CHAPTER 8: STRUCTURE OF FORWARD AND FUTURES MARKETS

MULTIPLE CHOICE TEST QUESTIONS

1.

Which of the following is a false statement related to options on futures?

a.
options on futures are also known as futures options
b.
options on futures are also known as options on the underlying instrument
c.
options on futures is a derivative on a derivative
d.
options on futures are also known as commodity options
e.
all of the above statements are true related to options on futures

2.

Which of the following contract terms is not set by the futures exchange?
a.
the dates on which delivery can occur
b.
the expiration months
c.
the deliverable commodities
d.
the size of the contract
e.
the price

3.

Which of the following organizations has the ultimate regulatory authority in the futures industry?
a.
National Futures Association
b.
Commodity Futures Trading Commission
c.
Commodity Exchange Authority
d.
Securities and Exchange Commission
e.
none of the above

4.

Margin in a futures transaction differs from margin in a stock transaction because

a.
stock transactions are much smaller
b.
delivery occurs immediately in a stock transaction
c.
no money is borrowed in a futures transaction
d.
futures are much more volatile
e.
none of the above

5.

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $4,000, how much
must you deposit?
a.
$6,000
b.
$1,500
c.
$9,000
d.
nothing
e.
none of the above

6.

If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is $3,100, how much
must you deposit?
a.
$1,500
b.
$400
c.
$1,900
d.
0
e.
none of the above

7.

The number of long or short futures positions outstanding is called the

a.
reportable position
b.
minimum volume
c.
open interest
d.
spread position
e.
none of the above

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8.

Most futures contracts are closed by

a.
delivery
b.
offset
c.
exercise
d.
default
e. none of the above

9.

Most forward contracts are closed by

a.
delivery
b.
offset
c.
exercise
d.
default
e.
none of the above

10.

Which of the following is not a forward contract?

a.
a long-term employment contract at a fixed salary
b.
an automobile lease non-cancelable for three years
c.
a rain check
d.
a signed contract to buy a house in six months
e.
none of the above

11.

Where did the U.S. futures market originate?

a.
Chicago
b.
Kansas
c.
New York
d.
Minneapolis
e.
none of the above

12.

Which of the following is a trader on the floor of the futures exchange?

a.
introducing broker
b.
commission broker
c.
commodity trading advisor
d.
commodity pool operator
e.
none of the above

13.

Variation margin is which of the following?

a.
the difference in margin between hedger and speculator
b.
margin differences according to trading style
c.
margin deposited as a result of marking-to-market
d.
margin set by the variability of a futures price
e.
none of the above

14.

Which of the following is the most actively traded U.S. futures contract?
a.
S&P 500 Index
b.
crude oil
c.
Treasury bonds
d.
Wheat
e.
none of the above

15.

Which of the following duties is not performed by the clearinghouse?

a.
holding margin deposits
b.
guaranteeing performance of buyer and writer
c.
maintaining records of transactions
d.
lending money to meet margin requirements
e.
none of the above

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16.

What are circuit breakers?

a.
rules that stop trading when futures are about to expire
b.
a system that shuts down the exchange computer during periods of abnormal volume
c.
limits on the number of contracts that can be traded on high volume days
d.
rules that limit the number of contracts a speculator can hold
e.
none of the above

17.

One of the first automated trading systems that matched bids and offers implemented at the CME is called
a.
COMEX
b.
GLOBEX
c.
LIFFE
d.
CFTC
e.
none of the above

18.

Which of the following is not a method of terminating a futures contract?

a.
offset
b.
delivery
c.
exchange for physicals
d.
scalping
e.
none of the above

19.

Trading as both a broker and a dealer is called

a.
dual trading
b.
spreading
c.
scalping
d.
arbitraging
e.
none of the above

20.

The trading procedure on the floor of the futures exchange is referred to as

a.
against actuals
b.
open interest
c.
open outcry
d.
index participation
e.
none of the above

21.

A futures contract covers 5000 pounds with a minimum price change of $0.01 is sold for $31.60 per pound.
If the initial margin is $2,525 and the maintenance margin is $1,000, at what price would there be a margin
call?
a.
31.91
b.
32.11
c.
31.29
d.
31.09
e.
31.80

22.

One of the advantages of forward markets is

a.
performance is guaranteed by the G-30
b.
trading is conducted in the evening over computers
c.
the contracts are private and customized
d.
trading is less costly and governed by more rules
e.
none of the above

23.

Which is the most active group of futures?

a.
energy
b.
agriculture

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c.
d.
e.

currency
financials
none of the above

24.

Options on futures have been trading since

a.
1973
b.
1982
c.
1966
d.
1936
e.
none of the above

25.

Which of the following is not a type of futures trader?

a. scalpers
b. arbitrageurs
c. profit-takers
d. hedgers
e. day traders

26.

Individuals engaging in this type of trading strategy are characterized by their attempt to profit from
guessing the direction of the market
a. hedgers
b. spreaders
c. speculators
d. arbitraguers
e. none of the above

27.

This financial instrument (sometimes referred to as a commodity option) permits the holder to buy if a call,
or to sell if a put, a specific underlying futures contract at a fixed price up to a specific expiration day
a. forward
b. futures option
c. swap
d. commodity swap
e. futures swap

28.

Despite the fact that forward contracts carry more credit risk than futures contracts, forward contracts offer
what primary advantage over futures contracts?
a. the over-the-counter forward market is a highly regulated market
b. forward contracts prevent the writer from assuming the credit risk of the buyer
c. terms and conditions are tailored to the specific needs of the two parties involved
d. transaction information between the two parties involved in the forward contract is readily available to
the public
e. conditions of the forward contract, such as delivery date and location, cannot be altered

29.

This individual takes a futures contract position that is opposite to the position in the spot market in order to
reduce risk
a. speculator
b. hedger
c. spreader
d. arbitrageur
e. trading advisor

30.

Which of the following correctly orders the process of daily settlement?

a. clearinghouse officials establish a settlement price; each account is marked to market; accounts of those
holding long/short positions are credited/debited appropriately; differences between todays
settlement price and the previous days settlement price are determined

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b.
c.
d.
e.

31.

clearinghouse officials establish a settlement price; each account is marked to market; differences
between todays settlement price and the previous days settlement price are determined; accounts of
those holding long/short positions are credited/debited appropriately
differences between todays settlement price and the previous days settlement price are determined;
accounts are marked to market; clearinghouse officials establish a settlement price; accounts of
those holding long/short positions are credited/debited appropriately
clearinghouse officials establish a settlement price; differences between todays settlement price and the
previous days settlement price are determined; accounts of those holding long/short positions are
credited/debited appropriately; each account is marked to market
differences between todays settlement price and the previous days settlement price are determined;
accounts are marked to market; clearinghouse officials establish a settlement price; accounts of
those holding long/short positions are credited/debited appropriately

The following process is the only type of permissible futures transaction that occurs off the floor of the
exchange
a. determination of the position day
b. determination of the delivery day
c. determination of a daily settlement price
d. offsetting
e. exchange for physicals

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CHAPTER 8: THE STRUCTURE OF FORWARD AND FUTURES MARKETS

TRUE/FALSE TEST QUESTIONS
T

1.

Futures contracts are similar to forward contracts because they both represent a
commitment to buy something at a future time at a fixed price.

2.

Forward contracts are regulated by the Commodity Forward Trading Commission.

3.

The earliest financial futures contracts were futures on foreign currencies.

4.

Credit risk is handled in forward markets by daily marking-to-market.

5.

One attraction of options on futures is that they trade side-by-side with the futures.

6.

Many futures contracts specify that there are several grades of a commodity that are
acceptable for delivery.

7.

Very few futures contracts are terminated in delivery of the underlying commodity or
security.

8.

Stock index futures contracts are terminated by delivery the portfolio of stocks represented
by the index.

9.

A limit move is when a futures price reaches its all time high or low price.

10.

Locals are futures traders who are in business for themselves.

11.

Scalping is a colorful term used to describe a futures trading style that involves aggressive,
emotional trading.

12.

Futures trades are executed in the pit.

13.

The clearinghouse is the middleman in a futures trade.

14.

When futures accounts are marked-to-market, an account balance below the maintenance
margin must be brought up to the initial margin.

15.

The most actively traded futures contract on a short-term financial instrument is Treasury
bill futures.

16.

Futures funds have typically provided outstanding returns to their investors.

17.

Because futures markets do not have designated market makers, there is no such thing as a
bid-ask spread.

18.

One party to a futures transaction does not bear the risk that the other party will default.

19.

The federal regulator of the futures markets is the National Futures Association.

20.

A hedge fund is a very risky form of investment.

21.

The largest futures exchange in the United States is the Chicago Mercantile Exchange.

22.

Firms that solicit futures trading business from the public are called Futures Commission

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Merchants.
T

23.

Position traders are futures traders who take very large positions.

24.

The daily settlement procedure is a major difference between futures contracts and forward
contracts.

25.

There are no futures contracts on the Dow Jones Industrial Average.

26.

Options on futures contracts expire after the underlying futures contract expires.

27.

Less than half of futures contracts launched in the United States are successful.

28.

An arbitrageur operates by two rules, take risk and spend money.

29.

Each futures contract has both a long and a short position and counts as only one unit of
open interest.

30.

The minimum price fluctuation is called a tick.

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