Chapt 4

Question 1

Daily limits are established by ___ and must be approved by ____.

Answer 1

the Board of Directors; the CFTC

Question 2

What is the price limit on most exchanges for the current month or spot month?

Answer 2

there is not a daily limit

Question 3

On the CBOT, what happens when three or more delivery months of a given commodity close at a limit higher or lower?

Answer 3

the daily limit is raised 150% of the current level for all contract months and remain like this for 3 business days. Minimum margin rates are also increased by 150% when price limits are expanded.

Question 4

Which exchange does not automatically raise margin rates when expanded daily price limits are in effect?

Answer 4

Chicago Mercantile Exchange (CME)

Question 5

Explain the valuation of a wheat contract on the CBOT:

Answer 5

• 5000 bushels for 1 contract
• prices are quoted in cents and quarter cents per bushel
• the min price fluctuation (tick) is one quarter cent/bushel (AKA $12.50 per contract) 5000 x $.0025 = $12.50

Question 6

explain the valuation of a soybean contract on the CBOT:

Answer 6

• 5000 bushels/contract
• prices are quoted in cents and quarter cents per bushel
• the min price fluctuation (tick) is one quarter cent/bushel (AKA $12.50 per contract) 5000 x $.0025 = $12.50

Question 7

explain the valuation of a soybean oil contract on the CBOT:

Answer 7

• 60,000 pounds
• prices quoted in dollars and cents per hundredweight
• daily price limit is 1 cent/pound or $1.00/hundredweight
• expanded limit is $1.50/hundredweight
• min tick is 1/100 of a cent/pound, 1 cent/hundredweight, $6.00 per contract

Question 8

explain the valuation of a soybean meal contract on the CBOT:

Answer 8

• contract is 100 tons and prices are quoted in dollars and cents per ton
• daily price limit is $10/ton
• expanded price limit is $15/ton
• minimum price fluctuation is $0.10/ton or $10/contract($0.10 x 100 tons = $10.00)

Question 9

U.S. Treasury Bonds are also referred to as…

Answer 9

T-bond futures

Question 10

Describe the value and maturing of a T-bond

Answer 10

T-bond futures contract is $100,000 face value of U.S. Treasury bonds maturing at least 15 years from delivery date. T-bonds may not be callable for 15 years after the delivery date

Question 11

T-bonds call for the delivery of US Treasury bonds which are back by the full faith and credit of the US government, but the futures contracts ____.

Answer 11

are not back by, or obligations of, the US government.

Question 12

How are T-bond futures prices quoted?

Answer 12

as a % in increments of 1/32 of a point (or tick).

Question 13

What is the daily price limit of a T-bond futures contract?

Answer 13

96/32nds or $3,000/contract

Question 14

What is the expanded limit of a T-bond futures contract?

Answer 14

144/32nds or $4500/contract

Question 15

Bond prices move in an inverted relationship to interest rates. In other words…

Answer 15

when interest rates rise, bond prices drop, and when interest rates drop, bond prices rise.

Question 16

T-bond futures are referred to as long-term financial futures. What are two other long-term financial futures

Answer 16

Treasury note futures and Government National Mortgage Association Contracts (GNMA futures)

Question 17

What exchange trades short-term futures contract?

Answer 17

CME

Question 18

what are the 5 short-term interest rate futures contracts?

Answer 18

1. US Treasury bills (US T bills)
2. Domestic Certificates of Deposits (CDs)
3. Eurodollar Time Deposits
4. AMERIBOR
5. SOFR

Question 19

How are US T-bills sold and when do they mature?

Answer 19

sold on a discount basis (less than face value); mature at face value

Question 20

What is the trading limit for short-term securities?

Answer 20

there is no trading limit

Question 21

If interest rates decline, what happens to the price of the t-bills contract?

Answer 21

it rises

Question 22

If interest rates rise, what happens to the price of the t-bills contract?

Answer 22

it declines

Question 23

What is the face value of a T-bill

Answer 23

$1,000,000.00

Question 24

what is the minimum tick for a US T-bill?

Answer 24

$25 or (.01%(.0001) x 1,000,000 x 1/4 yr = 25)

Question 25

the net profit realized in selling the bond futures contract and the using those funds to purchase the bond for delivery

Answer 25

implied repo rate

Question 26

explain 2 main points about EURODOLLAR futures

Answer 26

• based on a 3 month US dollar London Interbank Offered Rate (LIBOR)
• frequently used to hedge against interest rate changes (for companies that plan to borrow or lend in the future)

Question 27

explain features of the AMERIBOR

Answer 27

• an alternative to LIBOR
• based on the cost of overnight, unsecured funding across all 50 states and PR
• 7 day and 3 month contracts available on the CBOE

** uses a multiplier of 100, with a pricing convention of 10,000 - (rate x 100) = AMERIBOR

Question 28

Where are foreign exchange rates established?

Answer 28

in the Interbank Market

Question 29

involves the purchase and sale of foreign currencies between financial intermediaries, such as commercial and investment banks

Answer 29

Interbank Market - this market is unregulated and decentralized

Question 30

What is the most common type of transaction that takes place in the foreign exchange market?

Answer 30

spot transactions - which are settled in two business days from the trade date

Question 31

what type of transaction settles in more than 2 business days on the foreign exchange?

Answer 31

forward transaction

Question 32

What are the factors that affect supply & demand of a country’s currency?

Answer 32

1. demand for raw materials
2. country’s balance of payments
3. affluence of the population
4. level of foreign investment by the country
5. government monetary and fiscal policy
6. Direct government intervention

**other factors: political atmosphere, threat of war, trade embargoes

Question 33

was formed to implement monetary policy, conduct foreign exchange operations and operate the system of the Euro

Answer 33

European Central Bank (ECB)