Reading 61: Futures Markets and Contracts Los f~Q1-7

following, contract, expected, whether, future

LOS f: Discuss whether futures prices equal expected spot prices.

Q1. Which of the following best defines normal contango? A contango is known as when the futures price lies:

A) above the expected future spot price and the futures price rises over the life of the contract.

B) below the expected future spot price and the futures price falls over the life of the contract.

C) above the expected future spot price and the futures price falls over the life of the contract.

Q2. Which of the following is TRUE in normal backwardation? Futures prices tend to:

A) rise over the life of the contract because speculators are net long and have to receive compensation for bearing risk.

B) rise over the life of the contract because hedgers are net long and have to receive compensation for bearing risk.

C) fall over the life of the contract because hedgers are net short and have to receive compensation for bearing risk.

Q3. Under the view that futures transfer risk from asset holders to futures buyers, the:

A) expected asset price in the future will be less than the futures price.

B) convenience yield is positive.

C) futures price will be less than the expected future spot price.

Q4. What is the situation called when a futures price continuously increases over its life because most hedging strategies are short hedges?

A) Contango.

B) Normal backwardation.

C) A normal market.

Q5. The theoretical question of whether futures prices are unbiased predictors of future spot rates focuses on:

A) whether futures buyers are taking on asset owners’ price risk.

B) whether futures markets are efficient.

C) the correlation between interest rate changes and asset price changes.

Q6. Under the view that futures markets are primarily a mechanism for short hedgers and long hedgers to offset their respective asset price risks:

A) forward prices will be greater than futures prices.

B) expected future asset prices are less than the futures prices.

C) futures prices will be unbiased predictors of future spot rates.

Q7. Suppose the soybean market is in backwardation with a cash price of $6.50/bushel and a futures price of $6.00/bushel. Also assume that a trader owns 5,000 bushels of soybeans and does not need the soybeans until after futures expiration. Which of the following is the best strategy for the trader?

A) Do nothing since the convenience yield is so high.

B) Sell the soybeans in the spot market, buy an appropriate futures, and profit $2,500.

C) Sell the soybeans in the spot market, buy an appropriate futures, and profit $1,250.