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Chapter 19 Commodity and Financial Futures
TRUE/FALSE
“purchases”) commodity contracts, the individual takes
physical delivery of the goods.
among the riskiest of all investment alternatives.
(speculators) by futures contracts is the large amount of
leverage.
contracts cannot be sold.
markets such as the Chicago Board of Trade.
position.
index is a long position.
futures contract may deliver any type of corn.
(offset) by entering into the opposite position.
that position is closed by delivering the contract.
position is closed by buying corn.
offsets (closes) the position, the individual experiences
neither losses nor profits.
jurisdiction over commodity trading, these markets are
unregulated.
laws regulating commodity transactions.
futures contract is at least 50 percent of the value of the
contract.
long positions in futures contracts.
which the price of a futures contract may rise or fall
during a day.
equity (i.e., maintenance margin) to maintain a futures
position.
futures contracts.
it may hedge against a price increase by taking a short
position in the futures contract.
for the supplier of a commodity.
foreign moneys (i.e., foreign exchange).
they enter into contracts to sell bonds.
futures price will be less than the spot price.
that individual enters into a short position in stock index
futures.
futures, that investor is anticipating lower interest
rates.
changes in the futures markets to the stock markets.
spot contract.
to reduce risk exposure.
in a foreign currency to payments in the domestic currency.
MULTIPLE CHOICE
a. entering into a contract to make delivery
b. refusing to take delivery
c. refusing to make delivery
d. letting the contract expire
1. bought and sold through commodity exchanges
2. considered to be speculative investments
3. permit investors to take either long or
short positions
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. the long position profits
2. the short position profits
3. the buyer of the contract profits
4. the seller of the contract profits
a. 1 and 3
b. 1 and 4
c. 2 and 3
d. 2 and 4
in the futures markets is
a. the daily limit
b. the daily range
c. $1 per contract
d. 5% per contract
a. investing in physical goods
b. entering into contracts for future delivery
c. executing contracts for prior delivery
d. selling a contract in anticipation of
price increases
a. reduces the risk of loss
b. results when an investor buys a contract
c. occurs when the individual takes delivery
d. is the opposite of selling short
a. expect prices to rise
b. are not seeking capital gains
c. are hedging their long positions
d. anticipate lower prices
a. potential leverage
b. liquidity
c. safety
d. tax savings
commodity rises, the individual
1. can expect a margin call
2. may take profits out of the position
3. may close the position at a loss
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. do not have to meet margin requirements
b. may anticipated an increase in inflation
c. are considered to have unleveraged positions
d. have less speculative positions
hedge the position by
a. entering a stock index futures to buy
b. entering a stock index futures to sell
c. selling the stocks
d. maintaining the positions
fall, that investor could
1. buy put options
2. sell a stock index futures contract
3. sell stock short
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. variable payments into fixed payments
b. short-term gains into long-term gains
c. bonds into stock
d. futures prices into spot prices
PROBLEMS
1. One use for futures markets is "price discovery," that is,
the future price mirrors the current consensus of the future
price. If the current price of corn is $2.00 a bushel and the
cost of carry is 7 percent, explain what an investor would do
if futures price of wheat were $2.40. Is the investor at
risk?
2. The futures price of gold is $1,000. Futures contracts
are for 100 ounces of gold, and the margin requirement is
$3,000 a contract. The maintenance market requirement is
$1,500. A speculator expects the price of gold to rise and
enters into a contract to buy gold.
a. How much must the speculator initially remit?
b. If the futures price of gold rises to $1,005, what
is the profit and return on the position?
c. If the futures price of gold declines to $998, what
is the loss on the position?
d. If the futures price declines to $984, what must the
speculator do?
e. If the futures price continues to decline to $982,
how much does the speculator have in the account?
3. The futures price of a commodity such as wheat is $2.50
a bushel. Futures contracts are for 10,000 bushels, and the
margin requirement is $2,500 a contract. The maintenance
market requirement is $1,000. A speculator expects the
price of the commodity to rise and enters into a contract
to buy wheat.
a. How much must the speculator initially remit?
b. If the futures price rises to $2.60, what is the
profit and return on the position?
c. If the futures price declines to $2.47, what is the
loss on the position?
d. If the futures price rises to $2.70, what must the
speculator do?
e. If the futures price continues to decline to $2.32,
how much does the speculator have in the account?
SOLUTIONS TO PROBLEMS
