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LOS d: Describe how a futures contract can be terminated at or prior to expiration by a close-out (i.e., offset), a delivery, an equivalent cash settlement, or an exchange-for-physicals.
Q1. 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.
Q2. Which of the following statements about closing a futures position through delivery is most accurate?
A) Although the popularity of physical delivery has decreased over time, delivery by cash settlement remains the most popular method of closing a futures position.
B) Delivery is also known as exchange for physicals (EFP).
C) 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.
Q3. Which of the following statements about closing a futures position is least accurate?
A) Closing a position through delivery refers exclusively to the physical delivery of goods.
B) Few futures positions are settled by delivery of cash or assets.
C) Except for exchange for physicals (EFP) transactions, futures contracts must be closed on the exchange floor.
Q4. All of the following are methods to close out a futures position EXCEPT:
A) allowing the contract to expire without taking action.
B) delivery of the underlying commodity.
C) through an exchange for physicals with another trader.
Q5. Which method is NOT an appropriate way to close out a futures contract?
A) Reverse trade.
B) Delivery.
C) Default.
Q6. 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) 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.
C) The clearinghouse nets the position to zero.
Q7. 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.
Q8. Which of the following is least likely a way to terminate a long position in a deliverable futures contract at expiration?
A) Close-out at expiration.
B) An equivalent cash settlement.
C) An exchange-for-physicals.
Q9. Closing out a futures position prior to expiration:
A) can only be done by the long.
B) can be done by entering into an offsetting trade at the current futures price.
C) removes price risk but not necessarily counterparty risk.
Q10. 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.
Q11. Most deliverable futures contracts are settled by:
A) an offsetting trade.
B) delivery of the asset at contract expiration.
C) a cash payment at expiration.
LOS d: Describe how a futures contract can be terminated at or prior to expiration by a close-out (i.e., offset), a delivery, an equivalent cash settlement, or an exchange-for-physicals. fficeffice" />
Q1. 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.
Correct answer is C)
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.
Q2. Which of the following statements about closing a futures position through delivery is most accurate?
A) Although the popularity of physical delivery has decreased over time, delivery by cash settlement remains the most popular method of closing a futures position.
B) Delivery is also known as exchange for physicals (EFP).
C) 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.
Correct answer is C)
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.
Q3. Which of the following statements about closing a futures position is least accurate?
A) Closing a position through delivery refers exclusively to the physical delivery of goods.
B) Few futures positions are settled by delivery of cash or assets.
C) Except for exchange for physicals (EFP) transactions, futures contracts must be closed on the exchange floor.
Correct answer is A)
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.
Q4. All of the following are methods to close out a futures position EXCEPT:
A) allowing the contract to expire without taking action.
B) delivery of the underlying commodity.
C) through an exchange for physicals with another trader.
Correct answer is A)
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.
Q5. Which method is NOT an appropriate way to close out a futures contract?
A) Reverse trade.
B) Delivery.
C) Default.
Correct answer is C)
Default is failure to perform as required under the contract.
Q6. 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) 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.
C) The clearinghouse nets the position to zero.
Correct answer is C)
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.
Q7. 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.
Correct answer is C)
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.
Q8. Which of the following is least likely a way to terminate a long position in a deliverable futures contract at expiration?
A) Close-out at expiration.
B) An equivalent cash settlement.
C) An exchange-for-physicals.
Correct answer is B)
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Q9. Closing out a futures position prior to expiration:
A) can only be done by the long.
B) can be done by entering into an offsetting trade at the current futures price.
C) removes price risk but not necessarily counterparty risk.
Correct answer is B)
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.
Q10. 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.
Correct answer is A)
An offsetting/reversing trade is used to close out a futures position prior to expiration.
Q11. Most deliverable futures contracts are settled by:
A) an offsetting trade.
B) delivery of the asset at contract expiration.
C) a cash payment at expiration.
Correct answer is A)
Most futures positions are closed out by an offsetting trade at some point during life of the contract.
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