Hull: Options, Futures, and Other Derivatives, Ninth Edition

Chapter 2: Mechanics of Futures Markets

Multiple Choice Test Bank: Question with Answers

1. A company enters into a short futures contract to sell 50,000 units of a commodity for 70
cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is
the futures price per unit above, which there will be a margin call?

2. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price
will allow $2,000 to be withdrawn from the margin account?

3. One futures contract is traded where both the long and short parties are closing out existing
positions. What is the resultant change in the open interest?
.
4. You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units and the initial margin per contract that you provide is $2,000. The
maintenance margin per contract is $1,500. During the next day the futures price rises to
$1,012 per unit. What is the balance of your margin account at the end of the day?

5. An investor shorts 100 shares when the share price is $50 and closes out the position six
months later when the share price is $43. The shares pay a dividend of $3 per share during
the six months. How much does the investor gain?

6. The spot price of an investment asset that provides no income is $30 and the risk-free rate
for all maturities (with continuous compounding) is 10%. What is the three-year forward
price?

7. The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10%
with continuous compounding. The asset provides an income of $2 at the end of the first
year and at the end of the second year. What is the three-year forward price?

8. An exchange rate is 0.7000 and the six-month domestic and foreign risk-free interest rates
are 5% and 7% (both expressed with continuous compounding). What is the six-month
forward rate?

9. A short forward contract that was negotiated some time ago will expire in three months and
has a delivery price of $40. The current forward price for three-month forward contract is
$42. The three month risk-free interest rate (with continuous compounding) is 8%. What is
the value of the short forward contract?

10. Consider a Fixed Income Future with 120$ for delivery. As a seller you can deliver two
bonds:
 A. A bond with price of 110 and conversion ratio 0.7
B. A Bond with a price of 120 and conversion ratio 0.9
Which bond you will deliver and what will be your loss/gain as a seller ?