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Multiple Choice Questions

Understanding Futures Markets

1. Spot markets are:

a. for a limited number of commodities.

b. for immediate delivery
c. for future delivery.
d. markets designed to attract speculators.

2. A forward contract differs from a futures contract in that:

a. a forward contract is for a shorter period of time.

b. a forward contract does not specify the selling price.
c. a forward contract does specify the selling price.
d. a forward contract is non-binding.

3. Futures contracts are regulated by the:

a. Securities Exchange Commission.

b. National Association of Security Dealers.
c. National Association of Commodity Dealers.
d. Commodity Futures Trading Commission.

4. A futures contract is

a. a nonnegotiable, nonmarketable instrument.

b. a security, like stocks and bonds.
c. a standardized transferable agreement providing for the deferred
delivery of a specified traded quantity of a commodity.
d. not a legal contract, and therefore its terms can be changed .

5. Futures contracts were first traded on

a. stock indexes.
b. foreign currencies.
c. commodities.
d. government bonds.

6. Which of the following variables is not established on a futures contract?

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a. contract size
b. price
c. delivery date
d. specified grade

The Structure of Futures Markets

7. Futures trade on the:

b. over-the-counter market.
c. futures exchanges.
e. options exchanges.

8. Futures exchange members:

a. trade strictly for their own accounts.

b. trade strictly for others.
c. can trade for their own accounts or for others.
d. are all controlled by commodity firms.

9. On the other side of every futures transaction is:

a. the dealer.
b. the futures exchange.
c. the commodity producer.
d. the clearinghouse.

10. An appealing feature of options on futures contracts is that:

a. they have longer terms until expiration.

b. the purchaser has limited liability.
c. losses virtually never occur.
d. margin calls occur less frequently.

The Mechanics of Trading

11. In the case of a futures contract, buyers can settle their positions

a. only by taking delivery.

b. only by arranging an offsetting contract.
c. either by delivery or offset.
d. by a combination of delivery and offset.

12. The typical method of settling a futures contract is by:

a. arbitrage.
b. delivery

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c. offset.
d. hedging.

13. When trading futures, margin

a. is seldom used.
b. indicates that credit is being extended.
c. is a down payment.
d. in effect, is a performance bond.

14. Which of the following is a characteristic of futures contracts? They

a. are marked to the market daily.

b. can be sold short only on an uptick.
c. are handled by specialists on futures exchanges.
d. have no daily price limits.

15. The initial margin required for futures trading

a. is only put up by the seller.

b. is only put up by the buyer.
c. can be put up by either party, whoever initiates the transaction.
d. must be put up by both the buyer and the seller.

16. Of the following statements about futures trading, which one is


a. There are no specialists on futures exchanges.

b. All futures contracts are eligible for margin trading.
c. Trading is halted for the day if the prices reach the daily limit.
d. The uptick rule applies to the shorting of futures contracts.

17. Which of the following features is NOT similar between stock and futures

a. Buying and selling mechanics

b. Existence of highly organized exchanges
c. The charging of interest on margin trades
d. The ability of only members to trade on the floor

18. The cumulative number of futures contracts that are not offset at any
point in time is called:

a. margin.
b. open interest.
c. hedged position.
d. marked to the market position.

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Using Futures Contracts

19. To protect the value of a bond portfolio against a rise in interest rates
using futures, the portfolio owner could execute a ____________ hedge.

a. long
b. duration
c. short
d. maturity

20. An investor with a bond portfolio wishes to protect the value of his
position by using futures contracts. This investor should use a

a. long hedge.
b. short hedge.
c. time spread.
d. money spread.

21. The difference between the cash price and the futures price on the same
asset or commodity is known as the

a. basis.
b. spread.
c. yield spread.
d. premium.

22. Speculators in the futures markets

a. make the market more volatile.

b. contribute liquidity to the market.
c. engage mainly in short sales.
d. serve no real economic function.

23. One difference between a hedger and a speculator is that the hedger

a. may have either a profit or a loss.

b. may not close out his position by taking an opposite position.
c. does not have to put up margin.
d. faces a risk without the futures contract.

24. Which of the following is NOT a potential advantage of speculating in


a. Leverage
b. Ease of transacting
c. Low transactions costs
d. High, narrow probability distribution of expected returns

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Financial Futures

25. Interest rate futures are not currently available on which of the following

a. Corporate bonds
b. Treasury notes
c. one-month LIBOR rate
d. Treasury bonds

26. Select the CORRECT statement regarding basis risk associated with

a. Basis risk can be completely eliminated.

b. Although the basis fluctuates over time, it can be precisely predicted.
c. The basis must be zero on the maturity date of the
d. A hedge will reduce risk as long as basis fluctuations are positive.

27. Stock-index futures can be used to hedge against which of the following
types of risks?

a. Diversifiable risk
b. Systematic risk
c. Unsystematic risk
d. Company specific risk

28. An investor who sells a treasury bond futures contract is expecting to

profit from

a. an increase in the price of the treasury bond.

b. an increase in the underlying level of interest rates.
c. interest rates remaining unchanged.
d. a decrease in the underlying level of interest rates.

29. If an investor strongly believes that the stock market is going to have a
sharp decline shortly, he or she could maximize profit by

a. short selling stock-index futures contracts.

b. hedging current short positions.
c. using stock-index futures to straddle the market.
d. buying stock-index futures contracts.

30. An attempt to exploit the differences between the prices of a stock index
future and the prices of a stock index is known as:

a. index programming.
b. arbitrage speculation.

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c. index arbitrage.
d. program speculation.

True/False Questions

Understanding Futures Markets

1. Unlike stock positions, futures position can remain open indefinitely. F

2. Japan, which banned financial futures in 1985, now is very active in

developing futures exchanges. T

3. The National Futures Association is the federal agency which regulates the
futures markets. F

4. Futures are essentially standardized forward contracts. T

The Mechanics of Trading

5. Futures contracts are handled by specialists on futures exchanges. F

6. Most futures contracts are settled by delivery. F

7. Futures contracts are written for specific amounts of a commodity and for
specific delivery dates. T

8. Investors can speculate on interest rate declines by purchasing interest

rate futures. T

Using Futures Contracts

9. With futures, hedging requires one to simply take an opposite position. T

Financial Futures

10. The DJIA is the most popular stock-index futures contract. F

11. An anticipatory hedge is when an investor anticipates a falling market and

liquidates his position. F

12. A pension fund holds $10 million in Treasury bonds. In order to protect
against a rise in interest rate, the pension fund should use a short hedge in
T-bond futures. T

13. Index arbitrage attempts to exploit the differences between the prices on
two different stock indices. T

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14. Program trading generally involves positions in both stocks and stock-
index futures. T

15. Stock-index futures may be settled either by cash or by delivery of

securities. F

16. A recent innovation in financial futures is the single stock future. T

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