Exam 20: Futures Contracts

A) the price agreed upon today for deferred delivery of an asset.
B) the spot price of an asset at the time it is delivered in the future.
C) the future value of the spot price of an asset.
D) a multiple of the current spot market price.

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A) basis.
B) spread.
C) yield spread.
D) premium.

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Solution: (a) Since the manager is long in the cash market, the correct hedge is a short futures position. This problem ignores weighted hedges. The \( \$ 2 \) million face value represents \( \$ 2,000,000 / \$ 1000=2000 \) bonds, which at a current price of 77 is worth \( \$ 1,540,000 \). The manager sells 20 contracts at a current price of 67 , for a total transaction value of \( 20(\$ 67,000)=\$ 1,340,000 \). Repurchasing the futures three months later at a price of 60 results in a total cost of \( 20(\$ 60,000)=\$ 1,200,000 \). \(\begin{array}{llll} \text { Beginning sale } \quad \$ 67,000 \times 20 & = & \$ 1,340,000 \\ \text { Ending purchase } \quad \$ 60,000 \times 20 & = & \underline{1,200,000} \\ \text { Gain from short futures } & = & \$ 140,000 \end{array}\) (b) As noted in (a), there are 2000 bonds. If the bonds are priced at 68 three months later, the cash market position is: \(\begin{array}{llll} \text { Beginning: } & \$ 770 \times 2000 & = & \$ 1,540,000 \\ \text { Ending: } & \$ 680 \times 2000 & = & \underline{\$ 1,360,000} \\ \text { Loss from long bonds }& & = & \$ 180,000 \end{array}\) \(\text { (c) The net effect of this hedge is a loss of } \$ 40,000 \text {. }\) \(\begin{array}{lll} \text { Gain from short futures } & = & \$ 140,000 \text { from part (a) } \\ \text { Loss from long bonds } & = & \underline{180,000 \text { from part (b) }}\\ \text { Net loss }&&{\$ 40,000} \end{array}\)

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All profits and losses are credited and ...

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A) The futures price and spot price converge over time.
B) The spot price is a discounted value of the futures price.
C) The futures price provides information about the expected future spot price.
D) In equilibrium, the spot price and futures price are equal.

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C

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A purchaser of a futures contract can ta...

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A) A short position in the S&P 500 contract
B) A long position in the S&P 500 contract
C) A short position in the DJIA contract
D) A long position in the DJIA contract

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The item being traded is not transferred at the time of the futures contract, so the margin is not a down payment. Instead, it is a performance bond. It is common for the margin to be in the range of two to ten percent of the value of the contract.

A) 25
B) 50
C) 75
D) 95

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A) trade strictly for their own accounts.
B) trade strictly for others.
C) can trade for their own accounts or for others.
D) are not allowed to trade on the exchange where they are members.

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A) The dealer
B) The futures exchange
C) The commodity producer
D) The clearinghouse

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The initial margin is $3500.
Each point ...

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