Futures

Which of the following is false?

• Futures contracts are marked to market.

• Futures contracts are more liquid than forward contracts.

• Futures contracts trade on a financial exchange.

• Futures contracts allow fewer delivery options than forward contracts.

Which one of the following actions will offset a long position in a futures contract that expires in June?

• Sell a futures contract that expires in June.

• Sell any futures contract, regardless of its expiration date.

• Buy any futures contract, regardless of its expiration date.

• Buy a futures contract that expires in June.

Which of the following does the most to reduce default risk for futures contracts?

• Credit checks for both buyers and sellers.

• Marking to market.

• High liquidity.

• Flexible delivery arrangements.

Using futures contracts to transfer price risk is called:

• hedging.

• arbitrage.

• diversifying.

• speculating.

Which of the following is best described as selling a synthetic asset and simultaneously buying the actual asset?

• Speculating.

• Diversifying.

• Arbitrage.

• Hedging.

Which of the following causes the futures price of an asset to increase, everything else held constant?

• Higher expected spot price for the underlying asset.

• Higher income received while carrying the underlying asset.

• Lower risk-free rate of interest.

• Higher costs of carrying the underlying asset.

A futures contract is:

• a nonnegotiable, nonmarketable instrument.

• a security, like stocks and bonds.

• a firm agreement by two parties to make or take delivery of an item sometime in the future.

• not a legal contract, and therefore its terms can be changed during the life of the contract.

With regard to the basis:

• basis risk can be eliminated completely.

• although the basis fluctuates over time, it can be predicted precisely.

• changes in the basis cannot affect the final results while a hedge is in effect.

• a hedge will reduce risk as long as basis fluctuations are usually less volatile than price fluctuations.