Chapter 17 Test Bank - Static PDF

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Student: _______________________________________________________________________________________

1.

Today's futures markets are dominated by trading in _______ contracts.

A. B. C. D.

metals agriculture financial commodity

2.

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

A. B. C. D.

decrease substantially increase substantially remain unchanged increase or decrease substantially

3.

If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

A. B. C. D.

long call option long put option long futures contract short futures contract

4.

The clearing corporation has a net position equal to ______.

A. B. C. D.

the open interest the open interest times 2 the open interest divided by 2 zero

5.

The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

A. B. C. D.

cash; cash cash; actual actual; cash actual; actual

6.

Which one of the following contracts requires no cash to change hands when initiated?

A. listed put option B. short futures contract C. forward contract D. listed call option 7.

Synthetic stock positions are commonly used by ______ because of their ______.

A. B. C. D.

market timers; lower transaction cost banks; lower risk wealthy investors; tax treatment money market funds; limited exposure

8.

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

A. B. C. D.

Investors; regulators Hedgers; speculators Speculators; hedgers Regulators; investors

9.

Futures contracts have many advantages over forward contracts except that _________.

A. B. C. D.

futures positions are easier to trade futures contracts are tailored to the specific needs of the investor futures trading preserves the anonymity of the participants counterparty credit risk is not a concern on futures

10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______. A. B. C. D.

an arbitrage a cross-hedge an over hedge a spread hedge

11. The open interest on silver futures at a particular time is the number of __________. A. B. C. D.

all outstanding silver futures contracts long and short silver futures positions counted separately on a particular trading day silver futures contracts traded during the day silver futures contracts traded the previous day

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. B. C. D.

pay; pay pay; receive receive; pay receive; receive

13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset. A. B. C. D.

pay; pay pay; receive receive; pay receive; receive

14. The advantage that standardization of futures contracts brings is that _____ is improved because ____________________. A. B. C. D.

liquidity; all traders must trade a small set of identical contracts credit risk; all traders understand the risk of the contracts pricing; convergence is more likely to take place with fewer contracts trading cost; trading volume is reduced

15. The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. B. C. D.

market credit interest rate basis

16. In the futures market the short position's loss is ___________ the long position's gain. A. B. C. D.

greater than less than equal to sometimes less than and sometimes greater than

17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices. A. B. C. D.

sell wheat futures buy wheat futures buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18. Which of the following provides the profit to a long position at contract maturity? A. original futures price - Spot price at maturity B. spot price at maturity - Original futures price C. zero D. basis 19. You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________. A. B. C. D.

cross-hedge reversing trade spread position straddle

20. Interest rate futures contracts exist for all of the following except __________. A. B. C. D.

federal funds Eurodollars banker's acceptances repurchase agreements

21. Initial margin is usually set in the region of ________ of the total value of a futures contract. A. B. C. D.

5%-15% 10%-20% 15%-25% 20%-30%

22. Margin must be posted by ________. A. B. C. D.

buyers of futures contracts only sellers of futures contracts only both buyers and sellers of futures contracts speculators only

23. The daily settlement of obligations on futures positions is called _____________. A. B. C. D.

a margin call marking to market a variation margin check the initial margin requirement

24. Which of the following provides the profit to a short position at contract maturity? A. original futures price - Spot price at maturity B. spot price at maturity - Original futures price C. zero D. basis 25. Margin requirements for futures contracts can be met by ______________. A. B. C. D.

cash only cash or highly marketable securities such as Treasury bills cash or any marketable securities cash or warehouse receipts for an equivalent quantity of the underlying commodity

26. An established value below which a trader's margin may not fall is called the ________. A. daily limit B. daily margin C. maintenance margin D. convergence limit

27. Which one of the following is a true statement? A. A margin deposit can be met only 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. 28. At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________. A. marking to market B. the convergence property C. the open interest D. the triple witching hour 29. A futures contract __________. A. is a contract to be signed in the future by the buyer and the seller of a commodity B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract D. gives the buyer the right, but not the obligation, to buy an asset some time in the future 30. Which one of the following exploits differences between actual future prices and their theoretically correct parity values? A. index arbitrage B. marking to market C. reversing trades D. settlement transactions 31. Which one of the following refers to the daily settlement of obligations on future positions? A. marking to market B. the convergence property C. the open interest D. the triple witching hour 32. The most actively traded interest rate futures contract is for ___________. A. B. C. D.

LIBOR Treasury bills Eurodollars Treasury bonds

33. The CME weather futures contract is an example of ______________. A. B. C. D.

a cash-settled contract an agricultural contract a financial future a commodity future

34. Single stock futures, as opposed to stock index futures, are _______________. A. B. C. D.

not yet being offered by any exchanges offered overseas but not in the United States currently trading on OneChicago, a joint venture of several exchanges scheduled to begin trading in 2015 on several exchanges

35. You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________. A. B. C. D.

a cross-hedge a reversing trade a speculation marking to market

36. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk. A. B. C. D.

cross-hedging long hedging spreading speculating

37. Futures markets are regulated by the __________. A. B. C. D.

CFA Institute CFTC CIA SEC

38. A hog farmer decides to sell hog futures. This is an example of __________ to limit risk. A. B. C. D.

cross-hedging short hedging spreading speculating

39. On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____. A. B. C. D.

that the market believed that Obama had a 57% chance of winning that the market believed that Obama would not win the election nothing about the market's belief concerning the odds of Obama winning that the market believed Obama's chances of winning were about 43%

40. An investor would want to __________ to exploit an expected fall in interest rates. A. B. C. D.

sell S&P 500 Index futures sell Treasury-bond futures buy Treasury-bond futures buy wheat futures

41. Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange. A. B. C. D.

are; are are; are not are not; are are not; are not

42. If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________. A. B. C. D.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index sell all the stocks in the S&P 500 and buy call options on S&P 500 Index sell S&P 500 Index futures and buy all the stocks in the S&P 500 sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. B. C. D.

long; long long; short short; long short; short

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity. A. B. C. D.

make; make make; take take; make take; take

45. An investor would want to __________ to hedge a long position in Treasury bonds. A. B. C. D.

buy interest rate futures buy Treasury bonds in the spot market sell interest rate futures sell S&P 500 futures

46. Futures contracts are said to exhibit the property of convergence because _______________. A. B. C. D.

the profits from long positions and short positions must ultimately be equal the profits from long positions and short positions must ultimately net to zero price discrepancies would open arbitrage opportunities for investors who spot them the futures price and spot price of any asset must ultimately net to zero

47. In the context of a futures contract, the basis is defined as ______________. A. B. C. D.

the futures price minus the spot price the spot price minus the futures price the futures price minus the initial margin the profit on the futures contract

48. The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform. A. B. C. D.

CBOE CBOT CME Eurex

49. Violation of the spot-futures parity relationship results in _______________. A. B. C. D.

fines and other penalties imposed by the SEC arbitrage opportunities for investors who spot them suspension of delivery privileges suspension of trading

50. When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________. A. F1 = S0(1 + rf) T

B. F0 = S0(1 + rf - d) T C. F0 = S0(1 + rf + d) D. F0 = S0(1 + rf)

T

51. An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________. A. F0 - FT B. F0 - S0 C. FT - F0 D. FT - S0

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market. A. B. C. D.

long; long long; short short; long short; short

53. Approximately __________ of futures contracts result in actual delivery. A. B. C. D.

0% less than 1% to 3% less than 5% to 15% less than 60% to 80%

54. A long hedger will __________ from an increase in the basis; a short hedger will __________. A. B. C. D.

be hurt; be hurt be hurt; profit profit; be hurt profit; profit

55. At year-end, taxes on a futures position _______________. A. B. C. D.

must be paid if the position has been closed out must be paid if the position has not been closed out must be paid regardless of whether the position has been closed out or not need not be paid if the position supports a hedge

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because: I. Gains in futures contracts can be larger due to leverage. II. Transaction costs in futures are typically lower than those in spot markets. III. Futures markets are often more liquid than the markets of the underlying commodities. A. B. C. D.

I and II only II and III only I and III only I, II, and III

57. On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.) A. B. C. D.

-$12,500 -$15,000 $15,000 $12,500

58. The current level of the S&P 500 is 1,250. 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 __________. A. B. C. D.

1,274.33 1,286.95 1,268.61 1,291.29

59. The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________. A. B. C. D.

$1,504.99 $1,569.08 $1,554.04 $1,557.73

60. If you expect a stock market downturn, one potential defensive strategy would be to __________. A. B. C. D.

buy stock-index futures sell stock-index futures buy stock-index options sell foreign exchange futures

61. At contract maturity the basis should equal ___________. A. B. C. D.

1 0 the risk-free interest rate -1

62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________. A. B. C. D.

buy the September contract and sell the June contract sell the September contract and buy the June contract sell the September contract and sell the June contract buy the September contract and buy the June contract

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________. A. B. C. D.

$3.27 $4.39 $5.24 $6.72

64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits? A. B. C. D.

Buy gold in the spot with borrowed money, and sell the futures contract. Buy the futures contract, and sell the gold spot and invest the money earned. Buy gold spot with borrowed money, and buy the futures contract. Buy the futures contract, and buy the gold spot using borrowed money.

65. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be? A. B. C. D.

$95.24 $100 $105 $107

66. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be? A. B. C. D.

$76.29 $93.46 $107 $131.08

67.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, 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 following questions.

After Monday's close the balance on your margin account will be ________.

A. B. C. D.

$2,700 $2,000 $3,137.50 $2,262.50

68.$100,000. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is 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 following questions.

At the close of day on Tuesday your cumulative rate of return on your investment is _____.

A. B. C. D.

16.2% -5.8% -.16% -2.2%

69.$100,000. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is 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 following questions.

On which of the given days do you get a margin call? A. B. C. D.

Monday Tuesday Wednesday none of these options

70.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, 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 following questions.

The cumulative rate of return on your investment after Wednesday is a ____. A. B. C. D.

79.9% loss 2.6% loss 33% gain 53.9% loss

71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today. A. B. C. D.

$40 million $400 million $400 billion $400 trillion

72. If the risk-free rate is greater than the dividend yield, then we know that _______________. A. B. C. D.

the futures price will be higher as contract maturity increases F0 < S0 FT > ST arbitrage profits are possible

73. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap wh...