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

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

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

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.

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 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

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

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 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

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).