Futures Contracts Quiz

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Questions and Answers

What is the roll yield when there is backwardation in the futures curve?

Positive (correct)

Negative

Zero

Indeterminate

In the context of futures pricing intuition, what must have the same market determined costs over time?

Both a and b (correct)

Neither a nor b

Taking a long position in futures on the asset

Purchasing the asset now and storing it

What is the consequence of spot-futures parity not being observed?

No arbitrage opportunity

Temporary arbitrage opportunity (correct)

Permanent arbitrage opportunity

Market inefficiency

What action should be taken if the futures price is too high?

Short the futures and acquire the stock by borrowing at the risk-free rate Signup and view all the answers

What is the purpose of the hedge in the given example?

To mitigate potential losses from the mutual fund Signup and view all the answers

What is the formula for the roll yield in the context of futures?

$\frac{(F_0 + D) - S_0}{S_0}$ Signup and view all the answers

What is the consequence of futures being purchased on margin?

Leverage is increased Signup and view all the answers

What is the term for the situation when the futures curve is upward sloping?

Contango Signup and view all the answers

What is the formula for calculating the profit on a futures contract?

Profit = (Change in futures price) $\times$ (Contract size) Signup and view all the answers

What does the convergence property state about the final futures price?

It must equal the spot price at maturity Signup and view all the answers

What does open interest represent in the context of futures contracts?

The number of outstanding contracts Signup and view all the answers

What is the term for the difference between the futures price and the spot price?

Basis Signup and view all the answers

When does contango occur in the futures market?

When the futures price is higher than the spot price Signup and view all the answers

Which entity uses futures contracts to hedge their needs for dairy and frozen food products?

Associated Wholesale Grocers (AWG) Signup and view all the answers

What does basis risk refer to in the context of futures contracts?

Variability in basis causing gains and losses on the contract and the asset to not perfectly offset if liquidated before maturity Signup and view all the answers

What does the Cboe Volatility Index (VIX) represent?

The market's expectations for the relative strength of near-term price changes of the S&P 500 index Signup and view all the answers

What has raised concerns about creating a feedback loop in the trading of securities derived from volatility measures?

Changes in underlying prices can be magnified Signup and view all the answers

In which markets are futures contracts used for products like wheat, corn, and soybeans?

Agricultural markets Signup and view all the answers

Who uses futures contracts to manage the price risk of their crops and ensure stable revenues?

Farmers Signup and view all the answers

What represents the number of outstanding contracts in the futures market?

Open interest Signup and view all the answers

What is the typical range for margin requirements for futures contracts?

3% to 15% Signup and view all the answers

Who seeks to profit from price movements in futures contracts?

Speculators Signup and view all the answers

What is the purpose of margin deposits in futures contracts?

To ensure both parties can meet their financial obligations as prices change Signup and view all the answers

Who uses futures and forward contracts to plan for the future and reduce uncertainty in markets?

Farmers and millers Signup and view all the answers

What do hedgers do in the futures market?

Transfer risk Signup and view all the answers

What is the financial exposure purpose of futures contracts?

Gain exposure to various assets Signup and view all the answers

How are futures contracts traded?

On a centralized futures exchange Signup and view all the answers

What happens with the futures price based on market movements?

It is adjusted daily through marking to market Signup and view all the answers

Who are the participants in futures exchanges?

Banks, corporations, governments, livestock ranchers, investment managers, construction planners, farmers, and food manufacturers Signup and view all the answers

What is the role of speculators in the futures market?

To seek profit from price movements Signup and view all the answers

What is the function of standardized futures contracts?

To increase liquidity and remove the need to verify creditworthiness of trade partners Signup and view all the answers

What is the relationship between margin and money changing hands at the time the contract is entered into?

No money changes hands at the time the contract is entered into Signup and view all the answers

Study Notes

Understanding Futures Contracts

Futures contracts are standardized and traded on a centralized futures exchange.
Standardization reduces customization, increases liquidity, and removes the need to verify creditworthiness of trade partners.
Futures contracts allow speculators and hedgers to gain financial exposure to various assets such as commodities, minerals, metals, energy, interest rates, indexes, and currencies.
Farmers and millers use futures and forward contracts to plan for the future and reduce uncertainty in markets.
Speculators seek to profit from price movements, either by going long (believing price will rise) or short (believing price will fall), while hedgers seek protection from price movements.
Futures contracts are traded on margin, with no money changing hands at the time the contract is entered into.
Futures exchanges attract a diverse range of traders including banks, corporations, governments, livestock ranchers, investment managers, construction planners, farmers, and food manufacturers.
Hedgers transfer risk, while speculators absorb that risk, bringing balance to the futures market.
There are various categories of futures contracts, and they are traded on different exchanges, with both buyers and sellers interacting directly with the exchange/clearinghouse.
Margin requirements for futures contracts typically range between 3% and 15% of the total contract value, depending on asset price and market volatility.
Margin deposits are not ownership, but rather funds that will be drawn from or added to over time as the futures contracts are marked to market, ensuring both parties can meet their financial obligations as prices change.
Investors make or lose money with daily marking to market, where the futures price is adjusted daily based on market movements, ensuring that both parties can meet their financial obligations as prices change.

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Description

Test your knowledge of futures contracts with this quiz! Explore the key concepts, benefits, and participants involved in futures trading, as well as the role of speculators and hedgers. Gain insights into margin trading, risk management, and the diverse range of assets traded through futures contracts.