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21
13) George purchased a futures contract at 349. The contract is on 2500 units, requires a 10%
margin deposit and is priced in cents per unit. George sold the contract at 278. What is George's
return on invested capital?
A) -255.4%
B) -203.4%
C) -155.4%
D) -103.4%
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
14) Lakshmi is confident that the price of gold is going to rise because the rate of inflation is
increasing. To profit from her prediction, Lakshmi should
A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
15) The purchasing manager of a jewelry manufacturer is worried that the rising price of gold
will have a negative impact on profit margins on items it has promised to merchants in 3
months. She should
A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
22
16) You short sell contract A at 428 and buy contract B at 333. After one month, you close
contract A at 435 and contract B at 339. What is you net profit in points?
A) -13
B) -1
C) 1
D) 13
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17) Which one of the following statements is correct if a speculator short sells a commodity or
financial futures contract?
A) The speculator expects to profit from a decline in the price of the contract.
B) The speculator stands to make an unlimited amount of profit since there is no limit to how
high the price of the underlying commodity or financial instrument can rise.
C) The speculator is hoping to gain some of the benefit derived from the volatile price while
limiting his/her exposure to loss.
D) The speculator may be hedging if the underlying commodity is not in the speculator's
possession.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18) Some investors combine two or more different futures contracts into one investment
position that offers the potential for generating a modest amount of profit while restricting
exposure to loss. This practice is called
A) speculating.
B) spreading.
C) gambling.
D) market making.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
19) The basic reason why investors use spreading strategies when speculating in commodities
is to
A) increase leverage.
B) increase profits.
C) reduce risk.
D) decrease transaction costs.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20) If an investor is going to participate in the commodities market by buying a contract, he/she
should do which of the following?
I. Realize that making a profit is relatively easy.
II. Be mentally prepared for an enormous loss.
III. Be financially able to meet repeated margin calls.
IV. Spend all of their available cash on margin deposits.
A) I, II and III only
B) II and III only
C) II and IV only
D) II, III and IV only
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
21) Benjamin bought a contract for future delivery of 5000 bushels of oats at $3.64 per bushel
and sold a later contract at $3.92 a bushel. A month later, corn prices were rising and Joseph
sold his long contract for $401 per bushel and covered his short by purchasing a contract for
$3.99 per bushel. Ignoring trading costs, Joseph
A) broke even.
B) made a profit of $1,850.
C) lost $1,500.
D) made a profit of $1,500.
managers
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
24
22) Which of the following are advantages of using options for futures speculation?
I. increased leverage
II. Potential losses are limited to the cost of the option.
III. Options are available on a broad range of commodity, index, and currency futures.
IV. Investors avoid the possibility of having to take delivery of the commodity.
A) I and II only
B) II and III only
C) I, II and IV only
D) I, II, III and IV
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23) Hedging in the commodities market is a strategy primarily used by
A) individual investors with high risk tolerance levels for commodities.
B) institutional investors on behalf of their conservative investors.
C) by producers and processors of commodities.
D) investors looking for short-term capital gains.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24) Briefly discuss futures options. What are they, and what advantage do they offer an
investor?
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
25
25) Calculate the return on invested capital on a platinum futures contract for 50 troy ounces
when the purchase price is $810.40 per ounce and the sale price is $823.54 per ounce. The
initial deposit is $2,500. (Show all work.)
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
15.5 Learning Goal 5
1) One of the advantages of speculating with stock-index futures is that they eliminate the need
to predict the future course of the stock market.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) The owner of a currency future has a claim on a specified amount of a specified foreign
currency.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
3) Businesses that engage in international trade can hedge their exchange rate risk with futures
contracts.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
4) Financial futures can be used to speculate or to manage risk.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26
5) The seller of a stock-index future is obligated to deliver a specified number of shares of the
underlying security.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) Given that futures contracts on the Japanese yen are traded in units of 12.5 million yen and
are quoted in cents per yen, it follows that a Japanese yen contract quoted at 0.0082 would be
worth $10,250,000.
managers
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 5
7) Interest rate futures are traded on all the following EXCEPT
A) savings bonds.
B) Treasury notes.
C) Treasury bills.
D) municipal bonds.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
8) Which one of the following statements concerning financial futures is correct?
A) Except for short-term securities, interest rate futures are quoted based on a percentage of the
par value of the underlying debt security.
B) Stock-index futures are priced at an amount equal to the value of the index.
C) Foreign currency futures are based on 100,000 units of the foreign currency.
D) An investor who is long on a financial future loses money when the value of the future rises.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
27
9) The value of an interest-rate futures contract will go up when
A) interest rates go up.
B) interest rates go down.
C) gold prices rise.
D) gold prices fall.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
10) An investor who is worried about the impact of rising interest rates on the value of a large
bond portfolio can reduce risk by
A) selling Treasury note or bond futures.
B) buying Treasury note or bond futures.
C) buying gold futures.
D) selling Treasury bond futures and buying S&P 500 Index futures.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11) The value of a euro futures contract will go up when
A) European interest rates go down.
B) interest rates go down.
C) the dollar strengthens against the euro.
D) the dollar weakens against the euro.
managers
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
