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T est Ba n k fo r Der i vat i ves : Pri ncip les & Pra cti ce Ch ap ter 2: Futu res Mark et s Rangarajan K. S u n d aram S an jiv R. Das Ma r ch 1 , 2 0 15
1. The most widel y tr ade d futures ar e of the following t ype: (a) Equit y. (b) Inter est rate. (c) A gricultural. (d) C omm odit y. Ans w er b. 2. W hich of the foll owing f eatur es di sti nguish fut ures markets f rom forw ar ds markets? (a) St andardiz ati on of co ntracts. (b) The use o f mar gin a c counts to m anage risk. (c) Eas e in rev ersin g posi ti ons. (d) All of the abov e. Answ er d. 3. W hich of the foll owing t ypes of o rders do es no t i nvolve specif yin g a pri ce li mi t or trigge r price as part o f the order? (a) St op order. (b) Mark et -if-touch ed or der. (c) A fill -or-kil l l im it order. (d) A spre ad ord er. Answ er d. 4. A price ti ck is (a) The m ax im um amount b y which the p rice can move in a da y. (b) The mi nim um amount b y which the p rice can move.
(c) The bid -ask spr ead on the price. (d) The mi nim um amount of trading requir ed on the ex chan ge pe r trad e. Answ er b. 5. Futures cont racts a re more li kel y to be cash -se tt led when (a) The asset unde rl yin g t he contra ct i s too costl y t o deli ver ph ysicall y. (b) Ther e is no “unde rl yi ng� for the futu res contr a ct. (c) The re are mor e futur e s contracts i n noti onal va lue than the ph ysi cal st oc k of the underl yin g asset. (d) The maturit y dat e of t he futures is not t he last da y o f the mont h. Answ er a. (Note that c is also someti mes specified as a possi ble reason, but is not alwa ys valid.)
6. W hen a counterpa rt y to a futures co ntract f ail s to p erform und er the cont ract, (a) The futures ex change informs t he part y on the other side of the amount of loss the y will be ar. (b) The futur es ex chan ge bears the loss , (c) The futures ex change sues the fail ed count erpa rt y. (d) The futur es ex chan ge replac es the fail ed count erpart y with a solvent on e . Answ er b. 7. P lut onium is trading at a one - ye ar futu res pric e of $5,000 per gr am. A fu tures contract comp rises 100 grams. The init ial mar gin i s $100,000 and the maint enanc e margin i s $80,000. You a re short one futu res contr act. Ther e is a mar gin cal l whe n the price pe r gram o f plutoni um changes to (a) $4,750 (b) $4,900 (c) $5,100 (d) $5,250 Answ er d. 8. A “stack- and-roll ” str a teg y mak es profit s from t he “roll ” pa rt when (a) The m arket i s in b ack wardati on. (b) The ma rket i s in contango. (c) The re is a sh ar p f all in commodi t y prices. (d) The co rrel ati on betwe en long- and short -te rm f utures prices is less than 0.5. Answ er a. 9. An investor enters int o a long posi ti on in 10 gol d futures contr acts at a fu tures price of $1000/oz and closes out t he posi ti on at a price of $1020/oz . If on e gold futures contract i s for 50 oun ces, what are th e investor ’s gains or los ses? (a) $100 (b) $1,000 (c) $5,000 (d) $10,000 Answ er d. 10. Igno ring convenien ce yields, t he theo reti cal fut ures price for a comm odit y with a posi ti ve cost of carr y sho uld t ypicall y ex hibi t (a) Back ward ati on. (b) C ontan go. (c) Eit her b ackw ardati on or contan go dep ending o n the deli ver y mont h. (d) Eit her ba ckwa rdati on or contan go dep ending o n the init ial level of the spot price. Answ er b 11. For a futures cont ract on an asset to be suc cess ful compared to t he alt er nati ve of forwa rd contra cts, whi ch of the foll owing featu res would help? (a) The most app ropriate standardiz ed grade for th e contra ct i s di fficult t o identif y. (b) C ounterpa rt y credit ri sk i s hi gh.
(c) Bid -ask spr eads i n the spot market are hi gh. (d) The unde rl yin g spot a sset is difficult t o short. Answ er b. 12. March wh at futures a re tradin g at $4.20 a bushel and Ma y wh eat futures are trading at $4.35 a bushel. You ex pect t he spread b etween Ma y and Ma rch f utures prices to wi den. To spe c ulate on thi s vi ew, you w ould (a) Go lon g Ma rch futur e s and short Ma y futures. (b) Go lon g Ma y futur es and short March futures. (c)GolongMa y futures. (d) Go lon g Mar ch future s. Answ er b. 13. S eptember corn futur es a re curr entl y tr adin g at $3.80 a bushel whil e the spot price of corn is $ 3.65 a bushel, so t he “basis � (the future s price mi nus t he spot price) is $0.15 a bushel. If you ex pect t he basis to we aken (i.e., to fall ) si gnificantl y in t he nex t few da ys, you can s peculate on your vi ew b y (a) Goin g lon g the Septe mber futures contract. (b) Goin g long spot corn. (c) Goin g lon g spot corn and short S eptember futu res. (d)GoinglongSept embe r futures and sho rt spot c orn. Answ er c. 14. You go short oil 10 f utures contra c ts on NYM EX when the futu res pric e of oil i s $79 a barr el and close ou t your posit ion t hree d a ys later at a futures pric e of $83 a barrel. On e futur es contr act i s for 1,000 ba rrels. Ignorin g int er est on the mar gin account, t he futu res tradi ng has result ed in a (a) G ain of $790,000. (b) Loss of $4,000 (c) G ain of $4,000 (d) Loss of $40,000 Answ er d. 15. The che apest -to -d eli ver option (a) Hu rts the holder of th e long posi ti on in t he fut ures contra ct. (b) Improves th e quali t y of the posit ion hedged b y the futu res. (c) Mak es it eas y to pric e the futures contr act. (d) Makes it e asier fo r market pl a ye rs to im plement sho rt squeez es. Answ er a. 16. The level of ma r gini ng in a futu res contr act t ak es as an im portant i nput (a) The t radin g volum e t hat underli es the contr act . (b) The c redit quali t y of counterpa rties tradin g in the futures mark et. (c) The vol ati li t y of the a sset underl yin g the future s contract.
(d) The diff er ence b etwe en the init ial and maintenance ma r gin i n the future s. Answ er c.
17. In the absen ce of arbi trage, the futur es pric e at maturit y shoul d equal (a) The p rice at i ncepti on plus int erest on the mar gin account for th e period of the contract. (b) The spot pric e of the underl yin g asset at t hat p oint . (c) The p rice at i ncepti on plus the storage cost for the asset over the contra c t period. (d) The pri ce of the und e rl yin g ass et m inus a conv enience yi eld. Answ er b. 18. A calend ar spr ead fut ures posi ti on comprises (a) A lon g posi ti on in a f utures contra ct of one ma turit y and a sho rt posit ion i n another futur es contra ct of a diffe rent m aturit y. (b) A contr act on t he diff erenc e betw een two diff e rent -maturit y futures p ric es. (c) A po rtfoli o of long fu tures contra cts of diffe re nt m aturiti es. (d) A portfolio of futu res contracts s pannin g mor e than one yea r. Answ er a. 19. If the mark et i s in b ackward ati on (a) Spot prices are less th an forw ard pric es. (b) Futur es pric es ar e les s than forwa rd pric es. (c) Spot prices are less th an futures pri ces. (d) None o f the abov e. Answ er d. 20. W hen the futures -spo t basis weakens (a) The di ffe renc e betw e en futures and spot prices drops. (b) The co rrel ati on betwe en chan ges in futures and spot prices drops. (c) A h ed ger ex periences more risk. (d) A hed ger loses mon e y on the h ed ge. Answ er a.
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