Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Question
Chapter 26, Problem 2PS
Summary Introduction
To discuss: The given statements are true or false.
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3. Why is the initial value of a futures contract zero?
a. impossible to tell
b. the futures is immediately marked-to-market
c. you do not pay anything for it
d. the basis will converge to zero
e. the expected profit is zero
6. Which one of the following statements is incorrect regarding the margining of exchange-traded
futures contracts?
(a) If an investor fails to deposit variation margin in a timely manner, the positions may be
liquidated by the carrying broker.
(b) Initial margin is the amount of money that must be deposited when a futures contract is
opened.
(c) A margin call will be issued if the investor's margin account balance drops below the mainte-
nance level.
(d) A margin call will be issued only if the investor's margin account becomes negative
2
6
Which of the following is NOT true
O a. Futures contracts nearly always last longer than forward contracts
O b. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures
contracts.
O c. Futures contracts are standardized; forward contracts are not.
O d. Forward contracts usually have one specified delivery date; futures contract often have a range of delivery dates.
Chapter 26 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 26 - Vocabulary check Define the following terms: a....Ch. 26 - Prob. 2PSCh. 26 - Prob. 3PSCh. 26 - Futures prices Calculate the value of a six-month...Ch. 26 - Prob. 5PSCh. 26 - Prob. 6PSCh. 26 - Prob. 7PSCh. 26 - Prob. 8PSCh. 26 - Prob. 9PSCh. 26 - Prob. 10PS
Ch. 26 - Hedging You own a 1 million portfolio of aerospace...Ch. 26 - Prob. 12PSCh. 26 - Prob. 13PSCh. 26 - Catastrophe bonds On some catastrophe bonds,...Ch. 26 - Futures contracts List some of the commodity...Ch. 26 - Prob. 16PSCh. 26 - Prob. 17PSCh. 26 - Prob. 18PSCh. 26 - Prob. 20PSCh. 26 - Prob. 21PSCh. 26 - Prob. 22PSCh. 26 - Hedging What is meant by delta () in the context...Ch. 26 - Futures and options A gold-mining firm is...Ch. 26 - Prob. 25PSCh. 26 - Hedging Price changes of two gold-mining stocks...Ch. 26 - Risk management Petrochemical Parfum (PP) is...Ch. 26 - Total return swaps Is a total return swap on a...Ch. 26 - Prob. 30PSCh. 26 - Prob. 31PSCh. 26 - Prob. 32PSCh. 26 - You are a vice president of Rensselaer Advisers...
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Similar questions
- After paying the initial margin, a futures investor does not have to pay any additional money until the investor's equity position falls below zero. True Falsearrow_forwardThe fact that the clearinghouse is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. Market B. Basis C. Interest rate D. Creditarrow_forwardConsider a security that pays income to its holders (e.g., a dividend-paying stock, or acoupon bond). Should the forward price of this security (for a contract that matures attime T), F0,T, be higher than, lower than, or equal to the security's current spot price?Why?.arrow_forward
- If spot price falls below the exercise price, seller of a futures contract makes a ______ while buyer makes a _________ in the derivative market. a)gain, loss b)loss, gain c)gain, gain d)loss, gainarrow_forwardWhy might individuals purchase futures contracts rather than the underlying asset? What is the difference in cash flow between short-selling an asset and entering a short futures position?arrow_forwardWhat are the key differences between future and forward contracts? a) direct contract for forwards b) clearing house for futures c) futures have less risk d) futures have a standard amountarrow_forward
- Financial Futures Markets: Explain how sellers of financial futures contracts can offset their position. How is their gain or loss determined? Note: there are 2 parts to this question.arrow_forwardWhich of the following is the advantage of swaps? Answer choices: a. Early termination of swaps before maturity will not incur any cost. b. Swaps does not have up-front premium. c. Swaps are only used only for shorter periods d. The financial intermediaries cannot earn any commission, only parties of swap do.arrow_forwardCan you please help with the question in the picture attached? The answer should be only one and I’m quite confused. Thank you!arrow_forward
- The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is TRUE? a. The hedger’s position stays the same. b. The hedger’s position improves. c. The hedger’s position sometimes worsens and sometimes improves. d. The hedger’s position worsens.arrow_forwardThe advantage of using a forward rate agreement FRA over a futures contract is: * A. FRAs are highly standardized. B. FRAs have only an initial margin and no ongoing maintenance margin. C. the terms and conditions of a FRA can be negotiated. D. FRAs have standardized maturitiesarrow_forwardThe ability to buy on margin is one advantage of futures. Another is the ease with which one can alter one’s holdings of the asset. This is especially important if one is dealing in commodities, for which the futures market is far more liquid than the spot market.arrow_forward
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