Test Bank For Options Futures and Other Derivatives 10th Edition By John C

Test Bank For Options Futures and Other Derivatives 10th Edition By John C

Chapter 2: Futures Markets and Central Counterparties

Multiple Choice Test Bank: Question with Answers

1. Which of the following is true

1. Both forward and futures contracts are traded on exchanges.
2. Forward contracts are traded on exchanges, but futures contracts are not.
3. Futures contracts are traded on exchanges, but forward contracts are not.
4. Neither futures contracts nor forward contracts are traded on exchanges.

Answer: C

Futures contracts trade only on exchanges. Forward contracts trade only in the over-the-counter market.

1. Which of the following is NOT true

1. 1. Futures contracts nearly always last longer than forward contracts
   2. Futures contracts are standardized; forward contracts are not.
   3. Delivery or final cash settlement usually takes place with forward contracts; the same is not true of futures contracts.
   4. Forward contracts usually have one specified delivery date; futures contracts often have a range of delivery dates.

Answer: A

Forward contracts often last longer than futures contracts. B, C, and D are true

1. In the corn futures contract a number of different types of corn can be delivered (with price adjustments specified by the exchange) and there are a number of different delivery locations. Which of the following is true

1. 1. This flexibility tends increase the futures price.
   2. This flexibility tends decrease the futures price.
   3. This flexibility may increase and may decrease the futures price.
   4. This flexibility has no effect on the futures price

Answer: B

The party with the short position chooses between the alternatives. The alternatives therefore make the futures contract more attractive to the party with the short position. The lower the futures price the less attractive it is to the party with the short position. The benefit of the alternatives available to the party with the short position is therefore compensated for by the futures price being lower than it would otherwise be.

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?

1. 78 cents
2. 76 cents
3. 74 cents
4. 72 cents

Answer: D

There will be a margin call when more than $1000 has been lost from the margin account so that the balance in the account is below the maintenance margin level. Because the company is short, each one-cent rise in the price leads to a loss of 0.01×50,000 or $500. A greater than 2 cent rise in the futures price will therefore lead to a margin call. The futures price is currently 70 cents. When the price rises above 72 cents there will be a margin call.

1. 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?
   A. $58

B. $62

C. $64

D. $66

Answer: B

Amounts in the margin account in excess of the initial margin can be withdrawn. Each $1 increase in the futures price leads to a gain of $1000. When the futures price increases by $2 the gain will be $2000 and this can be withdrawn. The futures price is currently $60. The answer is therefore $62.