Chapter 22 – Futures Markets
22–20
54. Open interest includes
Difficulty: Moderate
55. The process of marking-to-market
Difficulty: Easy
56. Futures contracts are regulated by
Difficulty: Easy
22–21
57. Taxation of futures trading gains and losses
Difficulty: Moderate
58. Speculators may use futures markets rather than spot markets because
Difficulty: Moderate
59. Given a stock index with a value of $1,000, an anticipated dividend of $30 and a risk-free
rate of 6%, what should be the value of one futures contract on the index?
Difficulty: Difficult
22–22
60. Given a stock index with a value of $1,125, an anticipated dividend of $33 and a risk-free
rate of 4%, what should be the value of one futures contract on the index?
Difficulty: Difficult
61. Given a stock index with a value of $1100, an anticipated dividend of $27 and a risk-free
rate of 3%, that should be the value of one futures contract on the index?
Difficulty: Difficult
62. Given a stock index with a value of $1,200, an anticipated dividend of $45 and a risk-free
rate of 6%, what should be the value of one futures contract on the index?
Difficulty: Difficult
22–23
63. Which of the following items is specified in a futures contract?
I) the contract size
II) the maximum acceptable price range during the life of the contract
III) the acceptable grade of the commodity on which the contract is held
IV) the market price at expiration
V) the settlement price
Difficulty: Moderate
64. Which of the following items is not specified in a futures contract?
I) the contract size
II) the maximum acceptable price range during the life of the contract
III) the acceptable grade of the commodity on which the contract is held
IV) the market price at expiration
V) the settlement price
Difficulty: Moderate
22–24
65. With regard to futures contracts, what does the word “margin” mean?
Difficulty: Easy
66. Which of the following is true about profits from futures contracts?
A. The person with the long position gets to decide whether to exercise the futures contract
and will only do so if there is a profit to be made.
Difficulty: Moderate
22–25
Difficulty: Moderate
68. Some of the newer futures contracts include
I) fashion futures.
II) weather futures.
III) electricity futures.
IV) entertainment futures.
22–26
69. Who guarantees that a futures contract will be fulfilled?
Difficulty: Easy
70. If you took a long position in a pork bellies futures contract and then forgot about it, what
would happen at the expiration of the contract?
Difficulty: Easy
22–27
71. Hedging a position using futures on another commodity is called
Difficulty: Easy
72. A trader who has a __________ position in oil futures believes the price of oil will
__________ in the future.
Difficulty: Moderate
73. A trader who has a __________ position in gold futures wants the price of gold to
__________ in the future.
Difficulty: Moderate
22–28
74. You hold one long oil futures contract that expires in April. To close your position in oil
futures before the delivery date you must
Difficulty: Moderate
75. Financial futures contracts are actively traded on the following indices except
Difficulty: Moderate
76. Financial futures contracts are actively traded on the following indices
Difficulty: Moderate
22–29
77. To exploit an expected decrease in interest rates, an investor would most likely
Difficulty: Difficult
78. An investor with a short position in Treasury notes futures will profit if
Difficulty: Moderate
79. To hedge a short position in Treasury bonds, an investor most likely would
Difficulty: Difficult
22–31
83. If you determine that the DAX-30 index futures is under priced relative to the spot DAX-
30 index you could make an arbitrage profit by
A. buying all the stocks in the DAX-30 and selling put options on the DAX-30 index.
B. selling short all the stocks in the DAX-30 and buying DAX-30 futures.
Difficulty: Moderate
84. On January 1, the listed spot and futures prices of a Treasury bond were 95.4 and 95.6.
You sold $100,000 par value Treasury bonds and purchased one Treasury bond futures
contract. One month later, the listed spot price and futures prices were 95 and 94.4,
respectively. If you were to liquidate your position, your profits would be
Difficulty: Difficult
22–33
88. Given a stock index with a value of $1,500, an anticipated dividend of $62 and a risk-free
rate of 5.75%, what should be the value of one futures contract on the index?
Difficulty: Difficult
Short Answer Questions
89. Describe the differences between futures and forward contracts.
Difficulty: Easy
22–34
90. Distinguish between the short and long positions in futures transactions.
Difficulty: Moderate
91. Discuss marking to market and margin accounts in the futures market.
Difficulty: Moderate
22–35
92. You purchased the following futures contract today at the settlement price listed in the
Wall Street Journal. Answer the questions below regarding the contract.
– What is the total value of the futures contract?
– If there is a 10% margin requirement how much do you have to deposit?
– Suppose the price of the futures contract changes as shown in the following table.
– Enter the relevant information into the table. Show your calculations.
– Explain why the account is marked-to-market daily.
Chapter 22 – Futures Markets
22–36
The answers are shown below.
Difficulty: Moderate
22–37
93. Describe the types of traders that are active in the futures markets. Explain why each type
is in the markets and how their goals differ. Give an example of how each might use the
market.
The two types of traders are hedgers and speculators. Hedgers use the markets to protect
themselves by limiting their risk. They take long or short positions to lock in the most
favorable purchase price or selling price at the time they enter the contract. An example of a
hedger would be a jewelry company that anticipates a need for a large quantity of gold in the
future. The company will have to purchase the gold and if it wants to protect itself from large
Difficulty: Moderate