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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 2: Mechanics of Futures Markets Multiple Choice Test Bank: Question with Answers 1. Which of the following is true A. Both forward and futures contracts are traded on exchanges. B. Forward contracts are traded on exchanges, but futures contracts are not. C. Futures contracts are traded on exchanges, but forward contracts are not. D. Neither futures contracts nor forward contracts are traded on exchanges. Answer: C Futures contr
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  Hull: Options, Futures, and Other Derivatives, Ninth EditionChapter 2: Mechanics of Futures MarketsMultiple Choice Test Bank: uestion !ith ns!ers 1.Which of the following is true A.Both forward and futures contracts are traded on exchanges. B.Forward contracts are traded on exchanges, but futures contracts are not.C.Futures contracts are traded on exchanges, but forward contracts are not.D.Neither futures contracts nor forward contracts are traded on exchanges. Answer: CFutures contracts trade only on exchanges. Forward contracts trade only in the oer!the!counter ar#et.$.Which of the following is N%& true A.Futures contracts nearly always last longer than forward contracts B.Futures contracts are standardi'ed( forward contracts are not. C.Deliery or )nal cash settle ent usually ta#es *lace with forward contracts( the sa e is not true of futures contracts. D.Forward contracts usually hae one s*eci)ed deliery date( futures contract often hae a range of deliery dates. Answer: AForward contracts often last longer than futures contracts. B, C, and D are true+.n the corn futures contract a nu ber of di-erent ty*es of corn can be deliered with *rice ad/ust ents s*eci)ed by the exchange0 and there are a nu ber of di-erent deliery locations. Which of the following is true A.&his exibility tends increase the futures *rice. B.&his exibility tends decrease the futures *rice. C.&his exibility ay increase and ay decrease the futures *rice. D.&his exibility has no e-ect on the futures *rice Answer: B &he *arty with the short *osition chooses between the alternaties. &he alternaties therefore a#e the futures contract ore attractie to the *arty with the short *osition. &he lower the futures *rice the less attractie it is to the *arty with the short *osition. &he bene)t of the alternaties aailable to the *arty with the short *osition is therefore co *ensated for by the futures *rice being lower than it would otherwise be.  2.A co *any enters into a short futures contract to sell 34,444 units of a co odity for 54 cents *er unit. &he initial argin is 62,444 and the aintenance argin is 6+,444. What is the futures *rice *er unit aboe which there will be a argin call7A.58 centsB.59 centsC.52 centsD.5$ cents Answer: D &here will be a argin call when ore than 61444 has been lost fro the argin account so that the balance in the account is below the aintenance argin leel. Because the co *any is short, each one cent rise in the *rice leads to a loss or 4.4134,444 or 6344. A greater than $ cent rise in the futures *rice will therefore lead to a argin call. &he future *rice is currently 54 cents. When the *rice rises aboe 5$ cents there will be a argin call. 3.A co *any enters into a long futures contract to buy 1,444 units of a co odity for 694 *er unit. &he initial argin is 69,444 and the aintenance argin is 62,444. What futures *rice will allow 6$,444 to be withdrawn fro the argin account7 A. 638B. 69$C. 692D.699 Answer: BA ounts in the argin account in excess of the initial argin can be withdrawn. ;ach 61 increase in the futures *rice leads to a gain of 61444. When the futures *rice increases by 6$ the gain will be 6$444 and this can bewithdrawn. &he futures *rice is currently 694. &he answer is therefore 69$.9.%ne futures contract is traded where both the long and short *arties are closing out existing *ositions. What is the resultant change in the o*en interest7 A.No changeB.Decrease by oneC.Decrease by twoD.ncrease by oneAnswer: B   &he o*en interest goes down by one. &here is one less long *osition and one less short *osition.5.Who initiates deliery in a corn futures contract A.&he *arty with the long *osition B.&he *arty with the short *osition C.;ither *arty D.&he exchange Answer: B &he *arty with the short *osition initiates deliery by sending a <Notice of ntention to Delier= to the exchange. &he exchange has a *rocedure for choosing a *arty with a long *osition to ta#e deliery. 8.>ou sell one Dece ber futures contracts when the futures *rice is 61,414 *er unit. ;ach contract is on 144 units and the initial argin *er contract that you *roide is 6$,444. &he aintenance argin *er contract is 61,344. During the next day the futures *rice rises to 61,41$ *er unit. What is the balance of your argin account at the end of the day7 A.61,844B.6+,+44C.6$,$44D.6+,544Answer: B &he *rice has increased by 6$. Because you hae a short *osition you lose $144 or 6$44. &he balance in the argin account therefore goes down fro 6+,344 to 6+,+44.?.A hedger ta#es a long *osition in a futures contract on a co odity on Noe ber 1, $41$ to hedge an ex*osure on @arch 1, $41+. &he initial futures *rice is 694. %n Dece ber +1, $41$ the futures *rice is 691. %n @arch 1, $41+ it is 692. &he contract is closed out on @arch 1, $41+. Whatgain is recogni'ed in the accounting year anuary 1 to Dece ber +1, $41+7 ;ach contract is on 1444 units of the co odity.A. 64B.61,444C.6+,444D.62,444Answer: Dedge accounting is used. &he whole of the gain or loss on the futures is therefore recogni'ed in $41+. None is recogni'ed in $41$. n this case the  gain is 62 *er unit or 62,444 in total. 14.A s*eculator ta#es a long *osition in a futures contract on a co odity onNoe ber 1, $41$ to hedge an ex*osure on @arch 1, $41+. &he initial futures *rice is 694. %n Dece ber +1, $41$ the futures *rice is 691. %n @arch 1, $41+ it is 692. &he contract is closed out on @arch 1, $41+. Whatgain is recogni'ed in the accounting year anuary 1 to Dece ber +1, $41+7 ;ach contract is on 1444 units of the co odity.A. 64B. 61,444C.6+,444D.62,444Answer: C n this case there is no hedge accounting. ains or losses are accounted for as they are accrued. &he *rice *er unit increases by 6+ in $41+. &he total gain in $41+ is therefore 6+,444.11.&he freuency with which futures argin accounts are ad/usted for gainsand losses isA.DailyB.Wee#lyC.@onthlyD.EuarterlyAnswer: An futures contracts argin accounts are ad/usted for gains or losses daily.1$.@argin accounts hae the e-ect of A.educing the ris# of one *arty regretting the deal and bac#ing out B.;nsuring funds are aailable to *ay traders when they a#e a *ro)tC.educing syste ic ris# due to colla*se of futures ar#etsD.All of the aboeAnswer: Dnitial argin reuire ents dra atically reduce the ris# that a *arty will wal# away fro a futures contract. As a result they reduce the ris# that the exchange clearing house will not hae enough funds to *ays *ro)ts to traders. Further ore, if traders are less li#ely to su-er losses because of counter*arty defaults there is less syste ic ris#.1+.Which entity in the Gnited Htates ta#es *ri ary res*onsibility forregulating futures ar#et7A.Federal esere Board
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