Topic 1 Sample problems

1. Cash markets are also known as

a. speculative markets
b. spot markets
c. derivative markets
d. dollar markets
e. none of the above

2. A call option gives the holder

a. the right to buy something
b. the right to sell something
c. the obligation to buy something
d. the obligation to sell something
e. none of the above

3. The positive relationship between risk and return is called

a. expected return
b. market efficiency
c. the law of one price
d. arbitrage
e. none of the above

4. A transaction in which an investor holds a position in the spot market and sells
a futures contract or writes a call is
a. a gamble
b. a speculative position
c. a hedge
d. a risk-free transaction
e. none of the above

5. Which of the following are advantages of derivatives?

a. lower transaction costs than securities and commodities
b. reveal information about expected prices and volatility
c. help control risk
d. make spot prices stay closer to their true values
e. all of the above
Topic 2 Sample problems

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

2. 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
e. none of the above

3. The number of futures contracts outstanding is called the

a. reportable position
b. minimum volume
c. open interest
d. spread position
e. none of the above

4. Most futures contracts are closed by

a. delivery
b. offset
c. exercise
d. default
e. none of the above

5. The trading procedure on the floor of the futures exchange is referred to as

a. against actuals
b. open interest
c. open outcry
d. index participation
e. none of the above
Topic 3 Sample problems

1. Suppose you buy a futures contract at $150. If the futures price changes to
$147, what is its value an instant before it is marked-to-market?
a. 0
b. $3
c. -$3
d. it is impossible to tell
e. none of the above

2. Which of the following best describes normal contango?

a. the spot price is less than the futures price
b. the futures price is less than the spot price
c. the expected spot price is less than the futures price
d. the cost of carry is negative
e. none of the above

3. Which of the following can explain a contango?

a. the interest rate exceeds the dividend yield
b. the cost of carry is negative
c. futures prices exceed forward prices
d. the market is at less than full carry
e. none of the above

4. Why is the initial value of a futures contract zero?

a. the futures is immediately marked-to-market
b. you do not pay anything for it
c. the basis will converge to zero
d. the expected profit is zero
e. none of the above

5. The spot price plus the cost of carry equals

a. the convenience yield
b. the expected future spot price
c. the risk premium
d. the futures price
e. none of the above
Topic 4 Sample problems

1. A short hedge is one in which

a. the margin requirement is waived
b. the hedger is short futures
c. the hedger is short in the spot market
d. the futures price is lower than the spot price
e. none of the above

2. An anticipatory hedge is one in which

a. the basis is expected to fall
b. the hedger expects to make a profit on the futures
c. the spot position will be taken in the future
d. all of the above
e. none of the above

3. A hedge in which the asset underlying the futures is not the asset being hedged
is
a. a cross hedge
b. an optimal hedge
c. a basis hedge
d. a minimum variance hedge
e. none of the above

4. Quantity risk is
a. the difficulty in measuring the volatility
b. the uncertainty about the size of the spot position
c. the risk of mismatching the futures maturity to the spot maturity
d. the possibility of regression error
e. none of the above

5. The relationship between the spot yield and the yield implied by the futures
price is called
a. the yield beta
b. the price sensitivity
c. the tail
d. the hedge ratio
e. none of the above