LOS c, (Part 1): Describe price limits and the process of marking to market.

Q1. 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.

Q2. The practice of adjusting the margin balance in a futures account for the daily change in the futures price is called:

A)   settling up.

B)   a margin call.

C)   marking to market.

Q3. A futures account is marked to market:

A)   only when margin falls below the maintenance margin level.

B)   weekly.

C)   daily.

Q4. Which of the following statements best describes marking-to-market of a futures contract? At the:

A)   end of the day, the gains or losses are tallied to the trader's account.

B)   conclusion of each trade, the gains or losses from all previous trades in the futures contract are tallied.

C)   end of the day, the maintenance margin is increased for traders who lost and decreased for traders who gained.

Q5. In commodity trading, the exchange removes any daily losses from a trader’s account and adds any gains to the trader’s account. This process is known as:

A)   initial margin.

B)   marking to market.

C)   variation margin.

LOS c, (Part 1): Describe price limits and the process of marking to market. fficeffice" />

Q1. 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.

Correct answer is A)

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.

Q2. The practice of adjusting the margin balance in a futures account for the daily change in the futures price is called:

A)   settling up.

B)   a margin call.

C)   marking to market.

Correct answer is C)        

Marking to market is the practice of adding to or subtracting from the margin balance to adjust for the daily change in the contract value.

Q3. A futures account is marked to market:

A)   only when margin falls below the maintenance margin level.

B)   weekly.

C)   daily.

Correct answer is C)        

Margin balances are marked to market (adjusted) daily based on the change in settlement price from the previous day.

Q4. Which of the following statements best describes marking-to-market of a futures contract? At the:

A)   end of the day, the gains or losses are tallied to the trader's account.

B)   conclusion of each trade, the gains or losses from all previous trades in the futures contract are tallied.

C)   end of the day, the maintenance margin is increased for traders who lost and decreased for traders who gained.

Correct answer is A)

Marking-to-market means that, at the end of the day, all gains or losses are tallied to the trader’s account.

Q5. In commodity trading, the exchange removes any daily losses from a trader’s account and adds any gains to the trader’s account. This process is known as:

A)   initial margin.

B)   marking to market.

C)   variation margin.

Correct answer is B)

To safeguard the clearinghouse, commodity exchanges require traders to settle their accounts on a daily basis. Marking to market is when any loss for the day is deducted from the trader’s account, and any gains are added to the account.

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