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LOS b, (Part 1): Differentiate between margin in the securities markets and margin in the futures markets. fficeffice" />

Q1. Which of the following statements regarding margin in futures accounts is FALSE?

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.

Correct answer is B)        

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.

 

Q2. A similarity of margin accounts for both equities and futures is that for both:

A)   interest is charged on the margin loan balance.

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

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

Correct answer is B)        

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.

 

Q3. Initial margin deposits for futures accounts are:

A)   based on price volatility.

B)   set by the Federal Reserve for ffice:smarttags" />U.S. markets.

C)   typically 50% of the purchase price.

Correct answer is A)        

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.

 

Q4. The clearinghouse in a futures contract performs all but which of the following roles? The clearinghouse:

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

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

C)   guarantees traders against default from another party.

Correct answer is B)

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.