jawz

If a farmer expects to sell his wheat in anticipation of a harvest and wants to hedge his risk, he needs to:

A) sell wheat futures contracts now.

B) sell wheat now.

C) buy wheat futures contracts now.

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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 while the seller (here the wheat farmer) of the contract promises to deliver the good and receive payment.
The payment price is determined at the initial time of the contract.

jawz

Which of the following is least likely a characteristic of futures contracts? Futures contracts:

A) are traded in an active secondary market.

B) are backed by the clearinghouse.

C) require weekly settlement of gains and losses.

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Futures contracts require daily settlement of gains and losses. The other statements are accurate.

jawz

A futures contract is least likely to be:

A) regulated.

B) standardized.

C) illiquid.

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Futures contracts are standardized and subject to governmental and exchange regulation. They are actively traded in the secondary market.

jawz

A futures contract is least likely:

A) an equity security.

B) a forward contract.

C) exchange-traded.

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A futures contract may be based on an equity price or return, but would be, in that case, an equity derivative. A futures contract is a forward contract that is standardized and exchange traded.

optiix

Which type of futures contract does NOT allow for the underlying goods to be delivered?

A) Index.

B) Interest rate.

C) Agricultural.

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The nature of an index future realistically prohibits settlement in the underlying commodity. For example, the Standard and Poor’s 500 stock index would require settlement in 500 different common stocks, in the exact proportion of the total value as exists in the index at expiration of the future. Agriculture and interest rate futures both involve deliverable commodities.

optiix

Which of the following statements about futures is least accurate?

A) Futures contracts have a maximum daily allowable price limit.

B) The futures exchange specifies the minimum price fluctuation of a futures contract.

C) The exchange-mandated uniformity of futures contracts reduces their liquidity.

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The exchange-mandated uniformity of futures contracts increases their liquidity.

optiix

The clearinghouse, in U.S. futures markets, does NOT:

A) choose which assets will have futures contracts.

B) guarantee performance of futures contract obligations.

C) act as a counterparty in futures contracts.

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The exchange decides which contracts will be traded and their specifications. The clearinghouse acts as the counterparty to every contract and guarantees performance.

optiix

Which of the following statements regarding futures contracts is least accurate?

A) The exchange sets the times of trading for futures contracts.

B) Price fluctuations can be any amount.

C) The long will have gains when the futures price rises above the initial contract price.

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The minimum price fluctuation, called a ‘tick’, is set by the exchange. The other statements are true

optiix

All of the following are characteristics of futures contracts EXCEPT:

A) they are liquid.

B) the contract size is standardized.

C) they trade in a dealer (over the counter) market.

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Futures contracts trade on organized exchanges; forward contracts are created by dealers.

optiix

Standardization features of futures contracts do not include the:

A) delivery time.

B) quality of the good that can be delivered.

C) delivery price of the commodity.

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The delivery, or spot price at contract expiration, of a commodity is a variable and cannot be included in a futures contract. Quality and delivery time are both part of the standardized terms of a futures contract.