TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 10
INTRODUCTION TO FINANCIAL FUTURES MARKETS
MULTIPLE CHOICE
1. The basic economic function of futures markets is to provide an opportunity for market
participants:
[D]
2. Financial futures can be classified as:
[E]
3. As the value of a futures contract is derived from the value of the underlying instrument,
they are commonly called:
[E]
4. A futures contract is a firm legal agreement between a buyer and a seller in which:
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5. The futures price is:
[M]
6. A party to a futures contract can liquidate the position by:
[M]
7. The role of the clearinghouse is to:
[M]
8. When a position is first taken in a futures contract, the investor must deposit a minimum
dollar amount per contract as specified by:
[M]
9. The minimum level by which an investor’s equity position may fall as a result of
unfavorable price movement before the investor is required to deposit additional margin
is called:
10. Futures contracts are traded:
[E]
11. The price of a futures contract is determined by:
[M]
12. Which of the following statements is most correct?
[D]
13. When an investor takes a position in the market by buying a futures contract, the investor
is said to be in a:
[M]
14. At the end of each trading day, futures contracts are:
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15. The difference between the cash price and the futures price is called:
16. When a futures contract is used to hedge a position where either the portfolio or the
individual financial instrument is not identical to the instrument underlying the futures, it
is called a:
[M]
17. The seller of a futures contract will realize a profit if the futures price:
[M]
18. The criticism of futures contracts that their introduction will increase the price volatility
of the underlying asset in the cash market is referred to as:
[M]
19. Investors can use the cash or futures market to alter their risk exposure, which requires
them to consider which of the following factors?
TRUE/FALSE
1. Most financial futures contracts have settlement dates in March, June, September, and
December.
[E]
2. The amount necessary to bring the equity in the account back to its initial margin level is
called the variation margin.
[M]
3. A daily price limit sets the minimum and maximum price at which the futures contract
may trade during its life.
[E]
4. In general, less than 2% of futures contracts are settled by delivery.
[E]
5. The major function of futures markets is to transfer price risk from hedgers to
speculators.
ESSAY QUESTIONS
1. Compare and contrast futures and forwards.
Key Issues:
2. Explain the mark-to-market and margin requirements of a futures contract and use an
example.
Key Issues:
3. Discuss the principles of hedging and explain the risks associated with hedging.
Key Issues: