. Assume each scenario has an equal chance of occurring (33%). Bad Okay Good Market - M-5% 5% 15% Asset - X -2%-3% 25% Asset - Y -4%-6% 30% What is the correlation of "Asset - Y" to "Market M"? enter your number to two decimal places without the percent sign. Example 23% enter as .23.
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- Assume the expected return on the market is 7 percent and the risk-free rate is 4 percent. a. What is the expected return for a stock with a beta equal to 1.10? (Enter your answers in decimals. Do not enter percent values.) b. What is the market risk premium? (Enter your answers in decimals. Do not enter percent values.)arrow_forwardProvide correct answer the financial accounting questionarrow_forwardSuppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Correlation = -1 Stock Rate of return B O Yes ● No Expected Return Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) % 6% 12% Standard Deviation 25% 75% b. Could the equilibrium rf be greater than rate of return?arrow_forward
- 3) see picturearrow_forwardPlease provide solution this financial accounting questionarrow_forwardPlease show working Please answer ALL OF QUESTIONS 1 AND 2 1. Assume that the risk-free rate is 3.5% and the market risk premium is 8%. a. What is the required return for the overall stock market? Round your answer to two decimal places. __________ % b. What is the required rate of return on a stock with a beta of 2.4? Round your answer to two decimal places. __________ % 2. An individual has $50,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 2.0. If these are the only two investments in her portfolio, what is her portfolio's beta? Do not round intermediate calculations. Round your answer to two decimal places._______arrow_forward
- answer each part correctly PLEASE.arrow_forwardANSWER EACH PART PLEASE!arrow_forwardANSWER QUESTION 5 ONLY. #5: Can you tell from the data below which stock's return has the highest correlation with the return of the market portfolio? CLUE: Involves how beta is calculated and Covariance. #1 answer: Expected Return on Risk Free Asset(RF)= 0.02 OR 2% #2 answer: Expected Return for the market portfolio = 10% #3 answer: Expected Return of Stock E = 0.1400 Expected Return of Stock F=0.1888 Expected Return of Stock G=0.220 #4 Answer: EXpected Return of Stock H = 22.8%arrow_forward
- PLEASE ANSWER EACH PART CORRECTLY PLEASE!! go overarrow_forwardQUESTIONS: 1) Assuming that the risk-free rate of return is currently 3,2%, the market risk premium is 6% whereas the beta of HelloFresh SH. stock is 1.8, compute the required rate of return using CAPM. 2) Compute the value of each investment based on your required rate of return and interpret the results comparing with the market values. 3) Which investment would you select? Explain why using appropriate financial jargon (language). 4) Assume HelloFresh SH's CFO Mr. Christian Gaertner expects an earnings upturn resulting increase in growth (rate) of 1%. How does this affect your answers to Question 2 and 3? 5) AACSB Critical Thinking Questions: A) Companies pay rating agencies such as Moody's and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. Why do you think they do it? (Textbook page: 198) B) What are the difficulties in using the PE ratio to value stock?…arrow_forwardSuppose you observe the following situation: Security Pete Corporation Repete Company Beta 1.70 1.39 a. Expected return on market b. Risk-free rate Expected Return .180 .153 a. Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the risk-free rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) % %arrow_forward
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