Reading 63: LOS b ～ Q1- 3

1.The value of a futures contract is:

A)   equal to the variation margin paid on any given day.

B)   equal to the cumulative variation margin paid over the life of the contract.

C)   zero when the account is marked to market for an account that has sufficient margin.

D)   calculated in the same manner as the value of a forward contract.

The correct answer was C)

The value of a futures contract is zero when the account is marked-to-market and there is no margin call. The price of the contract is adjusted to the new ‘no-arbitrage’value, which is theoretically the same as the settle price at the end of trading, as long as price change limits have not been reached. Note that this is different from a forward contract. With a forward contract, the forward price is fixed for the life of the contract so the contract may accumulate either a positive or negative value as the forward price for new contracts changes over the life of the contract.

2.The value of a futures contract:

A)   is zero after the mark-to-market period.

B)   is based on the difference between the futures price at contract initiation and the current futures price.

C)   depends on the risk-free rate over the term of the contract in a deliverable contract.

D)   is equal to the margin balance in the futures account after the mark-to-market period.

The correct answer was A)

While the value of a futures contract may be positive or negative during a trading day. However when the account is marked-to-market the futures price is effectively reset to the most recent settle price so that the contract has zero value unless the equilibrium price is outside daily price change limits.

3.The value of a futures contract between the times when the account is marked-to-market is:

A)   the same as the contract price.

B)   greater than the value of a forward contract entered into on the same date.

C)   never less than the value of a forward contract entered into on the same date.

D)   equal to the difference between the price of a newly issued contract and the settle price at the most recent mark-to-market period.

The correct answer was D)

Between the mark-to-market account adjustments, the contract value is calculated just like that of a forward contract; it is the difference between the price at the last mark-to-market and the current futures price, (i.e. the futures price on a newly issued contract). The mark-to-market of a futures contract is the payment or receipt of funds necessary to adjust for the gains or losses on the position. This adjusts the contract price to the ‘no-arbitrage’ price currently prevailing in the market.