17/04/2021

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Week10 Derivatives Mkt

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1. Futures contracts are marked to market every day. What does that mean?

(1 mark)
You scored 1 / 1 mark

At the end of every trading day, all contracts that have lost money are closed to avoid
possible defaults.

At the end of every trading day, all contracts are closed and positions are fully settled in cash.

At the end of every trading day, the price of the contract is quoted.

At the end of every trading day, the change in the value of the futures contract is added to or
subtracted from the margin account.

Response Rationale
Please provide a rationale for your answer.

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No rationale provided.

2. Futures and forwards have many similarities but also important differences. Select all statements that
are true for a forward contract.

(1 mark)
You scored 1 / 1 mark

The contract is negotiable.

The contract can be used only for speculative purposes.

The contract cannot be customised to satisfy investors’ specific needs.

The contract is traded on organised exchanges.

None of the above four statements is true.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

3.
Fill in the blanks

(6 marks)
You scored 5 / 6 marks

Sunshine Bread Co. produces and sells bread made of wheat. In early October 2020, Sunshine received a big order for July 2021 and
plans to get 300,000 bushels of wheat in June 2021 for this big order. The price of wheat on the spot market in Oct 2020 is US$ 5.80 per
bushel. As the owner of Sunshine, Mr. Smith would like to use futures hedge the price risk of wheat associated with this big order. Here
are the quotes of wheat futures in Oct 2020:

Wheat (CBOT) - 5000 bushels; cents per bushel

Open High Low Settle Chg Open Interest

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Mar 2021 594 599 591 595 -2.6 29,833
May 2021 593 597 589 592 -0.4 9,571
Jul 2021 601 605 596 600 -0.6 8,821

a. Suppose that Mr. Smith managed to enter the futures contracts in Oct 2020 when the price is the same as the settlement price shown in
the table. Ignore the margin requirements. At the initial hedging position, Mr. Smith would 1. long (long/short) 2. 60
(number of contracts, integer) the wheat futures contracts with maturity in 3. Jul (Mar/May/Jul) 2021. The paper cashflow for
this position is U$ 4. -1.800 million. (3 d.p.).

b. In June 2021, Mr. Smith purchased 300,000 bushels of wheat at a spot price of US$5.60 per bushel and closed his futures position. It
turns out that Mr. Smith pays an effective price of US$5.90. When Mr. Smith closed his position, the futures price is U$ 5. 5.70
(2 d.p.) and the basis (S-F) is 6. bigger (smaller/bigger) than the initial basis.

Enter the correct answer below.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

4. Futures and forwards have many similarities but also important differences. Select all statements that
are true for a futures contract.

(1 mark)
You scored 1 / 1 mark

The contract is negotiable.

The contract can be used only for speculative purposes.

The contract cannot be customised to satisfy investors’ specific needs.

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The contract is traded on organised exchanges.

None of the above four statements is true.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

5.
Fill in the blanks
(3 marks)
You scored 2 / 3 marks

The corn futures traded on CBOT is written on #2 Yellow corn. Delivery options are as follows: #2
Yellow at contract Price, #1 Yellow at a 1.5 cent/bushel premium, #3 Yellow at a discount between 2
and 4 cents/bushel depending on broken corn and foreign material and damage grade factors.

Suppose at the maturity of the futures contract, the market spot prices for the three grades of corn are
406 cents per bushesl of #1 Yellow, 405 cents for #2 Yellow, and 404 cents for #3 Yellow.

The cheapest-to-deliver grade is # 1. 1 (1/2/3) Yellow and the the amount you receive from
delivering this grade (the futures price adjusted for the specified price adjustment mechanism /
conversion factor) is 2. 406 cents per bushel.

If you choose to deliver a grade other than the cheapest-to-deliver grade, the amoung received would
be 3. lower than (lower than/ equal to/ higher than/ cannot tell) the spot price of the grade you
deliver.

Enter the correct answer below.

Response Rationale
Please provide a rationale for your answer.

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No rationale provided.

6. You hold one long oil futures contract that expires in April. To close your position in oil futures
before the delivery date, you must

(1 mark)
You scored 1 / 1 mark

buy one May oil futures contract.

buy two April oil futures contracts.

sell one April oil futures contract.

sell one May oil futures contract.

None of the options are correct.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

7. You purchased one silver future contract at $2 per ounce. What would be your profit (loss) at
maturity if the silver spot price at that time is $3.50 per ounce? Assume the contract size is 5,000
ounces and there are no transactions costs.

(1 mark)
You scored 1 / 1 mark

$5,500 profit

$7,500 profit

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$7,500 loss

$5,500 loss

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

8. Which one of the following statements is true?

(1 mark)
You scored 1 / 1 mark

The maintenance margin is the amount of money you post with your broker when you buy or
sell a futures contract.

If the value of the margin account falls below the maintenance-margin requirement, the
holder of the contract will receive a margin call.

All futures contracts require the same margin deposit.

The maintenance margin is set by the producer of the underlying asset.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

9. The potential loss for a writer of a put option on a stock is ______

(1 mark)
You scored 1 / 1 mark

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limited.

unlimited.

increasing when the stock price is decreasing.

None of the options are correct.

Response Rationale
Please provide a rationale for your answer.

No rationale provided.

7/9 QUESTIONS ANSWERED CORRECTLY

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