Q&A Hero

Q: 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.

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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

Q: The Country Farm and the Cookie 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

Q: You are the chief financial officer (CFO) of a major textile importer. Identify one of the key risks your company faces and explain how you can hedge this risk using futures.

Q: You are a wheat farmer with a crop that will be ready to harvest in approximately three months. How can you hedge this crop and what are the advantages and disadvantages of doing so?

Q: Explain why some futures contracts are settled in cash while others are not. Provide an example of each.

Q: Jackie manages a $620 million bond portfolio which has a duration of 4.05 years. She wants to hedge the portfolio with Treasury note futures that have a duration of 4.53 years and a futures price of 112. U.S. Treasury notes futures contracts are based on a par value of $100,000 and quoted as a percentage of par. How many contracts does she need to sell to complete this hedge?A. 4,667 contractsB. 4,868 contractsC. 4,949 contractsD. 5,183 contractsE. 5,216 contracts

Q: You manage a $265 million bond portfolio which has a duration of 7.1 years. You want to hedge this portfolio with Treasury note futures that have a duration of 7.6 years and a futures price of 116. U.S. Treasury notes futures contracts are based on a par value of $100,000 and quoted as a percentage of par. How many contracts do you need to sell to complete this hedge?A. 1,371 contractsB. 1,400 contractsC. 1,550 contractsD. 1,867 contractsE. 2,134 contracts

Q: The duration of a 3-month Treasury futures contract is 3.46 years. What is the duration of the underlying Treasury note? A. 2.98 years B. 3.11 years C. 3.21 years D. 3.36 years E. 3.48 years

Q: You own a 6-month futures contract on U.S. Treasury notes. The underlying notes have a duration of 3.87 years. What is the duration of the futures contract? A. 3.37 years B. 3.67 years C. 3.87 years D. 4.12 years E. 4.37 years

Q: You own a portfolio which is valued at $12.5 million and which has a beta of 1.42. You would like to create a riskless portfolio by hedging using S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts do you need to acquire if the current S&P 500 index is 1420? A. short 68 contracts B. short 50 contracts C. long 41 contracts D. long 57 contracts E. short 63 contracts

Q: You own a portfolio which is valued at $6.4 million and which has a beta of 1.27. You would like to create a riskless portfolio by hedging with S&P 500 futures contracts. The contract size is $250 times the index level. How many futures contracts are needed if the current S&P 500 index is 1406?A. short 16 contractsB. short 18 contractsC. short 23 contractsD. long 18 contractsE. long 23 contracts

Q: Julie purchased four (4) S&P 500 index futures at a price of 1392. The contract size is $250 times the index value. The futures are maturing today at a price of 1387.50. What is the amount of her profit or loss? A. -$3,125 B. -$4,500 C. -$5,625 D. -$13,575 E. -$15,625

Q: You purchased 3 DJIA index futures at a price of 13,200. The contract size is $10 times the level of the index. The futures are maturing today when the price is 12,758. What is the amount of your profit or loss? A. -$1,326 B. -$1,408 C. -$13,260 D. -$14,080 E. -$15,260

Q: A stock is currently selling for $38.50 a share and has a dividend yield of 1.75 percent. The risk-free rate is 3.5 percent. What is the 2-month futures price on this stock? A. $38.27 B. $38.41 C. $38.56 D. $38.61 E. $38.70

Q: A stock is currently selling for $28 a share and has a dividend yield of 3.2 percent. The risk-free rate is 2.5 percent. What is the 6-month futures price on this stock? A. $27.66 B. $27.90 C. $28.02 D. $28.10 E. $28.35

Q: The 6-month futures price on a non-dividend-paying stock is $36.20. The risk-free rate is 2.75 percent and the market rate is 9.60 percent. What is the spot rate for this stock if spot-futures parity exists? A. $35.43 B. $35.71 C. $36.30 D. $36.70 E. $36.99

Q: The spot rate on a non-dividend-paying stock is $42.30. The risk-free rate is 3.75 percent and the market rate is 11.50 percent. What is the three-month futures rate if spot-futures parity exists? A. $42.14 B. $42.54 C. $42.69 D. $42.82 E. $43.89

Q: The spot rate on a non-dividend-paying stock is $15.70. The risk-free rate is 3.15 percent and the market rate is 10.75 percent. What is the three-month futures rate if spot-futures parity exists? A. $15.48 B. $15.82 C. $16.01 D. $16.13 E. $16.24

Q: The 4-month futures price on a non-dividend-paying stock is $23.60. The risk-free rate is 2.25 percent and the market rate is 10.45 percent. What is the spot rate for this stock if spot-futures parity exists? A. $23.39 B. $23.43 C. $23.51 D. $23.64 E. $23.78

Q: The spot price for a non-dividend-paying stock is $24. The risk-free rate is 2.8 percent and the market rate is 10.6 percent. What is the 6-month futures price of this stock if spot-futures parity exists? A. $24.33 B. $24.41 C. $24.54 D. $24.59 E. $24.70

Q: The spot price on orange juice is 121.55 cents per pound. The futures price is 124.30. The basis is _____ and the market is a(n) _____ market. A. -2.75; carrying-charge B. -2.75; inverted C. 1.75; inverted D. 2.75; carrying-charge E. 2.75; inverted

Q: The spot price on cocoa is $2,880 a ton. The futures price is $2,760 a ton. The basis is _____ and the market is a(n) _____ market. A. -120; carrying-charge B. -120; inverted C. 20; inverted D. 120; carrying-charge E. 120; inverted

Q: You purchased two futures contracts on soybeans at a price quote of 1344-²0. The initial margin requirement is $4,750 per contract and the maintenance margin is $3,500 per contract. The contract quantity is 5,000 bushels and the price quote is in cents per bushel. What is the lowest the price quote can go before you receive a margin call?A. 1314-²0B. 1315-²0C. 1319-²0D. 1322-²0E. 1325-²0

Q: Your broker requires an initial margin of $4,500 per futures contract on soybeans and a maintenance margin of $3,000 per contract. Soybean futures contracts are based on 5,000 bushels and quoted in cents per bushel. Yesterday, you bought 5 soybean futures contracts at the closing settlement price of 1372. Today, the settlement quote is 1340. All margin calls restore margin levels to their initial margin level. Will you receive a margin call and if so, for what amount? A. no margin call B. call for $1,425 C. call for $2,487 D. call for $4,650 E. call for $8,000

Q: Your broker requires an initial margin of $6,075 per futures contract on wheat and a maintenance margin of $4,500 per contract. Wheat futures contracts are based on 5,000 bushels and quoted in cents per bushel. You sold one wheat futures contract yesterday at the closing settlement price quote of 786. Today, the settlement quote is 808. Will you receive a margin call and if so, for what amount? All margin calls restore the margin level to its initial level. A. no margin call B. call for $475 C. call for $1,100 D. call for $4,750 E. call for $11,000

Q: Your broker requires an initial margin of $1,500 and a maintenance margin of $1,000 on Treasury note futures. Treasury note futures contracts are based on a $100,000 par value and quoted in points and one-half of 1/32 of a point. You own one Treasury futures contract that had a closing settlement quote of 113"²245 yesterday. Today, the settlement quote is 112"²265. Your margin balance at yesterday's close was $1,150. All margin calls restore margin levels to their initial level. Will you receive a margin call based on today's settlement quote and if so, for what amount? A. no margin call B. call for $1,037.50 C. call for $937.50 D. call for $1,100 E. call for $1,287.50

Q: Will purchased 3 futures contracts on corn. The contract size is 5,000 bushels and the price is quoted in cents per bushel. Assume the initial margin requirement is 4.5 percent of the contract value. What is the amount of the initial margin if the futures quote is 624? A. $140.40 B. $421.20 C. $1,404 D. $2,808 E. $4,212

Q: The Shirt Factory purchased 10 futures contracts on cotton at a quoted price of 71.14 as a hedge against its inventory needs. At the time it actually needed the cotton, the spot price was 71.56. Cotton futures are based on 50,000 pounds and quoted in cents per pound. How much did the Shirt Factory save by hedging cotton? A. $90 B. $560 C. $1,280 D. $2,100 E. $3,000

Q: Southern Fields has an inventory of 838,000 pounds of sugar. The firm placed a partial hedge on this inventory by selling 6 futures contracts at 9.56. The futures contracts are based on 112,000 pounds and quoted in cents per pound. At the time the firm sold the sugar, the spot rate was 9.63. How much profit did the firm lose because of the hedge? A. $470.40 B. $586.60 C. $688.20 D. $4,704.00 E. $5,866.00

Q: Southern Fuel has an inventory of 756,000 gallons of heating oil. The futures contracts on heating oil are based on 42,000 gallons. If the firm wishes to fully hedge its inventory, it should take which one of the following positions in heating oil futures contracts? A. long on 16 B. long on 17 C. short on 18 D. short on 19 E. short on 20

Q: You own six November crude oil futures contracts. What is the settlement value of those contracts at the end of this trading day?A. $736,200B. $736,260C. $746,400D. $746,500E. $747,000

Q: What is the amount of the difference between the highest and the lowest value of a November heating oil contract on this day?A. $79.10B. $83.70C. $106.90D. $118.00E. $122.40

Q: What is the difference in the value of one November heating oil contract between this day's opening and closing prices?A. $59.40B. $249.48C. $2,494.80D. $2,970.00E. $5,940.00

Q: What is the difference between this day's high and closing prices for one 10-year Treasury note futures contract?Treasury note, $100,000, pts and one-half of 1/32 of a pointA. -$435.00B. -$550.00C. -$800.00D. -$971.88E. -$1,093.75

Q: What is the price difference on a $100,000, 10-year Treasury note futures contract between the highest and lowest prices at which the bond traded on this day?Treasury note, $100,000, pts and one-half of 1/32 of a pointA. $106.50B. $1,065.00C. $1,203.13D. $10,650.00E. $12,031.30

Q: What is the absolute price difference on a $100,000, 5-year Treasury note futures contract between the high and low prices?Treasury note, $100,000, pts and one-quarter of 1/32 of a pointA. $428.13B. $512.08C. $625.33D. $787.50E. $811.33

Q: By how much did one September futures contract on wheat vary during today's trading?A. $.115B. $1.15C. $11.50D. $115.00E. $575.00

Q: You purchased four September corn futures contracts at what turned out to be the lowest price of the day and sold those contracts at today's close. What is your total profit or loss on this investment?A. -$287.50B. -$1,100C. -$2,875D. $1,100E. $14,250

Q: You purchased five September wheat futures contracts at the open today and sold those contracts at the close. What is your total profit or loss on these contracts?A. -$750,000B. -$75,000C. -$7,500D. -$750E. -$75

Q: What is the closing value of one September futures contract on wheat?A. $8.110B. $811.00C. $40,550D. $405,500E. $4,055,000

Q: The duration of an interest rate futures contract is equal to the summation of which of the following? I. duration of the instrument most likely to be used as a cross-hedge II. duration of the underlying instrument III. initial length of time of the futures contract IV. time remaining on the futures contract A. II only B. I and II only C. I and III only D. II and III only E. II and IV only

Q: Which one of the following futures contracts is generally used to hedge a bond portfolio? A. S&P 500 index B. Eurodollar C. U.S. Treasury notes D. gold E. LIBOR rates

Q: A fully-hedged stock portfolio will have a beta equal to which one of the following? A. an average asset B. U.S. Treasury bill C. S&P 500 D. the beta of the stock portfolio exclusive of the hedge E. one-half of the beta of the stock portfolio exclusive of the hedge

Q: You currently own a stock portfolio that has a beta of 1.2. If you fully hedge your stock portfolio you will effectively change the portfolio's beta to which one of the following? A. 0 B. 1 C. 1/1.2 D. 1.2 E. 1.22

Q: Which of the following are needed to determine the number of stock index futures required to cross-hedge a stock portfolio? I. standard deviation of the stock portfolio II. beta of the stock portfolio III. value of the index futures contract IV. value of the stock portfolio A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, III, and IV only

Q: You own a diversified investment portfolio and wish to hedge it against market declines. Which one of the following would be best suited as a cross-hedge for this purpose? A. going long on Treasury bonds in the spot market B. going long on DJIA futures C. going short on S&P 500 index futures D. going long on an index fund E. going short on Eurodollar futures

Q: How is a futures contract on the S&P 500 settled? A. cash B. shares of stock selected by the contract buyer C. shares of stock selected by the contract seller D. shares of stock equivalent to those in the index E. delivery of a Treasury bill equal in value to the settlement amount

Q: You are trying to value a 3-month futures contract on a stock. The market rate of return is 11.2 percent, the risk-free rate is 3.8 percent, and the dividend yield on the stock is 2.6 percent. The stock is currently selling for $33 a share. What is the value of "T" as used in the formula for computing the future stock price (FT = S(1 - r)^T)? A. .112 B. .250 C. .026 D. .038 E. .064

Q: If spot-futures parity exists for an index future then the future price must equal the:A. spot price.B. present value of the spot price at the risk-free rate.C. present value of the spot price at the market rate.D. future value of the spot price at the risk-free rate.E. future value of the spot price at the market rate.

Q: Which one of the following statements is correct concerning an inverted futures market?A. The basis will be negative.B. The basis will equal zero.C. The cash price will equal the futures price.D. The cash price will exceed the futures price.E. Arbitrage opportunities must exist.

Q: Which of the following are reasons why commodities may have a negative basis? I. storage costs II. seasonal price fluctuations III. transportation costs IV. interest costs A. I only B. IV only C. I and III only D. I, II, and III only E. I, II, III, and IV

Q: Which one of the following statements is correct? A. Futures contracts must be held to maturity. B. Futures contracts can be closed out only by contract buyers. C. Futures contracts can be closed out, but only during the week prior to maturity. D. You cannot avoid accepting delivery once you purchase a futures contract. E. Futures contracts can be closed out by entering a reverse trade.

Q: A conservative investor has a well-diversified portfolio but is still concerned about two things. First, he is concerned about the downside risk and secondly, he is concerned whether he is earning a sufficient rate of return to compensate for the total risk he is assuming. How could you quantify these concerns for this investor?