Finance Chapter 14 1 You have a market position which allows you to profit

Fundamentals of Investments, 8e (Jordan)

Chapter 14 Futures Contracts

1) The Country Farm and the Cereal Maker met today and agreed to exchange wheat six months

from now at a price which they negotiated today. This agreement was made between the two

firms and did not pass through an organized exchange. Which one of the following best describes

this transaction?

A) futures contract

B) spot market

C) cash market

D) forward contract

E) CME transaction

2) Which one of the following is a contract managed by an organized exchange that allows a

buyer and seller to agree on a price today for an exchange of goods that will occur sometime in

the future?

A) futures contract

B) spot market

C) cash market

D) forward contract

E) discounted contract

3) A futures price is a price that is negotiated ________ and paid ________.

A) today; in the future

B) today; today

C) in the future; in the future

D) in the future; today

E) either today or in the future; in the future

4) You have a market position which allows you to profit when market prices increase but causes

you a loss when market prices decline. This position is defined by which one of the following

terms?

A) forward position

B) futures position

C) long position

D) short position

E) speculative position

5) When does the holder of a short position realize a profit?

A) when prices rise

B) when prices either remain constant or rise

C) when prices remain constant

D) when prices either remain constant or decline

E) when prices decline

6) An investor who accepts the risk of a loss in exchange for the chance to earn a profit is

referred to as which one of the following?

A) hedger

B) short seller

C) speculator

D) broker

E) dealer

7) An investor who shifts risk is referred to as which one of the following?

A) hedger

B) short seller

C) speculator

D) broker

E) dealer

8) A financial instrument on which a futures contract is based is called which one of the

following?

A) hedged security

B) short position

C) long position

D) speculative asset

E) underlying asset

9) You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you

will be taking which one of the following positions?

A) short hedge

B) long hedge

C) program trade

D) short arbitrage

E) long arbitrage

10) A futures position that is equal, but opposite, the position you have in the underlying asset

defines which one of the following terms?

A) short hedge

B) long hedge

C) full hedge

D) partial hedge

E) underlying hedge

11) A long hedge is the addition of which one of the following to a short position in the

underlying asset?

A) short spot position

B) any spot position

C) any futures position

D) long futures position

E) either a short spot or short futures position

12) Futures margin is defined as the deposit of funds into a futures trading account for which one

of the following purposes?

A) purchase additional futures contracts

B) take a hedge position in the future

C) cover potential losses from outstanding positions

D) cover the trading costs and commissions

E) cover the future costs of reversing the position

13) Which one of the following terms applies to the amount of money required when a futures

position is first bought or sold?

A) original deposit

B) initial margin

C) spot margin

D) equity deposit

E) mark-to-market

14) Which one of the following terms is defined as the process of recognizing gains and losses

on outstanding futures positions on a daily basis?

A) profit taking

B) margin adjusting

C) daily distributing

D) market adjusting

E) marking-to-market

15) Which one of the following is the definition of maintenance margin?

A) initial amount required when a futures contract is either bought or sold

B) maximum amount of margin permitted for a futures account

C) minimum margin required in a futures account at all times

D) the additional amount requested in a margin call

E) the minimum amount needed to reverse a futures position

16) Which one of the following is a notification to a futures contract holder that additional

margin funds are needed?

A) marking-to-market

B) deposit call

C) shortage notice

D) margin call

E) marking call

17) Which one of the following is a trade that will close out a previously established futures

position?

A) maintenance call

B) margin call

C) reverse trade

D) position reversal

E) margin closeout

18) Which one of the following is the price of a commodity designated for delivery today?

A) daily price

B) marked price

C) margin price

D) arbitrage price

E) cash price

19) Which one of the following is another name for the cash market?

A) futures market

B) forward market

C) arbitrage market

D) current basis market

E) spot market

20) Which one of the following is the strategy of earning risk-free profits by taking advantage of

any unusual differences between cash and futures prices?

A) cash-futures arbitrage

B) mark-to-market

C) margin calling

D) basis recognition

E) cash spotting

21) Which one of the following is the definition of the term “basis”?

A) initial cost of purchasing a futures contract

B) future price of a transaction that is agreed upon today

C) difference between the cash and futures price of a commodity

D) the expected future price of a commodity based on the current spot price

E) the expected spot price of a commodity based on the future price

22) Which one of the following best defines a carrying-charge market?

A) market where interest is charged on the margin balance

B) cash price is less than the futures price

C) positive basis market

D) spot market price is greater than the cash price

E) spot market price exceeds the futures price

23) The spot price of corn is $5.85 a bushel. The 3-month futures price of corn is $5.80. Which

one of the following best describes this market?

A) buyer’s market

B) arbitrage opportunity

C) inverted market

D) carrying-charge market

E) market parity

24) Assume the futures price of a commodity is equal to the future value of the cash price,

calculated at the risk-free rate. Given this, which one of the following terms applies to the market

for this commodity?

A) positive basis equilibrium

B) humped market

C) inverted market

D) time equilibrium

E) spot-futures parity

25) Which one of the following terms is defined as the strategy of monitoring the futures price

on a stock index in relation to the value of the underlying index to profit from any parity

deviations?

A) parity trading

B) index trading

C) program monitoring

D) inverted arbitrage

E) index arbitrage

26) Which one of the following entails the use of computers to monitor prices and also to submit

trade orders in response to arbitrage opportunities?

A) computer simulation

B) computer hedging

C) automated monitoring

D) program trading

E) cash-futures parity

27) A farmer has a long position in barley and hedges it with a short position in wheat. Which

one of the following terms applies to this situation?

A) cross-arbitrage

B) parity play

C) market arbitrage

D) cross-hedge

E) program trade

28) When the seller of a futures contract is granted a choice among various assets to deliver, the

seller is said to have which one of the following options?

A) right-to-choose option

B) spot or futures option

C) cheapest-to-deliver option

D) mark-to-market option

E) flexible delivery option

29) Which one of the following is a difference between a forward contract and a futures

contract?

A) Forward contracts are based on commodities while futures contracts are based on financial

instruments.

B) The price of the asset exchanged is determined when a forward contract is entered while the

price is set on the exchange date for a futures contract.

C) A forward contract is a formal agreement while a futures contract is an informal agreement.

D) Futures contracts are managed through an organized exchange while forward contracts are

not.

E) There are no differences between forward and futures contracts.

30) In 2007, the Chicago Mercantile Exchange merged with which one of the following

exchanges?

A) Intercontinental Exchange

B) New York Board of Trade

C) Chicago Board of Trade

D) Coffee, Sugar, and Cocoa Exchange

E) New York Futures Exchange

31) Futures contracts exist for which of the following?

I. pork bellies

II. S&P 500 index

III. Eurodollars

IV. cocoa

A) I and IV only

B) II and III only

C) I, II, and IV only

D) I, III, and IV only

E) I, II, III, and IV

32) Which of the following features apply to a futures contract?

I. zero-sum game

II. derivative security

III. maturity date

IV. settlement procedure

A) I and II only

B) I and III only

C) II and III only

D) II, III, and IV only

E) I, II, III, and IV

33) Which one of the following statements related to futures contracts is correct?

A) The buyer of the contract has a short position.

B) The buyer of the contract has the right to either accept delivery or cancel the contract.

C) Futures contracts can be cancelled by either the buyer or the seller with 10 days notice to the

other party.

D) Both the buyer and the seller of the contract are obligated to fulfill their duties as outlined in

the futures contract.

E) The buyer of the contract must deliver the underlying asset on the settlement date.

34) Which one of the following statements is true regarding futures contracts?

A) Futures prices are generally set equal to the spot price on the delivery date.

B) Futures contracts generally grant the buyer the option to accept only a portion of the contract.

C) Cost and convenience are the two key considerations when establishing the settlement

procedures.

D) The seller of a futures contract has the option to deliver cash in an amount equal to the

contract value in lieu of the underlying asset.

E) The buyer and seller of the contract negotiate the price on the maturity date.

35) What is the normal means of delivery on a Treasury note futures contract?

A) delivery in cash

B) change in registered ownership

C) direct deposit of cash into the seller’s bank account

D) wire transfer of funds from the buyer’s bank to the seller’s bank

E) payment by certified check on the maturity date

36) What was the price per pound of December cotton at the end of this trading day?

Contract

High

Low

Close

Chg

May, Coffee, 37,500 lbs., cents per lb

138.00

135.50

137.15

2.20

Dec, Cotton, 50,000 lbs., cents per lb

80.59

78.85

80.63

0.27

A) $0.7885

B) $0.8036

C) $0.8059

D) $0.8063

E) $0.8090

37) What is the highest price at which the May coffee futures contract traded during this day?

Contract

High

Low

Close

Chg

May, Coffee, 37,500 lbs., cents per lb

138.00

135.50

137.15

2.20

Dec, Cotton, 50,000 lbs., cents per lb

80.59

78.85

80.63

0.27

A) $1.3715

B) $1.3800

C) $137.15

D) $138.00

E) $140.20

38) What price will be used for this day for the mark-to-market per pound on December cotton?

Contract

High

Low

Close

Chg

May, Coffee, 37,500 lbs., cents per lb

138.00

135.50

137.15

2.20

Dec, Cotton, 50,000 lbs., cents per lb

80.59

78.85

80.63

0.27

A) $0.7885

B) $0.8063

C) $78.85

D) $80.59

E) $80.63

39) In which city does the largest volume of futures trading in the United States occur?

A) Boston

B) New York

C) Chicago

D) Kansas City

E) Minneapolis

40) Corn is currently selling for $6.15 a bushel while the 3-month futures price is $6.20. Carl

believes that corn will actually sell for $6.45 a bushel 3 months from now. Which one of the

following positions in corn should he take today, given this belief?

A) sell in the spot market

B) sell in the futures market

C) take a long position in the futures market

D) take a short position in the futures market

E) take a short position in the spot market