burning0spear

Which of the following statements about closing a futures contract through offset is most accurate?

A) A low percentage of offsets take place ex-pit.

B) The clearinghouse nets the position to zero.

C) In an offset, or reversing trade, a trader makes an exact opposite trade (maturity, quantity, and good) to her current position, either through the clearinghouse or a private party.

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An offset trade must be conducted on the floor of the exchange through the clearinghouse. Exchange for physicals (EFP) involves private parties and takes place ex pit, or off the exchange floor.

burning0spear

Prior to contract expiration the short in a futures contract can avoid futures exposure by:

A) using an exchange-for-physicals.

B) paying a cash settlement amount.

C) entering into a reversing trade.

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Prior to expiration, a futures position (long or short) is closed out by an offsetting/reversing trade. The other methods are used to settle positions at contract expiration.

burning0spear

Closing out a futures position prior to expiration:

A) can be done by entering into an offsetting trade at the current futures price.

B) can only be done by the long.

C) removes price risk but not necessarily counterparty risk.

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Taking the opposite position in an equal number of contracts on the same asset with the same expiration date ends any further exposure under the original contract.

burning0spear

An offsetting trade is used to:

A) close out a futures position prior to expiration.

B) fully hedge a risk arising in the normal course of business activity.

C) partially hedge the interest rate risk of a bond position.

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An offsetting/reversing trade is used to close out a futures position prior to expiration.

burning0spear

Most deliverable futures contracts are settled by:

A) delivery of the asset at contract expiration.

B) an offsetting trade.

C) a cash payment at expiration.

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Most futures positions are closed out by an offsetting trade at some point during life of the contract.

burning0spear

A trader has a long position in a wheat contract.

• The initial margin is $5,000.
• The maintenance margin is $3,750.
• There are 5,000 bushels in each wheat contract.
• On July 10, the price is $2.00 per bushel.

What is the price at which the trader will receive a maintenance margin call?

A) $2.25.

B) $1.90.

C) $1.75.

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The trader would have to lose $1,250, or 5,000 − 3,750 before they get a margin call. 5,000(2.00 − P) = 1,250. P = $1.75.

burning0spear

A trader is long four July gold futures contracts, each with a contract size of 300 oz. If the price of July gold increases from $380.20 to $381.00 per ounce the change in the margin balance will be:

A) $240.

B) $960.

C) -$960.

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4 × 300 × (381 – 380.20) = $960

burning0spear

An investor sold ten March stock index futures contracts. The multiplier on the contract is 250. At yesterday’s settlement price of 998.40 the margin balance in the account was computed as $86,450. Today the index future had a settlement price of 1000.20. The new margin amount is:

A) $81,950.

B) $90,950.

C) $86,900.

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86,450 − 10 × 250 × (1000.2 − 998.4) = $81,950

burning0spear

An investor bought a futures contract covering 100,000 Mexican Pesos at 0.08196 and deposited margin of $320. The following day the contract settlement price was 0.08201. The new margin balance in the account is:

A) $320.

B) $314.

C) $325.

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320 + 100,000(0.08201 − 0.08196) = $325

burning0spear

Which of the following statements regarding the mark to market of a futures account is least accurate? Marking to market of a futures account:

A) is only done when the settlement price is below the maintenance price.

B) may result in a margin balance above the initial margin amount.

C) may be done more often than daily.

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Futures accounts are marked to market daily based on the new settlement price, which can result in either an addition to or subtraction from the previous margin balance. Under extraordinary circumstances (volatility) the mark to market can be required more frequently. Once the margin is marked to market, the contract is effectively a futures contract at the new settlement price.