978-0134083308 Chapter 15 Part 3

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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%

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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.

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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.

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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

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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.

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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.

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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.

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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

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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.

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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

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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.

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24) Briefly discuss futures options. What are they, and what advantage do they offer an

investor?

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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.)

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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.

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2) The owner of a currency future has a claim on a specified amount of a specified foreign

currency.

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3) Businesses that engage in international trade can hedge their exchange rate risk with futures

contracts.

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4) Financial futures can be used to speculate or to manage risk.

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5) The seller of a stock-index future is obligated to deliver a specified number of shares of the

underlying security.

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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.

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7) Interest rate futures are traded on all the following EXCEPT

A) savings bonds.

B) Treasury notes.

C) Treasury bills.

D) municipal bonds.

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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.

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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.

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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.

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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.

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