Futures, Forwards, Hedgers, and Speculators

Question 1

Risk capital includes savings accounts and life insurance policies.

Answer 1

False - Savings accounts and life insurance policies are never considered to be Risk Capital.

Question 2

According to the CFTC a Contract Market means all futures traded in the U.S. must be traded on an exchange.

Answer 2

True

Question 3

Long-term U.S. Treasury notes normally pay interest:

Answer 3

Semi-annually

Question 4

When the yields on long-term securities are more than the yields on short-term securities, the yield curve is described as negative.

Answer 4

False

Question 5

Strategies using combinations of positions, such as spreads, may be as risky as outright long or short positions.

Answer 5

True - Although spreading generally reduces risk, it can increase risk because the spreader has a position in two contracts simultaneously rather than one contract. Generally, the spreader expects to make money on one contract and lose money on the other contract and net out a gain in the spread position. But, under certain circumstances (e.g. a price limit market), the spreader could lose money on both contracts. This risk must be disclosed on the disclosure documents.

Question 6

In futures trading a ‘‘Spread’’ position may not be less risky than a simple “long” or “short” position.

Answer 6

True - A spread can increase risk because the spreader has a position in two contracts simultaneously rather than just one contract. This risk is a required disclosure in the Risk Disclosure Document.

Question 7

Marking to market is part of the daily cash flow system used by U.S. futures exchanges to maintain a minimum level of margin equity for a given futures contract position by calculating the gain or loss in each contract position resulting from changes in the price of the futures contracts at the end of each trading session.

Answer 7

True

Question 8

Which of the following represents the best description of Federal Funds?

Answer 8

Excess reserves which banks that are members of the Federal Reserve System lend to each other.

Question 9

The term “money market” refers to transactions:

Answer 9

In various kinds of short-term debt instruments.

Question 10

Trading in futures developed from practices established earlier in securities trading.

Answer 10

False - Commodities trading started before securities trading began.

Question 11

Forward contracts differ from futures contracts in that they are:

Answer 11

D -
[A] Not standardized, private contracts and not subject to exchange regulations of a future exchange.
[B] Not subject to federal regulations.
[C] Not priced.
[D] All of the above

Question 12

If a client in the commodities market establishes a short position:

Answer 12

C -

[A] he can do so only on an up tick.
[B] he must carefully consider possible call dates.
[C] he can do so at any time without considering up or down ticks.
[D] he must obtain his certificate before offsetting.

Question 13

All of the following are TRUE of speculators in the futures market EXCEPT:

Answer 13

D-

[A] They are risk takers and assume the price risk
[B] They provide liquidity in the futures markets
[C] They never intend to take or make delivery of the underlying asset
[D] Most speculators are long term investors in the futures markets.