Q&A Hero

Q: An investor controls contracts on five 5,000 bushel futures contracts on grain, at a price of $3 per bushel. The margin requirement is 5%, and the maintenance margin is 80%. How much would the price per bushel have to change to provide a $750 profit? $0.03 Feedback: Refer to the Application example. 5 contracts x 5,000 bushels each = 25,000 bushels 25,000 bushels x ? price change = $750 ?

Q: Given a 5,000 bushel futures contract on grain at a price of $2.75 per bushel, where the margin requirement is 5%, and the maintenance margin is 80%. What would the return on investment be if the price increases by $.08 per bushel?

Q: You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. You decide to hedge one-half of your exposure to a drop in the value of soybeans. Assume that in three months, when you take the soybeans to market, you close out the futures contracts and the price has fallen to $5.80. What was your overall net gain or loss when considering the actual gain or loss when taking the actual soybeans to market and the partial hedge in the futures market?A.$800 gainB.$800 lossC.$400 gainD.$400 lossE.$320 gain

Q: You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. You decide to hedge one-half of your exposure to a drop in the value of soybeans. Assume that in three months, when you take the soybeans to market, you close out the futures contracts and the price has fallen to $5.80. What is the total loss in value over the three months on the actual soybeans you produced and took to market? A.$2,400 B.$2,000 C.$6,400 D.$4,000 E.$3,200

Q: You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months. The current cash price for soybeans is $5.85. The size of the futures contract is 5,000 bushels per contract, and the current three-month futures price is $5.88. If you wanted to hedge one-half of your exposure to a drop in the value of soybeans, how many futures contracts would you buy or sell? A.Sell 16 futures contracts B.Buy 16 futures contracts C.Sell 8 futures contracts D.Buy 8 futures contracts E.Sell 4 futures contracts

Q: A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the annualized gain? A.252.8% B.264.4% C.51.2% D.63.2% E.66.1%

Q: A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the percentage of profit? A.252.8% B.264.4% C.51.2% D.63.2% E.66.1%

Q: Interest rate swaps are __________ structured than futures and options contracts. A.usually less B.usually more C.always more D.Never less

Q: A banker who is paying a fixed 6% rate on CDs for the next two years, and is afraid interest rates may go down on new loans, may hedge this exposure with interest rate swaps by: A.swapping a fixed rate for a variable rate. B.swapping a variable rate for a fixed rate. C.swapping short-term exposure for long-term exposure. D.swapping long-term exposure for short-term exposure.

Q: If a pension fund manager is afraid interest rates may go down on his short-term portfolio of 90-day Treasury bills, he could hedge by going: A.long on Treasury bill futures contracts. B.short (sell) on Treasury bill futures contracts. C.long on U.S. dollar contracts. D.short (sell) on the U.S. dollar contracts.

Q: In the futures market, the yen may strengthen against the dollar for all of the following reasons except: A.declining inflation in Japan. B.increasing inflation in the U.S. C.decreasing Japanese interest rates. D.decreasing U.S. interest rates.

Q: Using paper gains to expand the number of contracts outstanding is referred to as: A.horizontal pyramiding. B.vertical pyramiding. C.reserve pyramiding. D.inverse pyramiding.

Q: An investor may be asked to put up more margin if: A.the price of the commodity goes up in a long position. B.the price of the commodity goes down in a short position. C.the price of the commodity goes up in a short position. D.the contract has less than one week to run.

Q: Margin maintenance contracts normally represent what percent of the initial margin? A.2-10% B.20-50% C.60-100% D.There is no requirement for margin maintenance

Q: As opposed to a farmer, a miller (processor of wheat) is likely to go __________ in the futures market. A.long B.short C.long and short D.around in circles

Q: An interest rate futures contract represents a bet or hedge on: A.the direction of future interest rates. B.the direction of future bond prices. C.the expectation of future interest rates. D.All of the above

Q: The currency futures market is different than the other types of futures markets, because: A.the contracts are standardized. B.the currency futures market provides a strong secondary market. C.the currency market has communication networks throughout the world, whereas the other ones do not. D.A and B

Q: The difference between the cash market and the futures market is: A.that commodity prices cannot be negotiated in the futures market, while they can be in the cash market. B.that larger margins are used in the cash market. C.that in the cash market, there must be a transfer of the physical possession of the goods. D.that the commodities are usually less expensive in the futures market.

Q: Commodity trading is based on the use of: A.actual dollars. B.a margin. C.a hedge. D.fictitious money.

Q: Margin requirements on commodities contracts: A.are much higher than those on common stock transactions. B.vary over time, and even among exchanges, for a given commodity. C.typically are 2-10% of the value of the contract. D.None of the above are true

Q: Which of the following exchanges is more important within the financial futures market? A.AMEX Commodity Exchange B.New York Futures Exchange C.IMM of the Chicago Mercantile Exchange D.May be either A or B

Q: The difference between speculators and hedgers is that speculators are ______, while hedgers are _____. A.risk-takers; risk-averters B.individual investors; financial managers C.short term; long-term D.None of the above

Q: The primary difference between options and futures is that: A.the option premium is the full liability of the purchaser, while a futures contract may call for additional margin to hold the position. B.options are more speculative than futures. C.futures require the physical transfer of goods, while options do not. D.More than one of the above

Q: While hedging through interest rate futures reduces or eliminates the risk of loss, it also: A.is illegal in some cases. B.has not been accepted by most corporate financial managers. C.eliminates the possibility of an abnormal gain. D.None of the above

Q: The settle price is the same as the: A.opening price. B.closing price. C.intraday high price. D.None of the above

Q: Corn futures are traded on the: A.New York Futures Exchange. B.Chicago Board of Trade. C.International Money Market of the CME. D.All of the above

Q: The interest rate futures market includes all of the following except: A.Treasury bonds, notes and bills. B.Eurodollars. C.GNMA certificates and bank CDs. D.All of the above are traded in the interest rate futures market

Q: Assume you have purchased a contract for 25,000 British pounds for $35,000. Your margin requirement is $2,000. If the value of a pound increases .01, what is your percentage profit? A.10.0% B.12.5% C.15.0% D.8.0% E.None of the above

Q: Which of the following is not a major category of financial futures? A.Commodity futures B.Currency futures C.Interest rate futures D.Stock index futures E.None of the above are major categories

Q: The financial futures market has evolved recently because of: A.volatility and risk in the foreign exchange markets. B.the volatility of interest rates. C.appeal to speculators due to low margin requirements. D.All of the above

Q: All of the following are characteristics of the cash market except: A.that the spot price represents the actual dollar value for the immediate transfer of a commodity. B.that there must be a transfer of the actual physical possession of the goods. C.that prices in the cash market are independent of prices in the futures market. D.All of the above are characteristics of the cash market

Q: The high-risk, speculative nature of commodities futures is due primarily to: A.the presence of hedgers in the markets. B.high leverage brought about by low margin requirements. C.Both A and B D.None of the above

Q: Assume you have just purchased a corn futures contract for 5,000 bushels at $3.24 per bushel. What will your percentage profit on the cash investment be if the price of corn rises $.10 per bushel in 4 months? Your initial margin requirement was $1,500. A.3.1% B.33% C.9.2% D.None of the above

Q: Which of the following statements about the margin requirements on commodities contracts is NOT true? A.Use of margin is less common than trading with actual cash dollars B.They are generally much lower than those on stock transactions C.It is merely a good faith payment against losses D.All of the above are true

Q: The New York Futures Exchange specializes in: A.transactions involving companies listed on AMEX and NYSE. B.American-produced commodities. C.financial futures. D.grains and livestock. E.More than one of the above

Q: In what city are the two largest commodities exchanges? A.Chicago B.New York C.Kansas City D.Minneapolis

Q: Financial futures consist of: A.gold and foreign currencies. B.foreign exchange and interest rate futures. C.corporate bonds and common stock. D.None of the above

Q: Which of the following is not one of the primary categories of commodities? A.Food and fiber B.Wood C.Gemstones D.All of the above are primary categories

Q: Hedging through futures contracts: A.increases risk of loss if prices fall. B.eliminates profit maximization potential. C.is considered to be speculative in nature. D.All of the above

Q: A(n) ______ contract is an agreement which provides for the delivery of a given amount of something at a given time in the future, at a given price. A.seasonal B.futures C.options D.None of the above

Q: The primary participants in the commodities market include both the speculators and the hedgers.

Q: An example of an interest rate futures contract would be a Treasury bill future.

Q: Cash prices and spot prices are very different in nature.

Q: Margin requirements on commodities are much higher than those on common stock transactions.

Q: The basic premise behind interest rate swaps is that one party is able to trade one type of risk exposure for another.

Q: There is no real difference in loss potential in the options and the commodities markets.

Q: A cross hedge uses the same form of security to hedge against potential rate changes, even though there may be different maturity dates in the securities.

Q: If a financial manager wishes to protect against an interest rate drop, he can go long in the futures market.

Q: If a corporate treasurer wants to hedge against interest rate increases on a new bond issue to be floated, he can sell short in the futures market.

Q: Treasury bond futures trade on the New York Stock Exchange.

Q: Treasury bonds are quoted in percent of par, taken to a 32nd of a percentage point.

Q: Prices in the cash market are somewhat dependent on prices in the futures market.

Q: The daily trading limits do not affect the efficiency of the market much because the commodity exchanges place very broad limitations on maximum daily price movements.

Q: Margin maintenance requirements usually run 5-10% of the initial margin.

Q: Commodity exchanges do not limit maximum daily price movements.

Q: The margin requirement, relative to size, is less for financial futures than traditional commodities.

Q: The high risk in commodities contracts is due primarily to the volatility of price movements.

Q: Initial margin requirements usually run 70-80% of the contract price.

Q: As in the stock and bond markets, interest is paid on a margined commodity contract.

Q: Commodity trading is based on the use of margin rather than actual cash dollars.

Q: The commodity exchanges are primarily regulated by the Federal Reserve.

Q: Speculators are not significant participants in the commodities markets.

Q: Hedging is the basic reason for the existence of the commodity exchanges.

Q: A hedger reduces risk of loss and enhances additional profit opportunities.

Q: For a hedge to work, the futures contract must continue until actual delivery takes place.

Q: To close a position, the seller/buyer of a contract would buy/sell a similar contract.

Q: Most commodity futures contracts are closed out before the actual transaction is to take place.

Q: The futures markets were originally set up to allow livestock producers to speculate in their positions in a given commodity.

Q: The use of financial futures will most likely increase as financial managers gain a greater understanding and appreciation of their uses.

Q: Cross-hedging refers to the practice of using one form of security to reduce risk on another form of security.

Q: Corporate financial managers use interest rate futures to reduce the risk of loss from a change in interest rates.

Q: Trading in financial futures is similar to trading in commodities except for considerably higher margin requirements for financial futures.

Q: Because of price movement limitations, the commodities market is not always in equilibrium.

Q: The margin requirement on commodities futures is generally the same as or lower than financial futures.

Q: The commodities exchanges are regulated primarily by the SEC.

Q: Commodities can usually be purchased with a very small margin requirement.

Q: A requirement of a futures contract is that the buyer takes possession on a given date.

Q: A stock is selling for $35. You buy an April 30 call option for 3.75 and short (write) an April 30 call option for 1.25. You have entered into a vertical spread. If the stock is $43 at expiration, what will be your profit or loss on the spread?

Q: Calculate the leverage from holding a call option with a closing price of $3 on February 18 and a closing price of $6.5 on April 6. The stock price on February 18 was $22 and closed at $27 on April 6.

Q: Assume that a stock is selling for $47 with options available at 20, 30, and 40 strike prices. The 40 call option is at 7 1/2. Calculate the following: (a) The intrinsic value of the $40 call (b) Is the call in-the-money? (c) The speculative premium on the 40 call option (d) The percent the speculative premium represents of the common stock price