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Chapter 22 Futures Markets

Multiple Choice Questions 1. A futures contract A) is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract. B) is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract. C) gives the buyer the right, but not the obligation, to buy an asset some time in the future. D) is a contract to be signed in the future by the buyer and the seller of the commodity. E) none of the above. Answer: B Difficulty: Easy Rationale: A futures contract locks in the price of a commodity to be delivered at some future date. Both the buyer and seller of the contract are committed. 2. The terms of futures contracts __________ standardized, and the terms of forward contracts __________ standardized. A) are; are B) are not; are C) are; are not D) are not; are not E) are; may or may not be Answer: C Difficulty: Easy Rationale: Futures contracts are standardized and are traded on organized exchanges; forward contracts are not traded on organized exchanges, the participant negotiates for the delivery of any quantity of goods, and banks and brokers negotiate contracts as needed.

Bodie, Investments, Sixth Edition

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Chapter 22 Futures Markets
3. Futures contracts __________ traded on an organized exchange, and forward contracts __________ traded on an organized exchange. A) are not; are B) are; are C) are not; are not D) are; are not E) are; may or may not be Answer: D Difficulty: Easy Rationale: See rationale for test bank question 22.2. 4. In a futures contract the futures price is A) determined by the buyer and the seller when the delivery of the commodity takes place. B) determined by the futures exchange. C) determined by the buyer and the seller when they initiate the contract. D) determined independently by the provider of the underlying asset. E) none of the above. Answer: C Difficulty: Moderate Rationale: The futures exchanges specify all the terms of the contracts except price; as a result, the traders bargain over the futures price. 5. The buyer of a futures contract is said to have a __________ position and the seller of a futures contract is said to have a __________ position in futures. A) long; short B) long; long C) short; short D) short; long E) margined; long Answer: A Difficulty: Moderate Rationale: The trader taking the long position commits to purchase the commodity on the delivery date. The trader taking the short position commits to delivering the commodity at contract maturity. The trader in the long position is said to "buy" the contract; the trader in the short position is said to "sell" the contract. However, no money changes hands at this time.

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Bodie, Investments, Sixth Edition

stay the same E) short. take delivery B) take delivery. decrease C) short.5. stay the same Answer: A Difficulty: Moderate Rationale: The trader holding the long position (the person who will purchase the goods) will profit from a price increase. A trader who has a __________ position in wheat futures believes the price of wheat will __________ in the future. Investments. 8. B) specified only by the buyers. A) make delivery. Investors who take long positions in futures agree to __________ of the commodity on the delivery date. increase B) long. take delivery D) make delivery. D) specified by brokers and dealers.Chapter 22 Futures Markets 6. and those who take the short positions agree to __________ of the commodity.Original futures price. C) specified by the futures exchanges. Bodie. make delivery C) take delivery. increase D) long. Answer: C Difficulty: Moderate Rationale: See rationale for test bank question 22. The terms of futures contracts such as the quality and quantity of the commodity and the delivery date are A) specified by the buyers and sellers. A) long.4. Sixth Edition 527 . take delivery E) negotiate the price. 7. pay the price Answer: B Difficulty: Moderate Rationale: See explanation for test bank question 22. Profit to long position = Spot price at maturity . E) none of the above.

When contracts begin trading. Most contracts are liquidated before the maturity date. Investments. B) Only one to three percent of futures contracts result in actual delivery. 528 Bodie. 11. D) number of all silver futures outstanding contracts. E) none of the above. decrease B) short. The open interest on silver futures at a particular time is the A) number of silver futures contracts traded during the day. A) long. 10. D) Approximately fifty percent of futures contracts result in actual delivery. open interest is zero. Answer: D Difficulty: Moderate Rationale: Open interest is the number of contracts outstanding. stay the same Answer: B Difficulty: Moderate Rationale: Profit to short position = Original futures price . E) Futures contracts never result in actual delivery.Chapter 22 Futures Markets 9. C) Only fifteen percent of futures contracts result in actual delivery. B) number of outstanding silver futures contracts for delivery within the next month. Which one of the following statements regarding delivery is true? A) Most futures contracts result in actual delivery. increase E) long. A trader who has a __________ position in gold futures wants the price of gold to __________ in the future. Sixth Edition .Spot price at maturity. the person in the short position profits if the price of the commodity declines in the future. Answer: B Difficulty: Moderate Rationale: Virtually all traders enter reversing trades to cancel their original positions. thereby realizing profits or losses on the contract. decrease C) short. as time passes more contracts are entered. C) number of silver futures contracts traded the previous day. stay the same D) short. Thus.

E) none of the above. B) the New York Stock Exchange Index. D) the Dow Jones Industrial Index. A margin deposit can be made with cash or interest-earning securities. the margin deposit amounts depend on the volatility of the underlying asset. Bodie. E) The maintenance margin is set by the producer of the underlying asset. You hold one long corn futures contract that expires in April. Financial futures contracts are actively traded on the following indices except A) the S&P 500 Index.1 on page 798. C) A margin deposit can only be met with cash. or sell the contract. Sixth Edition 529 . contracts on the Dow were added in 1997 to these existing indexes. D) sell one May corn futures contract. C) sell one April corn futures contract. 14.Chapter 22 Futures Markets 12. The indices are listed in Table 22. E) all of the above indices have actively traded futures contracts. Answer: E Difficulty: Moderate Rationale: To meet anticipated demand. Which one of the following statements is true? A) The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract. Answer: B Difficulty: Moderate Rationale: The maintenance margin applies to the value of the account after the account is opened. B) buy two April corn futures contract. B) The maintenance margin determines the value of the margin account below which the holder of a futures contract receives a margin call. 13. C) the Nikkei Index. to close out the position one must take a reversing position. Answer: C Difficulty: Moderate Rationale: The long position is considered the buyer. Investments. D) All futures contracts require the same margin deposit. To close your position in corn futures before the delivery date you must A) buy one May corn futures contract. if the value of this account falls below the maintenance margin requirement and the holder of the contract will receive a margin call.

An investor with a long position in Treasury notes futures will profit if A) interest rates decline. D) take a long position in Treasury bond futures. As bond prices decrease.original futures price. Answer: C Difficulty: Difficult Rationale: By taking the short position. C) buy S&P 500 index futures. 17. Investments. bond prices decrease. E) none of the above.Chapter 22 Futures Markets 15. 16. Sixth Edition . D) buy Treasury bonds in the spot market. To hedge a long position in Treasury bonds. if you are bearish about bond prices. which locks in the sales price for the bonds and guarantees that the total value of the bond-plus-futures position at the maturity date is the futures price. 530 Bodie. you might speculate by selling T-bond futures contracts. Answer: A Difficulty: Difficult Rationale: If interest rates rise. C) the prices of Treasury notes increase. E) none of the above. D) the price of the long bond increases. B) interest rate increase. To exploit an expected increase in interest rates. Thus. an investor would most likely A) sell Treasury bond futures. Answer: A Difficulty: Moderate Rationale: Profit to long position = Spot price at maturity . the hedger is obligated to deliver T-bonds at the contract maturity date for the current futures price. the short position gains. C) sell interest rate futures. E) none of the above. B) take a long position in wheat futures. an investor most likely would A) buy interest rate futures. B) sell S&P futures.

Answer: B Difficulty: Difficult Rationale: A short hedge is a situation where the investor owns an interest paying financial asset and a short position in comparable futures contracts. C) a short position in the spot market and a simultaneous short position in the futures market. Answer: D Difficulty: Difficult Rationale: By entering into the long side of a futures contract. A long hedge is A) a long position in the spot market and a simultaneous short position in the futures market. Investments. E) none of the above. which offsets the risk of the short position in the spot market. 19.Chapter 22 Futures Markets 18. C) a long position in the futures market and a simultaneous long position in the spot market. Sixth Edition 531 . A short hedge is A) a short position in the spot market and a simultaneous short position in the futures market. B) a long position in the spot market and a simultaneous long position in the futures market. E) none of the above. D) a short position in the spot market and a simultaneous long position in the futures market. B) a long position in the spot market and a simultaneous short position in the futures market. D) a short position in the spot market with a simultaneous long position in the futures market. the investor is committed to purchasing at the current futures price. Bodie.

basis risk exists and futures price and spot price need not move in lockstep before delivery date. B) the basis risk is borne by the hedger.Chapter 22 Futures Markets 20. Answer: D Difficulty: Moderate Rationale: If you think one asset is overpriced relative to another. 21. you sell the overpriced asset and buy the other one. Answer: C Difficulty: Difficult Rationale: See explanation for test bank question 22. E) none of the above. An increase in the basis will __________ a long hedger and __________ a short hedger. Sixth Edition . B) selling short all the stocks in the S&P 500 and buying S&P Index futures. D) selling S&P 500 Index futures and buying all the stocks in the S&P 500. have no effect upon Answer: C Difficulty: Difficult Rationale: If a contract and an asset are to be liquidated early. benefit B) hurt. Which one of the following statements regarding "basis" is not true? A) the basis is the difference between the futures price and the spot price. 532 Bodie. E) none of the above. Investments. A) hurt. hurt D) benefit. D) the basis increases when the futures price increases by more than the spot price. An increase in the basis will hurt the short hedger and benefit the long hedger. 22. C) selling all the stocks in the S&P 500 and buying call options on the S&P 500 index. hurt C) benefit. If you determine that the S&P 500 Index futures is overpriced relative to the spot S&P 500 Index you could make an arbitrage profit by A) buying all the stocks in the S&P 500 and selling put options on the S&P 500 index. benefit E) benefit.20. C) a short hedger suffers losses when the basis decreases.

If you were to liquidate your position.10 . Answer: D Difficulty: Moderate Rationale: Each T-bond contract calls for delivery of $100. You purchased one silver future contract at $3 per ounce.$93.406. $96.500 profit C) $5.$3. What would be your profit (loss) at maturity if the silver spot price at that time is $4.000 par value bonds. Investments. B) $125 profit. Net profits: $750 . You purchased a Treasury bond futures contract on the Chicago Board of Trade (CBOT) at a futures price of 96. 25.500.000 ounces and there are no transactions costs. E) none of the above. D) $1.10.250 = $750. Answer: B Difficulty: Moderate Rationale: $4. You purchased $100.10 X 5. Bodie. the listed spot price and futures prices were 94 and 94.000 loss B) $20 loss C) $20 profit D) $2.000.25 = -$875. your profits would be A) $125 loss.000 .50 loss.$96. respectively.00 = $1.09.281. On futures: $93.13.Chapter 22 Futures Markets 23.000 par value Treasury bonds and sold one Treasury bond futures contract.250 loss.000 profit E) None of the above.312. One month later.50 = $2.50 profit B) $5.312. Answer: A Difficulty: Difficult Rationale: On bonds: $94. the listed spot and futures prices of a Treasury bond were 93.50 loss D) $5.8 and 93.10 per ounce? Assume the contract size is 5. 24. C) $12. On January 1.500 loss E) none of the above. Sixth Edition 533 . A) $5.25 $94. What would your profit (loss) be at maturity if the futures price increased by 2 points? A) $2.$875 = -$125.50 .000 = $5.

10 = $0.000 = -$5. A) $950 profit B) $95 profit C) $950 loss D) $95 loss E) none of the above. 534 Bodie. 27. A) $5. You sold one corn future contract at $2.Chapter 22 Futures Markets 26. What would be your profit (loss) at maturity if the silver spot price at that time is $4.29 = -$0.000 = $950.000 ounces and there are no transactions costs. Answer: D Difficulty: Moderate Rationale: $3.$2. You purchased one corn future contract at $2.500 loss E) none of the above.10 = -$1. Sixth Edition .50 profit B) $5.10 per bushel? Assume the contract size is 5. Answer: C Difficulty: Moderate Rationale: $2.000 = -$950. Investments.19 X 5.10 per bushel? Assume the contract size is 5. Answer: A Difficulty: Moderate Rationale: $2.19 X 5. A) $950 profit B) $95 profit C) $950 loss D) $95 loss E) none of the above. You sold one silver future contract at $3 per ounce.29 . What would be your profit (loss) at maturity if the corn spot price at that time were $2.29 per bushel.10 .00 .50 loss D) $5.10 X 5.10 per ounce? Assume the contract size is 5.$2.29 per bushel.500.000 ounces and there are no transactions costs. 28.500 profit C) $5. What would be your profit (loss) at maturity if the corn spot price at that time were $2.000 ounces and there are no transactions costs.$4.

You sold one wheat future contract at $3. Sixth Edition 535 .98 = $0.04 . A) $30 profit B) $300 profit C) $300 loss D) $30 loss E) none of the above.000 = -$300. Investments.000 = $300. Answer: C Difficulty: Moderate Rationale: $2.Chapter 22 Futures Markets 29.500 loss B) $10 loss C) $2.000 ounces and there are no transactions costs.04 per bushel. you sold one April S&P 500 index futures contract at a futures price of 420.98 per bushel? Assume the contract size is 5.$430 = -$10 X 250 = -$2.06 X 5. What would be your profit (loss) at maturity if the wheat spot price at that time were $2. what would be your profit (loss) if you closed your position (without considering transactions costs)? A) $2.04 per bushel.98 per bushel? Assume the contract size is 5. Answer: B Difficulty: Moderate Rationale: $3. If on February 1 the April futures price were 430.06 X 5.04 = -$0. You purchased one wheat future contract at $3.$3.$2. 31.500 Bodie.500 profit D) $10 profit E) none of the above Answer: A Difficulty: Difficult Rationale: $420 . What would be your profit (loss) at maturity if the wheat spot price at that time were $2.000 ounces and there are no transactions costs.98 . A) $30 profit B) $300 profit C) $300 loss D) $30 loss E) none of the above. 30. On January 1.

13 per bushel. 34. What would be your profit (loss) at maturity if the wheat spot price at that time were $5.500 loss B) $10 loss C) $2.13 X 5. what would be your profit (loss) if you closed your position (without considering transactions costs)? A) $2.13 .13 per bushel.500 33.Chapter 22 Futures Markets 32. On January 1.$420 = $10 X 250 = $2. Answer: C Difficulty: Moderate Rationale: $5. If on February 1 the April futures price were 430.000 ounces and there are no transactions costs. A) $65 profit B) $650 profit C) $650 loss D) $65 loss E) none of the above.000 ounces and there are no transactions costs. You bought one soybean future contract at $5. A) $65 profit B) $650 profit C) $650 loss D) $65 loss E) none of the above.26 per bushel? Assume the contract size is 5. you bought one April S&P 500 index futures contract at a futures price of 420. Sixth Edition .26 per bushel? Assume the contract size is 5.500 profit D) $10 profit E) none of the above Answer: C Difficulty: Difficult Rationale: $430 . Answer: B Difficulty: Moderate Rationale: $5.13 X 5. 536 Bodie.000 = -$650.000 = $650. Investments.26 .13 = $0. What would be your profit (loss) at maturity if the wheat spot price at that time were $5. You sold one soybean future contract at $5.$5.$5.26 = -$0.

$1. Sixth Edition 537 . The expectations hypothesis of futures pricing A) is the simplest theory of futures pricing. D) A and B.. C) is not a zero sum game.550 loss B) $15. Investments. Answer: D Difficulty: Easy Rationale: The expectations hypothesis relies on the concept of risk neutrality.500 37. If on June 15th the futures price were 1012. E) A and C.e. On April 1.550 profit D) $1.550 profit E) none of the above Answer: B Difficulty: Difficult Rationale: $950 .012 .012 = -$62 X 250 = -$15.550 profit D) $1.$950 = $62 X 250 = $15.500 36.Chapter 22 Futures Markets 35. B) states that the futures price equals the expected value of the future spot price of the asset. what would be your profit (loss) if you closed your position (without considering transactions costs)? A) $1.550 profit E) none of the above Answer: C Difficulty: Difficult Rationale: $1. they should agree on a futures price that provides an expected profit of zero to all parties. i.550 loss B) $15. On April 1.550 loss C) $15.550 loss C) $15. what would be your profit (loss) if you closed your position (without considering transactions costs)? A) $1. you sold one S&P 500 index futures contract at a futures price of 950. if all market participants are risk neutral. you bought one S&P 500 index futures contract at a futures price of 950. Bodie. If on June 15th the futures price were 1012.

Sixth Edition . B) is a hypothesis polar to backwardation. E) is made by delivering a value-weighted basket of stocks.Chapter 22 Futures Markets 38. Investments. similar to the procedure used for index options. Answer: E Difficulty: Easy 40. C) requires delivery of 1 share of each stock in the index. C) assumes that risk premiums in the futures markets are based on systematic risk. not the suppliers. B) is made by a cash settlement based on the index value. Normal backwardation A) maintains that for most commodities. 39. D) A and C. D) is made by delivering 100 shares of each stock in the index. Answer: B Difficulty: Moderate Rationale: Stock index futures are cash-settled. Contango A) holds that the natural hedgers are the purchasers of a commodity. 538 Bodie. Delivery of stock index futures A) is never made. C) holds that FO must be less than (PT). D) A and B. B) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price. E) A and B. Answer: D Difficulty: Easy Rationale: Risk premiums in this theory are based on total variability. there are natural hedgers who desire to shed risk. E) B and C.

The most recently established category of futures contracts is A) agricultural commodities. If a trader holding a long position in corn futures fails to meet the obligations of a futures contract. Answer: C Difficulty: Moderate Rationale: Losses and gains to futures contracts net to zero. the party that is hurt by the failure is A) the offsetting short trader.Chapter 22 Futures Markets 41. B) the futures market is illiquid. Bodie. D) financial futures. 43. C) the clearinghouse. and bears any losses arising from failure to meet contractual obligations. B) metals and minerals. B) the corn farmer. Investments. C) foreign currencies. Answer: C Difficulty: Moderate Rationale: The clearinghouse acts as a middle party to every transaction. E) both B and C. Sixth Edition 539 . and this segment of the market has seen rapid innovation. Answer: D Difficulty: Moderate Rationale: Financial futures were first introduced in 1975. E) most futures contracts do not take delivery. E) the commodities dealer. The establishment of a futures market in a commodity should not have a major impact on spot prices because A) the futures market is small relative to the spot market. D) the broker. C) futures are a zero-sum game D) the futures market is large relative to the spot market. 42. and thus should not impact spot prices.

Answer: E Difficulty: Easy Rationale: Marking-to-market effectively puts futures contracts on a "pay as you go" basis. sets rules and requirements for futures trading. The process of marking-to-market A) posts gains or losses to each account daily. Answer: E Difficulty: Moderate Rationale: Open interest is the number of contracts outstanding across all delivery dates for a given contract. a federal agency. long and clearinghouse positions. Investments. C) the Chicago Mercantile Exchange. Open interest includes A) only contracts with a specified delivery date. Sixth Edition . D) the sum of long or short positions and clearinghouse positions. 540 Bodie. C) impacts only long positions. B) the Chicago Board of Trade. 45. Long and short positions are not counted separately.Chapter 22 Futures Markets 44. C) the sum of short. Answer: A Difficulty: Easy Rationale: The CFTC. D) all of the above are true. and the clearinghouse position is not counted because it nets to zero. Futures contracts are regulated by A) the Commodity Futures Trading Corporation. 46. D) the Federal Reserve. E) both A and B are true. E) only long or short positions but not both. B) the sum of short and long positions. B) may result in margin calls. E) the Securities and Exchange Commission.

C) can be timed to offset stock portfolio gains and losses.09 E) $1000. C) spot markets are less efficient.40. E) none of the above.00 C) $913.Chapter 22 Futures Markets 47.40 D) $915. B) futures markets provide leverage.06) . D) is based on the contract holding period. Sixth Edition 541 . Given a stock index with a value of $1. an anticipated dividend of $30 and a riskfree rate of 6%. B) occurs based on the date contracts are sold or closed. Answer: E Difficulty: Moderate Rationale: Futures markets allow speculators to benefit from leverage and minimize transactions costs. Investments. 49.00 Answer: C Difficulty: Difficult Rationale: F = 1. F = 913.000.000/(1. 48. Taxation of futures trading gains and losses A) is based on cumulative year-end profits or losses. E) both A and B are true. D) futures markets are less efficient.40 B) $970. Bodie.30. Both markets should be equally price-efficient. Speculators may use futures markets rather than spot markets because A) transactions costs are lower in futures markets. what should be the value of one futures contract on the index? A) $943. Answer: A Difficulty: Moderate Rationale: Futures profits and losses are taxed based on cumulative year-end value due to marking-to-market procedures.

00 C) $993.40 D) $995.40 D) $995. F = 1. 51. F = 1048.Chapter 22 Futures Markets 50. an anticipated dividend of $45 and a riskfree rate of 6%.040. Given a stock index with a value of $1.08 B) $1070.100/(1. Investments.08.200.09 E) $1000.00 Answer: A Difficulty: Difficult Rationale: F = 1.087. F = 1.00 Answer: D Difficulty: Difficult Rationale: F = 1. what should be the value of one futures contract on the index? A) $1048. Sixth Edition .73. Given a stock index with a value of $1.200/(1.27.40 B) $970.125/(1.00 C) $993.09 E) $1000. what should be the value of one futures contract on the index? A) $1087. an anticipated dividend of $33 and a riskfree rate of 4%.03) .33.40 D) $1040. 542 Bodie.125.00 C) $913. 52. an anticipated dividend of $27 and a riskfree rate of 3%. what should be the value of one futures contract on the index? A) $943. Given a stock index with a value of $1100.00 Answer: A Difficulty: Difficult Rationale: F = 1.96 E) $1000.06) .96.04) .45.73 B) $1070.

E) It is the amount by which the contract is marked to market. III. so it requires a good-faith deposit. This helps avoid the cost of credit checks. B) It is the maximum percentage that the price of the contract can change before it is marked to market. and IV I. C) It is the maximum percentage that the price of the underlying asset can change before it is marked to market. IV. what does the word “margin” mean? A) It is the amount of the money borrowed from the broker when you buy the contract. Investments. and V I. and V Answer: B Difficulty: Moderate Rationale: The maximum price range and the market price at expiration will be determined by the market rather than specified in the contract. and V I and V I. II. 54.Chapter 22 Futures Markets 53. Which of the following items is specified in a futures contract? I) II) III) IV) V) A) B) C) D) E) the contract size the maximum acceptable price range during the life of the contract the acceptable grade of the commodity on which the contract is held the market price at expiration the settlement price I. II. Bodie. D) It is a good-faith deposit made at the time of the contract's purchase or sale. III. Answer: D Difficulty: Easy Rationale: The exchange guarantees the performance of each party. Sixth Edition 543 . IV. With regard to futures contracts.

57. E) Holders of short positions can recognize profits by making delivery early. weather futures. the trading volume in futures contracts was highest in _______. Answer: D Difficulty: Moderate Rationale: The net profit on the contract is zero -. B) It is possible for both the holder of the long position and the holder of the short position to earn a profit. A) 1994 B) 1996 C) 1998 D) 2000 E) 2002 Answer: E Difficulty: Easy Rationale: See Figure 22. According to the Chicago Board of Trade's 2002 Annual Report. 544 Bodie. D) The amount that the holder of the long position gains must equal the amount that the holder of the short position loses. Investments. II.Chapter 22 Futures Markets 55. electricity futures. entertainment futures. III.3 on page 797. Sixth Edition . Which of the following is true about profits from futures contracts? A) The person with the long position gets to decide whether to exercise the futures contract and will only do so if there is a profit to be made. C) The clearinghouse makes most of the profit.it is a zero-sum game. I and II II and III III and IV I. and IV Answer: B Difficulty: Easy Rationale: Weather and electricity futures are mentioned in the textbook as recent innovations. Some of the newer futures contracts include I) II) III) IV) A) B) C) D) E) fashion futures. and III I. 56.

Answer: D Difficulty: Easy Rationale: The item is usually not delivered. B) cross hedging.Chapter 22 Futures Markets 58. Bodie. D) You would be notified that you owe the holder of the short position a certain amount of cash. E) proxy hedging. Who guarantees that a futures contract will be fulfilled? A) the buyer B) the seller C) the broker D) the clearinghouse E) nobody Answer: D Difficulty: Easy Rationale: Once two parties have agreed to enter the transaction. B) You would wake up to find the pork bellies on your front lawn. 59. the clearinghouse becomes the buyer and seller of the contract and guarantees its completion.the seller understands that these things happen. C) alternative hedging. You are still obligated to fulfill the contract and give the holder of the short position the value of the pork bellies. C) Your broker would send you a nasty letter. If you took a long position in a pork bellies futures contract and then forgot about it. Sixth Edition 545 . The two commodities should be highly correlated. Hedging a position using futures on another commodity is called A) surrogate hedging. D) correlative hedging. Investments. Answer: B Difficulty: Easy Rationale: Cross-hedging is used in some cases because no futures contract exists for the item you want to hedge. E) You would be notified that you have to pay a penalty in addition to the regular cost of the pork bellies. 60. what would happen at the expiration of the contract? A) Nothing -. but cash settlement can be made through the use of warehouse receipts.

The contract is for a deferred delivery of an asset at an agreed upon price. The trader taking the short position commits to delivery of the commodity at contract maturity. Distinguish between the short and long positions in futures transactions. in the aggregate. Answer: Futures contracts are traded on the organized exchanges and are standardized as to the contract size. The purpose of this question is to insure that the student understands the meanings of these terms as related to the futures markets. is a zero sum game. The terms. the futures market. Difficulty: Easy 62. have different meanings for different investment alternatives. Answer: The trader taking the long position commits to purchase the commodity on the delivery date. short and long. The trader in the short position profits from price decreases. no money exchanges hands when the contract is initiated. Difficulty: Moderate 546 Bodie. The purpose of this question is to insure that the student understands the basic differences between futures and forward contracts. Describe the differences between futures and forward contracts. The profits and losses of the two positions exactly offset each other. A forward contract is only a commitment to contract in the future.Chapter 22 Futures Markets Short Answer Questions 61. Sixth Edition . Investments. the trader in short position "sells" the contract. The trader holding the long position profits from price increases. No money exchanges hands initially. the acceptable grade of the commodity. The trader in the long position "buys" the contract. and the contract delivery date. However.

Answer the questions below regarding the contract. Investments. Both sides of the contract must post margin. This question is designed to ascertain whether the student understands these differences.. the trader establishes a margin account.2 5 5 Open Interest 7. Day 0 1 2 3 Futures Price $0. Discuss marking to market and margin accounts in the futures market. You purchased the following futures contract today at the settlement price listed in the Wall Street Journal. Bodie. maturity date does not govern the realization of profits or losses. thus proceeds accrue to the trader's account immediately. Difficulty: Moderate 64. The initial margin is between 5 and 15% of the total value of the contract.000 lbs. n. the higher the margin requirement. Margin requirements and marking to market differ in the futures markets from that of the markets previously studied.Chapter 22 Futures Markets 63. such as T-bills. Show your calculations. Soybean Oil (CBT) 60.29 -. • • • • • Open 15.3 3 Low 15.2 8 High 15.02 Lifetime High Low 20.2 5 Settle Change 15. Sixth Edition 547 .441 What is the total value of the futures contract? If there is a 10% margin requirement how much do you have to deposit? Suppose the price of the futures contract changes as shown in the following table. Enter the relevant information into the table.1527 $0. The margin deposit may be cash or near cash. Explain why the account is marked-to-market daily.3 15. The more volatile the asset.1529 $0.1597 Profit/Loss per lb. Total Value of Contract Mark-to-Market Settlement n.a. The clearinghouse recognizes profits and losses at the end of each trading day. this daily settlement is marking to market.1540 $0. Oct. cents per lb.a. Answer: When opening an account.

a.40 in cash or securities.582 Mark-to-Market Settlement n. n.176=-$12 $9. If there is a 10% margin requirement. If the investor doesn't meet the call the clearinghouse can close out enough of the trader's position to restore the margin.1527*60.0057 Total Value of Contract $0.0002 $0.1540*60. $9.174 $0.Chapter 22 Futures Markets Answer: The answers are shown below.1527 $0. Investments.000 = $9.162 $0.0013 $0.1540 $0. The contract is marked to market daily and profits or losses are posted in the account.240-9.000 = $9.1529*60.162=$78 $9. you will have to deposit $917.162-9.162=$342 The total value of the contract is $9.000=$9.174.000 = $9. Sixth Edition .a.1597 Profit/Loss per lb.1597*60. Difficulty: Moderate 548 Bodie.1529 $0. The marking-to-market process protects the clearinghouse because the margin percentage is calculated daily and if it falls below the maintenance margin a margin call can be issued. The contract keeps pace with market activity and doesn't change value all at once at the maturity date.240 $0. $0.582-9. as shown in the table. Day 0 1 2 3 Futures Price $0.

Describe the types of traders that are active in the futures markets. This question tests whether the student understands the main characters in the futures markets. Hedgers use the markets to protect themselves by limiting their risk. As the value of the futures contract rises. Give an example of how each might use the market. and the role each of them plays in the market's operation. Investments. Speculators buy futures contracts rather than the underlying assets because transaction costs are much lower. Sixth Edition 549 . the company can take delivery of the gold at a more favorable price than the spot price at the time of maturity. A speculator will take a long position if he expects prices to increase. the holder of the long position gains and the holder of the short position loses. Answer: The two types of traders are hedgers and speculators. An example of a hedger would be a jewelry company that anticipates a need for a large quantity of gold in the future. the reasons they use the markets. Difficulty: Moderate Bodie. Only 1% to 3% of futures market participants actually plan to take delivery of the asset. They take long or short positions to lock in the most favorable purchase price or selling price at the time they enter the contract. Speculators dominate the futures market. Explain why each type is in the markets and how their goals differ. If gold prices fall rather than rising.Chapter 22 Futures Markets 65. The rest are speculators who plan to offset their positions prior to expiration of the contract. The company will have to purchase the gold and if it wants to protect itself from large price increases it can take a long position in a gold futures contract today. If prices rise. The speculator can sell the contract for more than he paid in this case. the company can sell an equivalent contract before the maturity date. The speculator also benefits from leverage since only a small percentage of the total contract value is required to be posted as margin.