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Contract Terms of a Future Exchanges

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1.
Which of the following contract terms is not set by the futures exchange?
a. the price
b. the deliverable commodities
c. the dates on which delivery can occur
d. the size of the contract
e. the expiration months

2.
Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months.
a. $5.104
b. none are correct
c. $4.458
d. $4.532
e. $4.468

3.
Margin in a futures transaction differs from margin in a stock transaction because
a. stock transactions are much smaller
b. delivery occurs immediately in a stock transaction
c. no money is borrowed in a futures transaction
d. futures are much more volatile

4.
Most futures contracts are closed by
a. exercise
b. offset
c. default
d. none are correct
e. delivery

5.
Which of the following is not a forward contract?
a. an automobile lease non-cancelable for three years
b. none are correct
c. a signed contract to buy a house in six months
d. a long-term employment contract at a fixed salary
e. a rain check

6.
One of the advantages of forward markets is
a. none are correct
b. the contracts are private and customized
c. trading is conducted in the evening over computers
d. performance is guaranteed by the G-30
e. trading is less costly and governed by more rules

7.
Which of the following best describes normal contango?
a. none are correct
b. the futures price is less than the spot price
c. the cost of carry is negative
d. the expected spot price is less than the futures price
e. the spot price is less than the futures price

8.
Suppose you sell a three-month forward contract at $35. One month later, new forward contracts are selling for $30. The risk-free rate is 10 percent. What is the value of your contract?
a. $4.55
b. $4.96
c. $4.92
d. $5
e. none are correct

9.
Futures prices differ from spot prices by which one of the following factors?
a. the systematic risk
b. the risk premium
c. the spread
d. none are correct
e. the cost of carry

10.
Suppose there is a risk premium of $0.50. The spot price is $20 and the futures price is $22. What is the expected spot price at expiration?
a. $21.50
b. none are correct
c. $24.50
d. $22.50
e. $20.50

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Solution Summary

Answers to 10 Multiple choice questions on derivatives.

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1. Which of the following contract terms is not set by the futures exchange?

a. the price

b. the deliverable commodities

c. the dates on which delivery can occur

d. the size of the contract

e. the expiration months

Answer: a. the price

The price quotes are given by traders

2. Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months.

a. $5.104

b. none are correct

c. $4.458

d. $4.532

e. $4.468

Answer: e. $4.468

F/S= (1+ domestic interest rate x 9/12) / (1+ foreign interest rate x 9/12)
F = S x (1+ domestic interest rate x 9/12) / (1+ foreign interest rate x 9/12)
0r F= $ 4.50 x (1+ 6% x 9/12) / (1+ 7 % x 9/12)
Or F = $ 4.468

3. Margin in a futures transaction differs from margin in a stock transaction because

a. stock transactions are much smaller

b. delivery occurs immediately in a stock ...

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