Introduction to Derivative Securities

Financial Markets and Risk

Management 1st Edition Jarrow Test
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CHAPTER 8: Forwards and Futures Markets

MULTIPLE CHOICE

1. Modern futures trading has most recently descended from:

a. derivatives trading in Amsterdam during the Dutch Golden Age
b. derivatives trading at Dojima Rice Exchange, Osaka, Japan
c. derivatives trading at the Chicago Board of Trade
d. derivatives trading at the New York Mercantile Exchange
e. derivatives trading at the Chicago Mercantile Exchange
ANS: C DIF: Easy REF: 8.3
TOP: A Brief History of Forwards and Futures MSC: Factual

2. The ten-year period 1972–82 saw amazing developments in the futures marketplace. These
developments did NOT include which of the following?
a. introduction of the first foreign currency futures
b. introduction of the first interest rate futures
c. a post-market global electronic transaction system called Globex
d. the first cash-settled contract, the Eurodollar futures
e. introduction of the first options on futures
ANS: C DIF: Easy REF: 8.3
TOP: A Brief History of Forwards and Futures MSC: Factual

3. Developments in futures markets since 1970 did NOT possess which of the following characteristics?
a. the introduction of numerous new futures contracts
b. the opening of many new exchanges
c. the consolidation and greater linkages among exchanges
d. the automation of trading
e. a reduction of volatility in the interest rate markets
ANS: E DIF: Easy REF: 8.3
TOP: A Brief History of Forwards and Futures MSC: Factual

4. US futures markets are regulated by the federal regulator

a. NFA
b. SEC
c. CFTC
d. FINRA
e. NASD
ANS: C DIF: Easy REF: 8.3
TOP: A Brief History of Forwards and Futures MSC: Factual

5. Nobel laureate economist Milton Friedman strongly supported the creation of the first successful
financial futures exchange. In this regard, which of the following statements is INCORRECT?
a. Friedman saw a need for a trading venue to sell the British pound forward.
b. Friedman’s offer to sell pound sterling forward was turned down because he could not
post enough collateral.
c. Friedman’s offer to sell pound sterling forward was turned down because the banks felt
that he did not have the necessary “commercial interest” for dealing in foreign currencies.
d. The Chicago Mercantile Exchange chairman Leo Melamed commissioned Friedman to do
a study that strongly supported the need for the creation of a futures market in currencies.
 e. Friedman did a study and lobbied for the creation of a financial futures exchange by
writing letters and issuing supporting statements.
ANS: B DIF: Easy REF: 8.3
TOP: A Brief History of Forwards and Futures MSC: Factual

6. Gold futures contracts trade for “delivery during the current calendar month; the next two calendar
months; any February, April, August, and October falling within a twenty-three-month period; and any
June and December falling within a sixty-month period beginning with the current month.” Which
contract does NOT trade on January 2, 2013?
a. March 2013
b. April 2013
c. June 2014
d. October 2015
e. December 2016
ANS: D DIF: Moderate REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Applied

7. The minimum price fluctuation of a futures contract is called a:

a. tick
b. spread
c. basis
d. straddle
e. jump
ANS: A DIF: Easy REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Factual

8. A limit move in the futures market is:

a. a movement of the futures price in either direction equal to the daily price limit
b. an order to execute a futures trade only if it touches a certain price
c. a movement of the position limit in the futures market
d. an extreme movement in the commodity price index which shuts the market down
e. None of these answers are correct.
ANS: A DIF: Easy REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Factual

9. Suppose that you have opened a futures position and posted funds with a broker in a margin account.
The minimum level to which a margin account’s value may fall before requiring additional margin is
known as the:
a. daily margin
b. initial margin
c. maintenance margin
d. profit margin
e. variation margin
ANS: C DIF: Easy REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Factual

10. The gold futures contract that trades in the CME Group’s COMEX division may be ended by:
a. a cash and carry
b. an exercise
c. a cash settlement
 d. an exchange for physical
e. daily settlement
ANS: D DIF: Moderate REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Factual

11. A trading at settlement futures contract allows a trader to trade anytime during the trading day but get
a price that is determined during the day’s close. Suppose that this price is the settlement price
determined by computing a volume-weighted average price (VWAP) during the last two minutes of
the trading day. A trader plans to manipulate the market by trading on one side of the market earlier in
the day and then trading in the opposite direction during the VWAP’s computation period to affect the
price to their advantage. Which of the following strategies can she employ?
a. selling earlier in the day and then steadily buying during the VWAP computation period to
create a higher VWAP price at which the earlier sell is executed
b. buying earlier in the day and then steadily selling during the VWAP computation period to
create a lower VWAP price at which the earlier buy is executed
c. either a or b would work
d. neither a nor b would work
e. the strategies in a or b only work in conjunction with index arbitrage
ANS: C DIF: Difficult REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Conceptual

12. For computing position limits, the following positions are on the same side of the market:
a. long call, long put, and long stock
b. long call, long put, and short stock
c. short call, long put, and short stock
d. short call, short put, and long stock
e. None of these answers are correct.
ANS: C DIF: Moderate REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Conceptual

13. Which of the following statements is INCORRECT about the settlement price in the futures markets?
a. It’s always the last trading price of the day.
b. It’s computed for all futures contracts—both active and inactive.
c. For actively traded contracts with little price fluctuations, the exchange’s settlement
committee picks a settlement price from this closing range, often the last traded price.
d. The settlement price is used for the futures position to be marked-to-market.
e. For inactive contracts, the settlement committee considers the spreads relative to other
futures prices and other relevant information to determine a settlement price.
ANS: A DIF: Moderate REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Factual

14. A clearinghouse does NOT have the following risk:

a. credit risk
b. market risk
c. operations risk
d. legal risk
e. regulatory risk
ANS: B DIF: Easy REF: 8.4
TOP: Futures Contract Features and Price Quotes MSC: Conceptual
15. Which of the following statements is FALSE? An examination of the Reuters/Jeffries CRB Index
reveals that commodity prices:
a. stayed at a low level and fluctuated little during 1956–2012
b. exhibited more volatility, but no discernable trend during the 70s, 80s, and 90s
c. went up rapidly starting in 2003 and remained at this high level
d. went up rapidly starting in 2003 but exhibited large price swings at the new higher level
e. went up rapidly starting in 2003, fell again, and never reached back to the 2003 level
ANS: A DIF: Easy REF: 8.5 TOP: Commodity Price Indexes
MSC: Factual

16. Commodity price indexes do NOT have which of the following features?
a. These indexes often use futures prices in index computation.
b. As these indexes are weighted averages, they typically have a fairly heavy weighting in
the energy sector.
c. The managers of the index must periodically roll the futures index by replacing the
expiring futures with similar new contracts.
d. Many financial products have been devised based on these indexes.
e. Exchange traded funds (ETFs) are futures that have been devised based on commodity
price indexes.
ANS: E DIF: Easy REF: 8.5 TOP: Commodity Price Indexes
MSC: Factual

17. The bet between professors Julian Simon and Paul Ehrlich involved a derivative that was:
a. a collection of forward contracts
b. a collection of futures contracts
c. a commodity swap contract
d. a collection of options on commodities
e. a collection of options on forward contracts
ANS: A DIF: Moderate REF: 8.5 TOP: Commodity Price Indexes
MSC: Factual