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)CjF+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 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)
22.Which is the correct representation of the forward-spot price-parity relation if we are considering the maturity of a forward contract and a pure discount bond with maturity equal to Tyears? (a)F=S1-r' (b)F=S1+r) (c)F=S(r) (d)F=(1+r） Answer:(b) 23.What is the cost of carry for stocks? (a)the square root of the dividend (b)the negative of the dividend (c)the inverse of the dividend (d)the square of the dividend Answer:(b) 24.Suppose the spot price of S&P is $150 and the one year forward price is $161.What is the implied risk-free rate? (a)6.83% (b)7.33% (c)9.50% (d)11% Answer:(b) 25.The one year forward price for S&P is $172 and the spot price is $159.What is the implied risk-free rate? (a)7.6% (b)7.9% (c)8.2% (d)13.0% Answer:(c) 14-6
14-6 22. Which is the correct representation of the forward-spot price-parity relation if we are considering the maturity of a forward contract and a pure discount bond with maturity equal to T years? (a) F = S(1 – r) T (b) F = S(1 + r) T (c) F =S(r) T (d) F = S T (1 + r) Answer: (b) 23. What is the cost of carry for stocks? (a) the square root of the dividend (b) the negative of the dividend (c) the inverse of the dividend (d) the square of the dividend Answer: (b) 24. Suppose the spot price of S&P is $150 and the one year forward price is $161. What is the implied risk-free rate? (a) 6.83% (b) 7.33% (c) 9.50% (d) 11% Answer: (b) 25. The one year forward price for S&P is $172 and the spot price is $159. What is the implied risk-free rate? (a) 7.6% (b) 7.9% (c) 8.2% (d) 13.0% Answer: (c)
26.The correct representation of the forward-spot price-parity with cash payouts is: (a)F=S+rS-D (b)F=S+rD-rS (c)F=S-rD (d)F=rS+D-S Answer:(a) 27.Grainne stock has a spot price of $115.The risk-free rate is 8%per year compounded annually and the expected dividend to be received one year from now is $2.80.What is the one year futures price? (a)$121.40 (b)$124.20 (c)$127.00 (d)$127.22 Answer:(a) 28.William JoFish stock has a current spot price of $92.One year from now,the expected dividend to be received is $1.70.The risk-free interest rate is 7%per year compounded annually.Calculate the one year futures price. (a)$96.74 (b)$98.44 (c)$100.14 (d)$101.84 Answer:(a) 29.The share price of OzDesign Press is currently $112,while the forward price for delivery of a share in four months is $118.50.If the yield of the risk-free zero-coupon security with term to maturity of four months is 7.5%,calculate the implied dividend for OzDesign Press. (a)$1.34 (b)$1.90 (c)$6.99 (d)$15.39 Answer:(b) 14-7
14-7 26. The correct representation of the forward-spot price-parity with cash payouts is: (a) F = S + rS – D (b) F = S + rD – rS (c) F = S – rD (d) F = rS + D – S Answer: (a) 27. Grainne stock has a spot price of $115. The risk-free rate is 8% per year compounded annually and the expected dividend to be received one year from now is $2.80. What is the one year futures price? (a) $121.40 (b) $124.20 (c) $127.00 (d) $127.22 Answer: (a) 28. William JoFish stock has a current spot price of $92. One year from now, the expected dividend to be received is $1.70. The risk-free interest rate is 7% per year compounded annually. Calculate the one year futures price. (a) $96.74 (b) $98.44 (c) $100.14 (d) $101.84 Answer: (a) 29. The share price of OzDesign Press is currently $112, while the forward price for delivery of a share in four months is $118.50. If the yield of the risk-free zero-coupon security with term to maturity of four months is 7.5%, calculate the implied dividend for OzDesign Press. (a) $1.34 (b) $1.90 (c) $6.99 (d) $15.39 Answer: (b)
30.The holds that the forward price of a currency equals its expected future spot price. (a)Foreign Currency Hypothesis (b)Foreign Currency Futures (c)Expectations Hypothesis (d)Currency Hypothesis Answer:(c) 31.Which of the following price-parity relations carry causal implications? (a)forward-spot price-parity for stocks (b)forward-spot price-parity for bonds (c)forward-spot price-parity for foreign exchange (d)none of the above Answer:(d) 32.Determine the forward price of the euro(EUR)if the current spot price is $1.5715 per euro, the USD interest rate is 6%per year and the EUR interest rate is 7%per year. (a)$1.5568 per EUR (b)$1.5863 per EUR (c)$1.6658 per EUR (d)$1.6815 per EUR Answer:(a) 33.Determine the spot price of the Swiss Franc(CHF)if the one-year forward price is $0.9701 per Swiss Franc,the CHF interest rate is 7%and the USD interest rate is 8%. (a)$1.0477 per CHF (b)$1.0380 per CHF (c)$0.9792 per CHF (d)$0.9611 per CHF Answer:(d) 34.Determine the forward price of the shekel if the current spot price is $0.3033 per shekel;the ILS interest rate is 7.5%and the USD interest rate is 6.25%per year. (a)$0.3223 per ILS (b)$0.3260 per ILS (c)$0.3069 per ILS (d)$0.2998 per ILS Answer:(d) 14-8
14-8 30. The ________ holds that the forward price of a currency equals its expected future spot price. (a) Foreign Currency Hypothesis (b) Foreign Currency Futures (c) Expectations Hypothesis (d) Currency Hypothesis Answer: (c) 31. Which of the following price-parity relations carry causal implications? (a) forward-spot price-parity for stocks (b) forward-spot price-parity for bonds (c) forward-spot price-parity for foreign exchange (d) none of the above Answer: (d) 32. Determine the forward price of the euro (EUR) if the current spot price is $1.5715 per euro, the USD interest rate is 6% per year and the EUR interest rate is 7% per year. (a) $1.5568 per EUR (b) $1.5863 per EUR (c) $1.6658 per EUR (d) $1.6815 per EUR Answer: (a) 33. Determine the spot price of the Swiss Franc (CHF) if the one-year forward price is $0.9701 per Swiss Franc, the CHF interest rate is 7% and the USD interest rate is 8%. (a) $1.0477 per CHF (b) $1.0380 per CHF (c) $0.9792 per CHF (d) $0.9611 per CHF Answer: (d) 34. Determine the forward price of the shekel if the current spot price is $0.3033 per shekel; the ILS interest rate is 7.5% and the USD interest rate is 6.25% per year. (a) $0.3223 per ILS (b) $0.3260 per ILS (c) $0.3069 per ILS (d) $0.2998 per ILS Answer: (d)
35.Which of the following parties tends to utilize the futures market? (a)speculators (b)parties hedging the sale price of assets (c)parties hedging the purchase price of assets (d)all of the above Answer:(d) 36.Which of the following items have no intrinsic value? (a)wheat (b)gold (c)bonds (d)all of the above Answer:(c) 37.The forward-spot price-parity relation for gold is that (a)the forward price equals the spot price times 1 plus the cost of carry (b)the forward price equals the spot price times the risk-free rate (c)the forward price equals the spot price times 1 plus the risk-free rate minus dividend paid (d)the forward price times the dividend minus the spot price Answer:(a) 38.The daily settlement of obligations on futures positions is called (a)open interest (b)checking the margin (c)marking to market (d)a margin call Answer:(c) 39.Futures markets are used by (a)individuals whose credit ratings may be costly to check (b)firms whose credit ratings may be costly to check (c)contracting parties whose credit rating is cheap and easy to check (d)both a and b Answer:(d) 14-9
14-9 35. Which of the following parties tends to utilize the futures market? (a) speculators (b) parties hedging the sale price of assets (c) parties hedging the purchase price of assets (d) all of the above Answer: (d) 36. Which of the following items have no intrinsic value? (a) wheat (b) gold (c) bonds (d) all of the above Answer: (c) 37. The forward-spot price-parity relation for gold is that ________. (a) the forward price equals the spot price times 1 plus the cost of carry (b) the forward price equals the spot price times the risk-free rate (c) the forward price equals the spot price times 1 plus the risk-free rate minus dividend paid (d) the forward price times the dividend minus the spot price Answer: (a) 38. The daily settlement of obligations on futures positions is called ________. (a) open interest (b) checking the margin (c) marking to market (d) a margin call Answer: (c) 39. Futures markets are used by ________. (a) individuals whose credit ratings may be costly to check (b) firms whose credit ratings may be costly to check (c) contracting parties whose credit rating is cheap and easy to check (d) both a and b Answer: (d)
40.Eisenstein stock has a current spot price of $95.One year from now,the expected dividend to be received is $2.10.The risk-free interest rate is 6%per year compounded annually. Calculate the one-year futures price. (a)$97.10 (b)$98.60 (c)$100.70 (d)$102.80 Answer:(b) 41.Trauffaut stock has a one year futures price of $99.50,a current spot price of $95,and the risk-free rate is 6%per year compounded annually.Calculate the implied dividend for this stock. (a)$1.13 (b)$1.20 (c)$1.70 (d)$4.50 Answer:(b) 42.A trader who has a long position in flax futures wants the price of flax to whereas a trader who has a short position in flax futures wants to price to (a)increase;increase (b)decrease;increase (c)increase:decrease (d)decrease;decrease Answer:(c) 43.In a commodity futures contract,an investor who takes a long position agrees to delivery of the commodity,whereas an investor who takes a short position agrees to delivery of the commodity. (a)take;take (b)make:take (c)take;make (d)make;do nothing regarding Answer:(c) 14-10
14-10 40. Eisenstein stock has a current spot price of $95. One year from now, the expected dividend to be received is $2.10. The risk-free interest rate is 6% per year compounded annually. Calculate the one-year futures price. (a) $97.10 (b) $98.60 (c) $100.70 (d) $102.80 Answer: (b) 41. Trauffaut stock has a one year futures price of $99.50, a current spot price of $95, and the risk-free rate is 6% per year compounded annually. Calculate the implied dividend for this stock. (a) $1.13 (b) $1.20 (c) $1.70 (d) $4.50 Answer: (b) 42. A trader who has a long position in flax futures wants the price of flax to ________, whereas a trader who has a short position in flax futures wants to price to ________. (a) increase; increase (b) decrease; increase (c) increase; decrease (d) decrease; decrease Answer: (c) 43. In a commodity futures contract, an investor who takes a long position agrees to ________ delivery of the commodity, whereas an investor who takes a short position agrees to ________ delivery of the commodity. (a) take; take (b) make; take (c) take; make (d) make; do nothing regarding Answer: (c)