Q&A Hero

Q: Suppose that the risk-free rates in the United States and in Japan are 5.25% and 4.5%, respectively. The spot exchange rate between the dollar and the yen is $0.008828/yen. What should the futures price of the yen for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs? A. $0.009999/yen B. $0.009981/yen C. $0.008981/yen D. $0.008891/yen

Q: Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.80/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs? A. $1.62/BP B. $1.72/BP C. $1.82/BP D. $1.92/BP

Q: Suppose that the risk-free rates in the United States and in the United Kingdom are 4% and 6%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs? A. $1.60/BP B. $1.70/BP C. $1.66/BP D. $1.63/BP E. $1.57/BP

Q: Foreign exchange futures markets are __________, and the foreign exchange forward markets are A. informal; formal B. formal; formal C. formal; informal D. informal; informal E. organized; unorganized

Q: If a stock index futures contract is overpriced, you would exploit this situation by A. selling both the stock index futures and the stocks in the index. B. selling the stock index futures and simultaneously buying the stocks in the index. C. buying both the stock index futures and the stocks in the index. D. buying the stock index futures and selling the stocks in the index. E. None of the options are correct.

Q: If you took a short position in two S&P 500 futures contracts at a price of 1,510 and closed the position when the index futures was 1,492, you incurred A. a gain of $9,000. B. a loss of $9,000. C. a loss of $18,000. D. a gain of $18,000. E. None of the options are correct.

Q: If you purchased one S&P 500 Index futures contract at a price of 1,550 and closed your position when the index futures was 1,547, you incurred A. a loss of $1,500. B. a gain of $1,500. C. a loss of $750. D. a gain of $750. E. None of the options are correct.

Q: Which one of the following stock index futures has a multiplier of 25 euros times the index? A. FTSE 100 B. Hang Seng C. Nikkei D. DAX-30 E. FTSE 100 and Hang Seng

Q: Which one of the following stock index futures has a multiplier of 50 Hong Kong dollars times the index? A. FTSE 100 B. Hang Seng C. Nikkei D. DAX-30 E. FTSE 100 and Hang Seng

Q: Which one of the following stock index futures has a multiplier of 10 euros times the index? A. CAC 40 B. Hang Seng C. Nikkei D. DAX-30 E. CAC 40 and Hang Seng

Q: Which one of the following stock index futures has a multiplier of $100 times the index value? A. CAC 40 B. S&P 500 Index C. Nikkei D. DAX-30 E. NASDAQ 100

Q: Which one of the following stock index futures has a multiplier of $50 times the index value? A. Mini-Russell 2000 B. FTSE 100 C. S&P Mid-Cap D. DAX-30 E. Russell 2000 and S&P Mid-Cap

Q: Which one of the following stock index futures has a multiplier of $50 times the index value? A. Russell 2000 B. FTSE 100 C. Nikkei D. NASDAQ 100 E. Mini-Russell 2000 and NASDAQ 100

Q: Which one of the following stock index futures has a multiplier of $10 times the index value? A. Russell 2000 B. Dow Jones Industrial Average C. Nikkei D. DAX-30 E. NASDAQ 100

Q: Which one of the following stock index futures has a multiplier of $50 times the index value? A. Russell 2000 B. S&P 500 (E-mini) C. Nikkei D. DAX-30 E. NASDAQ 100

Q: You sold one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs. A. $3.12 profit B. $31.20 profit C. $3.12 loss D. $31.20 loss E. None of the options are correct.

Q: You purchased one oil future contract at $70 per barrel. What would be your profit (loss) at maturity if the oil spot price at that time is $73.12 per barrel? Assume the contract size is 1,000 barrels and there are no transactions costs. A. $3.12 profit B. $31.20 profit C. $3.12 loss D. $31.20 loss E. None of the options are correct.

Q: 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 a A. $125 loss. B. $125 profit. C. $1,060.50 loss. D. $1,062.50 profit. E. None of the options are correct.

Q: If you determine that the DAX-30 Index futures is underpriced 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. C. selling all the stocks in the DAX-30 and buying call options on the DAX-30 Index. D. buying DAX-30 Index futures and selling all the stocks in the DAX-30. E. None of the options are correct.

Q: If you determine that the DAX-30 Index futures is overpriced 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. C. selling all the stocks in the DAX-30 and buying call options on the DAX-30 Index. D. selling DAX-30 Index futures and buying all the stocks in the DAX-30.

Q: Which one of the following statements regarding "basis" is true? I) The basis is the difference between the futures price and the spot price. II) The basis risk is borne by the hedger. III) A short hedger suffers losses when the basis decreases. IV) The basis increases when the futures price increases by more than the spot price. A. I only B. II only C. III only D. IV only E. I, II, and IV.

Q: A decrease in the basis will __________ a long hedger and __________ a short hedger. A. hurt; benefit B. hurt; hurt C. benefit; hurt D. benefit; benefit E. benefit; have no effect upon

Q: To hedge a short position in Treasury bonds, an investor would most likely A. ignore interest rate futures. B. buy S&P futures. C. buy interest rate futures. D. sell Treasury bonds in the spot market.

Q: An investor with a short position in Treasury notes futures will profit if A. interest rates decline. B. interest rates increase. C. the prices of Treasury notes increase. D. the price of the long bond increases. E. None of the options are correct.

Q: To exploit an expected decrease in interest rates, an investor would most likely A. buy Treasury bond futures. B. take a long position in wheat futures. C. buy S&P 500 Index futures. D. take a short position in Treasury bond futures. E. None of the options are correct.

Q: Financial futures contracts are actively traded on which of the following indices? A. The All ordinary index B. The DAX 30 Index C. The CAC 40 Index D. The Toronto 35 Index E. All of the options are correct.

Q: Financial futures contracts are actively traded on the following indices except A. the All ordinary index. B. the DAX 30 Index. C. the CAC 40 Index. D. the Toronto 35 Index. E. All of the options are correct.

Q: You hold one long oil futures contract that expires in April. To close your position in oil futures before the delivery date, you must A. buy one May oil futures contract. B. buy two April oil futures contracts. C. sell one April oil futures contract. D. sell one May oil futures contract. E. None of the options are correct.

Q: A trader who has a __________ position in oil futures believes the price of oil will __________ in the future. A. short; increase B. long; increase C. short; stay the same D. long; stay the same

Q: If a trader holding a long position in oil futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is A. the offsetting short trader. B. the oil producer. C. the clearinghouse. D. the broker. E. the commodities dealer.

Q: 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? A. Nothingthe seller understands that these things happen. B. You would wake up to find the pork bellies on your front lawn. C. Your broker would send you a nasty letter. D. You would be notified that you owe the holder of the short position a certain amount of cash. E. You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies.

Q: Who guarantees that a futures contract will be fulfilled? A. The buyer B. The seller C. The broker D. The clearinghouse E. Nobody

Q: Some of the newer futures contracts include I) fashion futures. II) weather futures. III) electricity futures. IV) entertainment futures. A. I and II B. II and III C. III and IV D. I, II, and III E. I, III, and IV

Q: Which of the following is false about profits from futures contracts? I) 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. II) It is possible for both the holder of the long position and the holder of the short position to earn a profit. III) The clearinghouse makes most of the profit. IV) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses. A. I only B. II only C. III only D. IV only E. I, II, and III

Q: 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. B. It is possible for both the holder of the long position and the holder of the short position to earn a profit. C. The clearinghouse makes most of the profit. D. The amount that the holder of the long position gains must equal the amount that the holder of the short position loses. E. Holders of short positions can recognize profits by making delivery early.

Q: With regard to futures contracts, what does the word "margin" mean? A. It is the amount of the money borrowed from the broker when you buy the contract. B. It is the maximum percentage that the price of the contract can change before it is marked to market. C. It is the maximum percentage that the price of the underlying asset can change before it is marked to market. D. It is a good-faith deposit made at the time of the contract's purchase or sale. E. It is the amount by which the contract is marked to market.

Q: 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 A. II and IV B. I, III, and V C. I and V D. I, IV, and V E. I, II, III, IV, and V

Q: 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 A. I, II, and IV B. I, III, and V C. I and V D. I, IV, and V E. I, II, III, IV, and V

Q: 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? A. $1,227.00 B. $1,070.00 C. $993.40 D. $995.09 E. $1,000.00

Q: Given a stock index with a value of $1,100, an anticipated dividend of $27, and a risk-free rate of 3%, what should be the value of one futures contract on the index? A. $943.40 B. $970.00 C. $913.40 D. $1,106.00 E. $1,000.00

Q: 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? A. $1137.00 B. $1070.00 C. $993.40 D. $995.09 E. $1000.00

Q: 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? A. $943.40 B. $970.00 C. $1,030.00 D. $915.09 E. $1,000.00

Q: Speculators may use futures markets rather than spot markets because A. transaction costs are lower in futures markets. B. futures markets provide leverage. C. spot markets are less efficient. D. futures markets are less efficient. E. transaction costs are lower in futures markets, and futures markets provide leverage.

Q: Taxation of futures trading gains and losses A. is based on cumulative year-end profits or losses. B. occurs based on the date contracts are sold or closed. C. can be timed to offset stock-portfolio gains and losses. D. is based on the contract holding period. E. None of the options are correct.

Q: Futures contracts are regulated by A. the Commodities Futures Trading Corporation. B. the Chicago Board of Trade. C. the Chicago Mercantile Exchange. D. the Federal Reserve. E. the Securities and Exchange Commission.

Q: The process of marking to market A. posts gains or losses to each account daily. B. may result in margin calls. C. impacts only long positions. D. posts gains or losses to each account daily and may result in margin calls. E. All of the options are correct.

Q: Open interest includes A. only contracts with a specified delivery date. B. the sum of short and long positions. C. the sum of short, long, and clearinghouse positions. D. the sum of long or short positions and clearinghouse positions. E. only long or short positions but not both.

Q: If a trader holding a long position in corn futures fails to meet the obligations of a futures contract, the party that is hurt by the failure is A. the offsetting short trader. B. the corn farmer. C. the clearinghouse. D. the broker. E. the commodities dealer.

Q: 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? A. $1,343.40 B. $62.00 C. $1,418.44 D. $1,524.25

Q: The establishment of a futures market in a commodity should not have a major impact on spot prices because A. the futures market is small relative to the spot market. B. the futures market is illiquid. C. futures are a zero-sum game. D. the futures market is large relative to the spot market. E. most futures contracts do not take delivery.

Q: Delivery of stock index futures A. is never made. B. is made by a cash settlement based on the index value. C. requires delivery of 1 share of each stock in the index. D. is made by delivering 100 shares of each stock in the index. E. is made by delivering a value-weighted basket of stocks.

Q: Contango A. holds that the natural hedgers are the purchasers of a commodity, not the suppliers. B. is a hypothesis polar to backwardation. C. holds that FO must be less than (PT). D. holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and holds that FO must be less than (PT). E. holds that the natural hedgers are the purchasers of a commodity, not the suppliers, and is a hypothesis polar to backwardation.

Q: Normal backwardation A. maintains that, for most commodities, there are natural hedgers who desire to shed risk. B. maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price. C. assumes that risk premiums in the futures markets are based on systematic risk. D. maintains that, for most commodities, there are natural hedgers who desire to shed risk, and that speculators will enter the long side of the contract only if the futures price is below the expected spot price. E. maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk.

Q: The expectations hypothesis of futures pricing A. is the simplest theory of futures pricing. B. states that the futures price equals the expected value of the future spot price of the asset. C. is not a zero-sum game. D. is the simplest theory of futures pricing and states that the futures price equals the expected value of the future spot price of the asset. E. is the simplest theory of futures pricing and is not a zero-sum game.

Q: On April 1, you sold one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)? A. $1,550 loss B. $15,550 loss C. $15,550 profit D. $1,550 profit

Q: On April 1, you bought one S&P 500 Index futures contract at a futures price of 1,550. If, on June 15, the futures price was 1,612, what would be your profit (loss) if you closed your position (without considering transactions costs)? A. $1,550 loss B. $15,550 loss C. $15,550 profit D. $1,550 profit

Q: You bought one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $65 profit B. $650 profit C. $650 loss D. $65 loss

Q: You sold one soybean future contract at $5.13 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.26 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $65 profit B. $650 profit C. $650 loss D. $65 loss

Q: On January 1, you bought one April S&P 500 index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)? A. $2,500 loss B. $10 loss C. $2,500 profit D. $10 profit

Q: On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,420. If, on February 1, the April futures price was 1,430, what would be your profit (loss) if you closed your position (without considering transactions costs)? A. $2,500 loss B. $10 loss C. $2,500 profit D. $10 profit

Q: You purchased one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $30 profit B. $300 profit C. $300 loss D. $30 loss

Q: You sold one wheat future contract at $3.04 per bushel. What would be your profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $30 profit B. $300 profit C. $300 loss D. $30 loss

Q: You sold one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $950 profit B. $95 profit C. $950 loss D. $95 loss E. None of the options are correct.

Q: You purchased one corn future contract at $2.29 per bushel. What would be your profit (loss) at maturity if the corn spot price at that time were $2.10 per bushel? Assume the contract size is 5,000 bushels and there are no transactions costs. A. $950 profit B. $95 profit C. $950 loss D. $95 loss E. None of the options are correct.

Q: You sold one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs. A. $5.50 profit B. $5,500 profit C. $5.50 loss D. $5,500 loss E. None of the options are correct.

Q: You purchased one silver future contract at $3 per ounce. What would be your profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the contract size is 5,000 ounces and there are no transactions costs. A. $5.50 profit B. $5,500 profit C. $5.50 loss D. $5,500 loss

Q: On January 1, the listed spot and futures prices of a Treasury bond were 93.8 and 93.13. You purchased $100,000 par value Treasury bonds and sold one Treasury bond futures contract. One month later, the listed spot price and futures prices were 94 and 94.09, respectively. If you were to liquidate your position, your profits would be a A. $125 loss. B. $125 profit. C. $12.50 loss. D. $1,250 loss. E. None of the options are correct.

Q: If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index, you could make an arbitrage profit by A. buying all the stocks in the S&P 500 and selling put options on the S&P 500 Index. B. selling short all the stocks in the S&P 500 and buying S&P Index futures. C. selling all the stocks in the S&P 500 and buying call options on the S&P 500 Index. D. selling S&P 500 Index futures and buying all the stocks in the S&P 500. E. None of the options are correct.

Q: Which one of the following statements regarding "basis" is true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price. E. The basis is the difference between the futures price and the spot price, basis risk is borne by the hedger, and basis increases when the futures price increases by more than the spot price.

Q: Which one of the following statements regarding "basis" is not true? A. The basis is the difference between the futures price and the spot price. B. The basis risk is borne by the hedger. C. A short hedger suffers losses when the basis decreases. D. The basis increases when the futures price increases by more than the spot price.

Q: An increase in the basis will __________ a long hedger and __________ a short hedger. A. hurt; benefit B. hurt; hurt C. benefit; hurt D. benefit; benefit E. benefit; have no effect upon

Q: To hedge a long position in Treasury bonds, an investor would most likely A. buy interest rate futures. B. sell S&P futures. C. sell interest rate futures. D. buy Treasury bonds in the spot market. E. None of the options are correct.

Q: An investor with a long position in Treasury notes futures will profit if A. interest rates decline. B. interest rates increase. C. the prices of Treasury notes decrease. D. the price of the S&P 500 Index increases. E. None of the options are correct.

Q: To exploit an expected increase in interest rates, an investor would most likely A. sell Treasury bond futures. B. take a long position in wheat futures. C. buy S&P 500 Index futures. D. take a long position in Treasury bond futures. E. None of the options are correct.

Q: Interest rate futures contracts are actively traded on the A. eurodollars. B. euroyen. C. sterling. D. eurodollars and euroyen. E. All of the options are correct.

Q: Metals and energy currency futures contracts are actively traded on A. copper. B. platinum. C. weather. D. copper and platinum. E. All of the options are correct.

Q: Metals and energy currency futures contracts are actively traded on A. gold. B. silver. C. propane. D. gold and silver. E. All of the options are correct.

Q: Foreign currency futures contracts are actively traded on the A. Japanese yen. B. Australian dollar. C. Brazilian real. D. Japanese yen and Australian dollar. E. All of the options are correct.

Q: Foreign currency futures contracts are actively traded on the A. euro. B. British pound. C. drachma. D. euro and British pound. E. All of the options are correct.

Q: Agricultural futures contracts are actively traded on A. rice. B. sugar. C. canola. D. rice and sugar. E. All of the options are correct.