11
17) Which of the following is(are) correct statements about the buyer of a futures contract?
I. The contract buyer is short on the position.
II. The contract buyer wants the price of the item to increase.
III. The buyer can liquidate the position with an offsetting transaction.
IV. The majority of the buyers actually take delivery of the item.
A) II only
B) I and II only
C) I and IV only
D) II and III only
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
18) In the futures markets, gains and losses in a contract’s value are calculated every day and
added to or subtracted from the trader’s account. This procedure is called
A) checking the maintenance margin.
B) checking the maintenance deposit.
C) settling.
D) mark-to-the-market.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
19) Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is
21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating
oil is $2.15 when the contract expires, Eric’s profit or loss is
A) $(2,100) loss.
B) $2,100 profit.
C) $(3,975) loss.
D) $(2,400) loss.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12
20) Eric has just purchased a heating oil contract at $2.05 per gallon. The contract size is
21,000 gallons. Initial margin is $6,075; maintenance margin is $4,500. If the price of heating
oil is $2.15 when the contract expires, Eric’s percentage profit or loss is
A) 4.88% profit.
B) 4.88% loss.
C) 9.23% loss.
D) 34.57% profit.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
21) The margin deposit associated with the purchase of a futures contract
A) is a partial payment on the contract with the amount of the payment equal to 10% or more of
the contract value.
B) represents the purchasers equity in the contract with the balance of the contract financed
with borrowed funds at the margin rate of interest.
C) is related to the value of the item underlying the contract.
D) is used to cover any loss in market value of the contract resulting from adverse price
fluctuations.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
22) Logan sold a corn futures contract using the initial margin of $2,700. His maintenance
margin is $2,000. The price of began to rise in early summer, but Logan wants to keep his
contract. When his margin falls below $2,000 (minimum maintenance)
A) his contract will be automatically sold or canceled.
B) he does not need to do anything since the most he can lose is $2,700.
C) he will need to deposit at least $700 with his broker to bring his margin back up to the initial
deposit.
D) he will need to deliver the corn immediately.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
13
23) If the purchaser of a futures contract fails to meet a margin call,
A) his/her contract will be sold at the current market price.
B) his/her contract will automatically be executed along with immediate delivery.
C) their local broker can decide to waive the call.
D) they will be given a 30-day grace period before payment is required.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
24) The purchaser of a futures contract
A) is required to obtain a margin loan equal in amount to the cost of the contract minus the cash
down payment.
B) is generally required to make a cash deposit of 10 to 20% of the contract price at the time
the contract is entered.
C) does not have to worry about margin calls since margin loans are not required.
D) is affected by the daily procedure known as mark-to-the-market.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
25) The futures market contains two basic types of traders: hedgers and speculators. Define the
role played by each of these types of traders.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14
26) All futures contracts are traded on a margin basis. What does “margin” mean, and how does
the use of margin affect the inherent risk-return nature of the futures market?
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
27) Fred has just sold short 3 contracts of May wheat on the CBT. These are 5,000 bushel
contracts. The initial deposit is $1,500 per contract with a maintenance margin of $1,200.
(a) What is Fred’s total initial margin?
(b) How much of an increase in the price of wheat is necessary to cause a margin call?
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15.3 Learning Goal 3
1) Investors can trade futures on electricity and natural gas.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) Each commodity contract specifies the product, the exchange on which the contract is
traded, the size of the contract, the price at which the commodity must be delivered, and the
delivery month.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 3
15
3) Each commodity quote clearly identifies the contract’s intrinsic value and time value.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
4) The open interest at the end of the trading day indicates the number of contracts in existence
at that time.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
5) The open interest at the end of the trading day indicates the volume of contracts traded
during the day.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
6) If oat futures are trading at $2.43 and the limit is 20 cents, the range will be $2.23 to $2.63.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 3
16
7) Every commodity contract specifies all the following EXCEPT
A) the settle price.
B) the product.
C) the delivery month.
D) the unit size 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 3
8) The November 22, 2015 the on-line edition of the Wall Street Journal listed the following
information on oat futures. Quotes are in cents per bushel.
Based on this information, which one of the following statements is correct?
A) Oats trade on the New York Mercantile Exchange.
B) The highest price at which the March oats contract traded was $228.60 per contract.
C) The cost of a March 2016 contract was $11,430 at the market close.
D) The price of the March 2016 oats contract at the close was $200 higher than the previous
day’s closing price.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
9) A wheat futures contract is quoted in cents per bushel with a contract unit of 5,000 bushels.
If the contract is quoted at a settle price of 685, then the value of one wheat futures contract is
A) $685.
B) $3,425.
C) $34,250.
D) $68,500
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 3
17
10) Which of the following is NOT actively traded in the commodities futures markets?
A) soybeans
B) ethanol
C) weather
D) euros
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) In commodities trading, open interest at the end of a trading day is equal to
A) the net change in price from the prior day’s close.
B) the number of speculative positions sold in the last 60-day period.
C) the number of contracts presently outstanding.
D) the advances minus the declines.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15.4 Learning Goal 4
1) The rate of return on a futures contract is based on the size of the initial margin deposit.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) The high rates of returns, either positive or negative, on futures contracts are primarily due to
the high initial margin requirement.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18
3) A successful hedge results in a guaranteed sales price to the producers of commodities.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
4) Producers and industrial users of commodities may participate as both hedgers and
speculators in the futures markets.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
5) For individual investors to adequately hedge their personal portfolios, they should always
use the S&P 500 Stock Index futures contract.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
6) An oat futures contract is for 5,000 bushels and the price can change by as much as 20 cents
in either direction per trading day. If the margin requirement is $800 per contract, the
maximum gain or loss in one day is
A) plus or minus 25%.
B) plus or minus 125%.
C) plus or minus 1.25%.
D) plus or minus 80%.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19
7) A corn futures contract closed yesterday at a price of $2.40 a bushel. The maximum daily
price range is $0.40 and the daily price limit is $0.20. Therefore, the
A) highest closing price for today is $2.80 a bushel.
B) the most the price can fluctuate today is $0.20 a bushel.
C) minimum change in the price today is $0.20 a bushel.
D) lowest closing price for today is $2.20 a bushel.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
8) Which of the following statements concerning futures are correct?
I. Investors in financial futures can earn both dividend income from the underlying security as
well as the potential capital gain from the futures contract.
II. The return on a futures contract is computed by dividing the net difference between the sale
and the purchase price of the contract by the amount of the margin deposit.
III. It is very easy to lose your entire investment in a futures contract in a very short period of
time due to the volatility of the futures market and also the use of leverage.
IV. Conservative investors tend to purchase one futures contract as a means of increasing the
return on their portfolio while maintaining minimal risk.
A) I and II only
B) II and III only
C) I, II and IV only
D) I, II and III only
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
9) One reason that commodities appeal to investors is because they
A) act as hedges against inflation during periods of rapidly rising consumer prices.
B) offer high returns for low risks.
C) do not require much specialized knowledge on the part of the investor.
D) are a suitable investment vehicle for one’s retirement savings.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20
10) The return on a futures contract is calculated as
A) (purchase price – selling price)/purchase price.
B) (selling price – purchase price)/purchase price.
C) (purchase price – selling price)/margin deposit.
D) (selling price – purchase price)/margin deposit.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
11) The return on a futures contract
A) is highly related to the low margin requirement.
B) is always equal to or greater than zero.
C) tends to be fairly stable from one trading day to the next.
D) is solely related to the current price of the underlying item.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
12) What is the return on invested capital to an investor who purchased a futures contract at a
price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin
deposit and is priced in cents per unit.
A) 116.5%
B) 119.0%
C) 123.5%
D) 127.4%
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4