Derivatives【Reading 62】Sample trade, 2012, ask

optiix

For a futures trade:

A) a single price is determined by supply and demand.

B) the buyer pays the bid price; the seller receives the ask price.

C) the seller receives the bid price; the buyer pays the ask price.

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There is no bid/ask spread in futures trades; the price for the trade is determined on the floor of the exchange and is the single price the long will pay the short for the asset at the termination of the contract.

burning0spear

Which is the only type of commodity where trading in forward contracts is larger than trading with future contracts?

A) Foreign currency.

B) Agricultural.

C) Interest rate.

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Trading in foreign currency forwards is far larger than the trading in futures. For example, with international trade, businesses can hedge against adverse currency fluctuations. But each business arrangement is unique, and most require the flexibility of a forward, whose terms are not standardized, that meets their special needs.

burning0spear

Which of the following statements about futures contracts on U.S. exchanges is least likely accurate?

A) Prices of currency futures contracts are quoted as U.S. dollars per unit of the foreign currency.

B) A $100,000 Treasury bond futures contract that settles at 102-16 represents Treasury bonds worth $102,500.

C) If annualized 90-day LIBOR decreases from 3.64% to 3.58%, a long position in a $1 million Eurodollar futures contract loses $150.

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The long position in a Eurodollar contract gains value when LIBOR decreases. Price quotes on Eurodollar futures are calculated as 100 minus annualized 90-day LIBOR in percent. A change in 90-day LIBOR of 0.01% represents a $25 change in value on a $1 million Eurodollar futures contract. If LIBOR decreases from 3.64% to 3.58%, the contract price increases six ticks from 96.36 to 96.42, so the long position gains 6 × $25 = $150.
Treasury bond futures that have a face value of $100,000 are quoted as a percent of face value with fractions measured in 1/32nds. A bond futures quote of 102-16 represents 102 16/32, or 102.5% of $100,000, which is $102,500.
Currency futures contracts are set in units of the foreign currency and stated as USD/unit.

burning0spear

At the Chicago Board of Trade, futures on foreign currencies have a contract size fixed in:

A) foreign currency units and are priced in dollars per foreign currency unit.

B) dollars and are priced in dollars per foreign currency unit.

C) dollars and are priced in foreign currency units per dollar.

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In the U.S., futures contracts for foreign currencies have a contract size fixed in foreign currency units (e.g. 125,000 Euros) and are priced in dollars per foreign currency unit (e.g. $0.08341 per Peso).

burning0spear

Which of the following statements regarding Treasury bond futures is least accurate?

A) Upon delivery, the long pays the short the futures price divided by the conversion factor for the bond the short chooses to deliver.

B) They are a deliverable contract.

C) The contract size is $100,000.

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The delivery price for Treasury bonds under the contract is multiplied by the conversion factor for the bond the short chooses to deliver. The other statements are true.

burning0spear

An exchange-for-physicals, as it pertains to futures contracts:

A) is another term for delivering an asset to satisfy a futures contract.

B) is another term for accepting delivery of an asset to satisfy a futures contract.

C) involves an agreement off the floor of the exchange.

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An exchange-for-physicals involves an agreement between long and short contract holders to settle their respective obligations by delivery and purchase of an asset. It is executed off the floor of the exchange and reported to exchange officials who then cancel both positions.

burning0spear

Which of the following statements about closing a futures position through delivery is most accurate?

A) Depending on the wording of the contract, a trader may close a contract by either delivering the goods to a designated location or by making a cash settlement of any gains or losses.

B) Although the popularity of physical delivery has decreased over time, delivery by cash settlement remains the most popular method of closing a futures position.

C) Delivery is also known as exchange for physicals (EFP).

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The other statements are false.
Physical deliveries and cash settlements combined represent less than one percent of all settlements.
An exchange for physicals differs from a delivery in that:

• 
  The traders actually exchange the goods.
• 
  The contract is not closed on the floor of the exchange.
• 
  The two traders privately negotiate the terms of the transaction.

burning0spear

Which of the following statements about closing a futures position is least accurate?

A) Few futures positions are settled by delivery of cash or assets.

B) Closing a position through delivery refers exclusively to the physical delivery of goods.

C) Except for exchange for physicals (EFP) transactions, futures contracts must be closed on the exchange floor.

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Delivery can also occur through cash settlement of gains and losses. The other statements are true. Approximately one percent of futures transactions are closed through actual delivery or cash settlement.

burning0spear

All of the following are methods to close out a futures position EXCEPT:

A) delivery of the underlying commodity.

B) allowing the contract to expire without taking action.

C) through an exchange for physicals with another trader.

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A futures contract cannot expire without any action being taken. If the contract has not been closed out through an offsetting trade, then one party must deliver the underlying commodity and the other party must purchase the commodity.

burning0spear

Which method is NOT an appropriate way to close out a futures contract?

A) Reverse trade.

B) Delivery.

C) Default.

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Default is failure to perform as required under the contract.