jawz

Which of the following statements about forward contracts and futures contracts is NOT correct? Forwards:

A) have no default risk, unlike futures.

B) are private contracts, unlike futures.

C) are unique contracts, unlike futures.

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Forwards have default risk because the seller may not deliver and the buyer may not accept delivery.

jawz

Which of the following is NOT a feature that distinguishes futures contracts from forward contracts? Futures contracts:

A) are regulated by the government.

B) cover a specific quantity of the underlying asset.

C) are not customized securities.

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Both futures contracts and forward contracts cover a specific quantity of the underlying asset. The other characteristics only apply to futures contracts.

jawz

Which of the following statements about forward and future contracts is least accurate?

A) The primary difference between forwards and futures is that only futures are considered financial derivatives.

B) A predetermined price to be paid for a good is a necessary requirement in the terms of a forward contract.

C) A future requires the contract purchaser to receive delivery of the good at a specified time.

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Forwards and futures are similar and serve similar needs. Both are considered types of financial derivatives in that payoffs depend on another financial instrument or asset. The primary difference is that forwards are designed for the needs of the particular parties entering the contract, where futures are standardized contracts.

jawz

If an oil wholesaler expects to buy some gasoline for his customers in the future and wants to hedge his risk using a standardized and specific contract, he should:

A) buy a crude oil futures contract.

B) buy a crude oil forward contract.

C) sell a crude oil futures contract.

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A futures contract is a forward contract that has been highly standardized and closely specified.
As with a forward contract, a futures contract calls for the exchange of some good at a future date for cash, with the payment for the good to occur at the future delivery date.
The purchaser of the contract is to receive delivery of the good and pay for it, (here the oil wholesaler) while the seller of the contract promises to deliver the good and receive payment.
The payment price is determined at the initial time of the contract.

jawz

The clearinghouse in a futures contract performs all but which of the following roles? The clearinghouse:

A) guarantees the physical delivery of the underlying asset to the buyer of futures contracts.

B) allows traders to reverse their position without having to contact the other side of the position.

C) guarantees traders against default from another party.

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The clearinghouse does not guarantee the physical delivery of the underlying asset. Indeed, most futures contracts do not have a physical delivery, but are reversed.

jawz

Initial margin deposits for futures accounts are:

A) set by the Federal Reserve for U.S. markets.

B) based on price volatility.

C) typically 50% of the purchase price.

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Margin deposits for futures trades are based on the price volatility of the underlying asset, are set by the clearinghouse, and are typically a small percentage of the contract value.

jawz

A similarity of margin accounts for both equities and futures is that for both:

A) interest is charged on the margin loan balance.

B) the value of the security is the collateral for the loan.

C) additional payment is required if margin falls below the maintenance margin.

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Both futures accounts and equity margin accounts have minimum margin requirements that, if violated, require the deposit of additional funds. There is no loan in a futures account; the margin deposit is a performance guarantee. The seller does not receive the margin deposit in futures trades. The seller must also deposit margin in order to open a position.

jawz

Which of the following statements regarding margin in futures accounts is NOT correct?

A) With futures margin, there is no loan of funds.

B) Margin is usually 10% of the contract value for futures contracts.

C) Margin must be deposited before a trade can be made.

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The margin percentage is typically low as a percentage of the value of the underlying asset and varies among contracts on different assets based on their price volatility. The other statements are true.

jawz

The initiation of a futures position:

A) is done through a bank or other large financial institution acting as a dealer.

B) is at a price negotiated between the buyer and seller.

C) requires both a buyer and a seller.

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Futures trades are done through open outcry on the futures exchange and require a buyer (long) and a seller (short) for a trade to take place. The other statements are generally true for forward contracts, which are all individually negotiated.

jawz

Which of the following statements regarding a futures trade of a deliverable contract is NOT correct?

A) The long is obligated to purchase the asset.

B) Equilibrium futures price is known only at the end of the trading day.

C) The price is determined by open outcry.

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Each trade is made at the then current equilibrium price, determined by open outcry on the floor of the exchange, and is reported as it is executed. The long is obligated to buy, and the short is obligated to sell, the specified quantity of the underlying asset.