978-0134083308 Chapter 15 Part 1

Unlock access to all the studying documents.

View Full Document

Fundamentals of Investing, 13e (Smart)

Chapter 15 Futures Markets and Securities

15.1 Learning Goal 1

1) All futures contracts trade continuously between 7:30 a.m. and 2:00 p.m., Monday through

Friday.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

2) Futures contracts for various commodities have different trading hours depending on the

commodity.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

3) The definition of commodity is broad enough to include such things as. foreign currencies

and the future value of stock market indexes.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

4) Unlike stocks and bonds, futures contracts trade only at specific times during normal

working hours.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

5) Futures trading requires large amounts of capital because the buyer of a contract must

deposit the full settlement price of the contract at the time of purchase.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

6) Futures contracts obligates a participant to buy or sell the commodity at the contracted price

unless the contract is canceled or liquidated before the expiration date.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

7) Commodity prices react to a unique set of economic, political, and international pressures, as

well as to the weather.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

8) Because a futures contract deals with very large trading units, even a modest price change in

the price of the underlying commodity can have a large impact on the market value of the

contract.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

9) With a futures contract, an investor cannot lose more than the price of the contract itself.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

10) The number of commodities traded in futures markets has been decreasing because of

tighter regulations and a narrower definition of commodity.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

11) The seller of a futures contract

A) has the option of canceling the contract the following day if the price is not acceptable to

him/her.

B) is legally bound to make delivery of the specified item on the specified day.

C) receives the entire contract amount at the time the contract is made.

D) must make delivery before receiving any monies on the contract.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

12) A futures contract

I. obligates the buyer of the contract to buy a specified amount of a commodity.

II. grants the buyer the right to either buy or sell a specified amount of a commodity.

III. uses specified settle prices that vary with the type of commodity.

IV. establishes the delivery price based on the selling price of the futures contract.

A) I and III only

B) I and IV only

C) II and III only

D) II and IV only

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

13) Which of the following features are shared by futures contracts and options?

I. They have specified expiration dates.

II. Their value is derived from changes in the value of some other asset.

III. Unprofitable futures or options can simply be allowed expire unexercised.

IV. Futures contracts specify the price at which the commodity will be delivered at the

expiration date.

A) I and II only

B) I and IV only

C) II and III only

D) I, II and III only

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Revised

Learning Goal: Learning Goal 1

14) Although the major commodities exchanges continue to operate separately, ownership has

been concentrated under

A) The New York Mercantile Exchange.

B) The Chicago Board of Trade.

C) The Chicago Mercantile Exchange.

D) The New York Stock Exchange.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

15) The Chicago Mercantile Exchange recently merged with

A) the Chicago Board of Trade.

B) the American Exchange.

C) the New York Mercantile Exchange.

D) NASDAQ.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

16) The amount paid at the time a futures contract is sold

A) represents the maximum loss for the buyer of the contract.

B) represents the maximum profit for the buyer of the contract.

C) is simply a refundable security deposit.

D) is the total value of the goods being traded in the future.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

17) With futures contracts, the price at which the commodity must be delivered is

A) set when the futures contract is sold.

B) set when the contract expires.

C) is equivalent to the strike price for an options contract.

D) changes frequently during the life of the contract.

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

18) Which of the following characteristics apply to futures contracts?

I. Futures contracts are an important tool to control risk.

II. Futures contracts are highly risky and involve speculation.

III. Futures contracts specify both the quantity and the quality of the item.

IV. The buyer must hold the contract until maturity.

A) I and II only

B) II and IV only

C) I, II and III only

D) I, II, III and IV

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

19) Which of the following are specifically stated in futures contracts?

I. the quantity of the commodity to be delivered

II. the quality of the commodity to be delivered

III. the exact price at which the commodity must be delivered

V. the time and place at which the commodity must be delivered

A) I and II only

B) II and IV only

C) I, II and III only

D) I, II and IV only

managers

AACSB: 8 Application of knowledge (Able to translate knowledge of business and management

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

15.2 Learning Goal 2

1) All trading in the futures market is done on a margin basis.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

2) The maximum loss on a futures contract is the price paid for the contract.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

3) Speculators provide liquidity to the futures market.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

4) Hedgers who buy futures contracts are protecting themselves from future price increases.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

5) Speculators in the futures markets have no intention of actually taking possession of the

commodity.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

6) The normal initial margin requirement for commodities or financial futures ranges from

about 2% to 10% of the value of the contract.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

7) An investor’s margin in a futures contract is checked each day under a procedure known as

mark-to-the-market.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

8) Short and long positions in the futures markets refer to the length of time before the

contracts’ delivery dates.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

9) Failure to meet a margin call will cause an investor’s futures contract to be sold.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

10) Hedgers in the futures markets are often either users or producers of the commodity traded.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

11) The loss that can occur with a futures contract. is limited to the initial margin deposit.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

12) The seller of a futures contract in euros hopes that the dollar will strengthen against the

euro.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

13) BBC Inc. needs to quote a price at which it will sell oatmeal to a large supermarket chain

next year. It can limit the risk from an increase in the price of oats next year by

A) taking short positions in oat futures.

B) taking long positions in oat futures.

C) taking long and short positions in oat futures with the same expiration date.

D) taking long and short positions in oat futures with different expiration dates.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

14) Larry is a corn farmer. To attempt to maximize the value of his crop, Larry is most likely to

benefit from

A) selling his crop at the market price when it is harvested.

B) buying a futures contract on corn for delivery at harvest time.

C) selling a futures contract on corn for delivery at harvest time.

D) buying a futures contract on corn and selling a futures contract on wheat.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2

15) Seth McDonald grows corn. In May, he decides to sell 3 contracts, about half of his

expected crop, for December delivery. The contract price is $3.65 per bushel and the contract

size is 5,000 bushels. Shortly before the delivery date, corn is selling in the spot (immediate

delivery) market for $3.85 per bushel.

A) Seth will simply let the contract expire and sell his corn in the spot market.

B) Seth can protect his profit by buying an offsetting contract.

C) Seth has an opportunity loss of $3,000 because he must deliver corn at the lower price.

D) Seth can hold on to his corn for several months and hope that the price to rises enough to

offset his loss.

managers

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 2

16) A farmer who grows soy beans can hedge against the risk that bad weather will damage her

crop by

A) buying soy bean futures for delivery near the time of harvest.

B) selling soy bean futures for delivery near the time of harvest.

C) buying contracts in alternative crops for delivery near the time of harvest.

D) buying contracts in unrelated commodities for delivery near the time of harvest.

managers

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 2