Chapter Fourteen Forward and Futures Markets This chapter contains 46 multiple choice questions,19 short problems and 8 longer problems. Multiple Choice 1.The is usually an average of the prices of the last few trades of the day (a)margin requirement (b)daily realization (c)forward price (d)settlement price Answer:(d) 2.The process of daily realization minimizes the possibility of contract default.To ensure parties do not default the exchange requires a posted in each account,and if the collateral in the account falls below a pre-specified level,the broker will make a (a)settlement price;margin call (b)margin requirement;margin call (c)margin call;margin requirement (d)margin call;settlement price Answer:(b) 3.The total number of futures contracts still outstanding at the end of each trading day is indicated by the (a)open interest (b)margin call (c)margin requirement (d)settlement price Answer:(a) 4.The physical costs of storing commodities,such as wheat or corn,are referred to as the and include (a)cost of storage;wastage costs (b)cost of distribution;interest,warehousing,and wastage costs (c)cost of carry;interest,warehousing,and spoilage costs (d)cost of carry;tax deductible payments Answer:(c) 14-1
14-1 Chapter Fourteen Forward and Futures Markets This chapter contains 46 multiple choice questions, 19 short problems and 8 longer problems. Multiple Choice 1. The ________ is usually an average of the prices of the last few trades of the day. (a) margin requirement (b) daily realization (c) forward price (d) settlement price Answer: (d) 2. The process of daily realization minimizes the possibility of contract default. To ensure parties do not default the exchange requires a ________ posted in each account, and if the collateral in the account falls below a pre-specified level, the broker will make a ________. (a) settlement price; margin call (b) margin requirement; margin call (c) margin call; margin requirement (d) margin call; settlement price Answer: (b) 3. The total number of futures contracts still outstanding at the end of each trading day is indicated by the ________. (a) open interest (b) margin call (c) margin requirement (d) settlement price Answer: (a) 4. The physical costs of storing commodities, such as wheat or corn, are referred to as the ________, and include ________. (a) cost of storage; wastage costs (b) cost of distribution; interest, warehousing, and wastage costs (c) cost of carry; interest, warehousing, and spoilage costs (d) cost of carry; tax deductible payments Answer: (c)
5.If one were to consider the commodity of wheat,distributor j will choose to carry wheat in storage for another month only if (a)Cj>F-S (b)Cj<F-S (c)Cj=F-S (d)Cj>F+S Answer:(b) 6.Suppose you are a distributor of flaxseed and you observe that the spot price is $9.90 per metric ton,and the futures price for delivery a month from now is $10.18.What should you do if your cost of carry is $0.20 per metric ton per month? (a)Choose to carry the flaxseed in storage for another month and hedge by taking a futures position. (b)Deliver the flaxseed immediately. (c)Immediately sell the flaxseed in the market for $9.90 per ton. (d)Buy more flaxseed for $9.90 per metric ton and not consider hedging. Answer:(a) 7.Suppose you are a distributor of barley and you observe that the spot price is $3.95 per metric ton,and the futures price for delivery a month from now is $4.10.If your cost of carry is $0.20 per metric ton per month,what should you do? (a)Choose to carry the barley in storage for another month and hedge by taking a futures position. (b)Sell the barley in the spot market for $3.95 per ton and deliver it immediately. (c)Choose to carry the barley in storage for another month and buy more barley. (d)Buy more barley and ignore hedging Answer:(b) 8.Suppose you are a distributor of canola and you observe that the spot price is $14.60 per metric ton,and the futures price for delivery a month from now is $14.71.If your cost of carry is $0.10 per metric ton per month,what should you do? (a)Deliver the canola immediately. (b)Sell the canola immediately for $14.60 per metric ton. (c)Sell short a futures contract at a price of $14.71 per metric ton and deliver the canola a month from now. (d)Buy more canola and forget about hedging. Answer:(c) 14-2
14-2 5. If one were to consider the commodity of wheat, distributor j will choose to carry wheat in storage for another month only if ________. (a) Cj > F – S (b) Cj < F – S (c) Cj = F – S (d) Cj > F + S Answer: (b) 6. Suppose you are a distributor of flaxseed and you observe that the spot price is $9.90 per metric ton, and the futures price for delivery a month from now is $10.18. What should you do if your cost of carry is $0.20 per metric ton per month? (a) Choose to carry the flaxseed in storage for another month and hedge by taking a futures position. (b) Deliver the flaxseed immediately. (c) Immediately sell the flaxseed in the market for $9.90 per ton. (d) Buy more flaxseed for $9.90 per metric ton and not consider hedging. Answer: (a) 7. Suppose you are a distributor of barley and you observe that the spot price is $3.95 per metric ton, and the futures price for delivery a month from now is $4.10. If your cost of carry is $0.20 per metric ton per month, what should you do? (a) Choose to carry the barley in storage for another month and hedge by taking a futures position. (b) Sell the barley in the spot market for $3.95 per ton and deliver it immediately. (c) Choose to carry the barley in storage for another month and buy more barley. (d) Buy more barley and ignore hedging. Answer: (b) 8. Suppose you are a distributor of canola and you observe that the spot price is $14.60 per metric ton, and the futures price for delivery a month from now is $14.71. If your cost of carry is $0.10 per metric ton per month, what should you do? (a) Deliver the canola immediately. (b) Sell the canola immediately for $14.60 per metric ton. (c) Sell short a futures contract at a price of $14.71 per metric ton and deliver the canola a month from now. (d) Buy more canola and forget about hedging. Answer: (c)
9.The futures price cannot exceed the by more than the (a)cost of carry;forward price (b)cost of carry;cost of distribution (c)spot price;cost of distribution (d)spot price;cost of carry Answer:(d) 10. in the futures markets improve the informational content of futures and they make futures more liquid than they would otherwise be. (a)hedgers (b)speculators (c)risk averse participants (d)diversifying hedgers Answer:(b) 11.The economic purposes served by speculators include: (a)increasing trading,which helps support organized exchanges (b)making futures prices better predictors of the direction of change of spot prices (c)making futures markets more liquid than they otherwise might be (d)all of the above Answer:(d) 12.In relation to gold,arbitrage forces a relation between futures and spot prices,known as: (a)gold-cost-of-carry relation (b)futures-forwards parity relation (c)forward-spot price-parity relation (d)spot parity relation Answer:(c) 13.The correct form for the forward-spot price-parity relation for gold is: (a)F-r=(1+s)S (b)F=(1-r-S)S (c)F=(1xrxs)S (d)F=(1+r+s)S Answer:(d) 14-3
14-3 9. The futures price cannot exceed the ________ by more than the ________. (a) cost of carry; forward price (b) cost of carry; cost of distribution (c) spot price; cost of distribution (d) spot price; cost of carry Answer: (d) 10. ________ in the futures markets improve the informational content of futures and they make futures more liquid than they would otherwise be. (a) hedgers (b) speculators (c) risk averse participants (d) diversifying hedgers Answer: (b) 11. The economic purposes served by speculators include: (a) increasing trading, which helps support organized exchanges (b) making futures prices better predictors of the direction of change of spot prices (c) making futures markets more liquid than they otherwise might be (d) all of the above Answer: (d) 12. In relation to gold, arbitrage forces a relation between futures and spot prices, known as: (a) gold-cost-of-carry relation (b) futures-forwards parity relation (c) forward-spot price-parity relation (d) spot parity relation Answer: (c) 13. The correct form for the forward-spot price-parity relation for gold is: (a) F – r = (1 + s)S (b) F = (1 – r – s)S (c) F = (1 x r x s)S (d) F = (1 + r + s)S Answer: (d)
14.What is the forward price of gold if r=0.07,S=$450,and s=0.03? (a)$463.50 (b)$481.50 (c)$468.00 (d)$495.00 Answer:(d) 15.You are a dealer in palladium and are contemplating a trade in a forward contract.The current spot price per ounce of palladium is $96.00,the forward price for delivery of one ounce of palladium in one year is $109.45 and annual carrying costs of the metal are five percent of the current spot price.Using the Law of One Price,what is the annual return on a riskless zero-coupon security? (a)5%per year (b)9%per year (c)10%per year (d)14%per year Answer:(b) 16.Determine the cost of storing gold for a year,if the current spot price is $390 per ounce,the forward price for delivery on one ounce of gold in one year is $492.50 and the risk-free interest rate is 7%per year. (a)0.19282 (b)0.26150 (c)0.33150 (d)0.51111 Answer:(a) 17.If the price of one ounce of gold for forward delivery in one year is $475.00,the interest rate is 8%per year and cost of storing gold for one year is 0.03,what is the current spot price of gold? (a)$427.93 (b)$439.81 (c)$461.17 (d)$527.25 Answer:(a) 14-4
14-4 14. What is the forward price of gold if r = 0.07, S = $450, and s = 0.03? (a) $463.50 (b) $481.50 (c) $468.00 (d) $495.00 Answer: (d) 15. You are a dealer in palladium and are contemplating a trade in a forward contract. The current spot price per ounce of palladium is $96.00, the forward price for delivery of one ounce of palladium in one year is $109.45 and annual carrying costs of the metal are five percent of the current spot price. Using the Law of One Price, what is the annual return on a riskless zero-coupon security? (a) 5% per year (b) 9% per year (c) 10% per year (d) 14% per year Answer: (b) 16. Determine the cost of storing gold for a year, if the current spot price is $390 per ounce, the forward price for delivery on one ounce of gold in one year is $492.50 and the risk-free interest rate is 7% per year. (a) 0.19282 (b) 0.26150 (c) 0.33150 (d) 0.51111 Answer: (a) 17. If the price of one ounce of gold for forward delivery in one year is $475.00, the interest rate is 8% per year and cost of storing gold for one year is 0.03, what is the current spot price of gold? (a) $427.93 (b) $439.81 (c) $461.17 (d) $527.25 Answer: (a)
18.The represents the indifference point for an investor who is indifferent between investing in gold itself or in synthetic gold. (a)expected future spot price (b)implied spot price (c)implied interest rate (d)implied cost of carry Answer:(d) 19.Suppose you observe that the current spot price of gold is $460 per ounce,the one year forward price is $490 and the risk-free interest rate is 7%per year.What is the implied cost of carry? (a)$2.10 per ounce (b)$28.04 per ounce (c)$30.00 per ounce (d)$32.10 per ounce Answer:(c) 20.Suppose you observe that the current spot price of gold is $460 per ounce,the one year forward price is $490 and the risk-free interest rate is 6%per year.What is the implied storage cost? (a)0.0052 (b)0.0522 (c)0.0650 (d)0.1352 Answer:(a) 21.When a financial futures contract is settled at the contract maturity date,what is actually paid? (a)the future stock price,S (b)the forward price,F (c)the difference between the stock price at delivery and current stock price (d)the difference between the forward price and stock price on delivery date Answer:(d) 14-5
14-5 18. The ________ represents the indifference point for an investor who is indifferent between investing in gold itself or in synthetic gold. (a) expected future spot price (b) implied spot price (c) implied interest rate (d) implied cost of carry Answer: (d) 19. Suppose you observe that the current spot price of gold is $460 per ounce, the one year forward price is $490 and the risk-free interest rate is 7% per year. What is the implied cost of carry? (a) $2.10 per ounce (b) $28.04 per ounce (c) $30.00 per ounce (d) $32.10 per ounce Answer: (c) 20. Suppose you observe that the current spot price of gold is $460 per ounce, the one year forward price is $490 and the risk-free interest rate is 6% per year. What is the implied storage cost? (a) 0.0052 (b) 0.0522 (c) 0.0650 (d) 0.1352 Answer: (a) 21. When a financial futures contract is settled at the contract maturity date, what is actually paid? (a) the future stock price, S1 (b) the forward price, F (c) the difference between the stock price at delivery and current stock price (d) the difference between the forward price and stock price on delivery date Answer: (d)