kmf229

The value of a futures contract between the times when the account is marked-to-market is:

A) never less than the value of a forward contract entered into on the same date.

B) equal to the difference between the price of a newly issued contract and the settle price at the most recent mark-to-market period.

C) the same as the contract price.

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Between the mark-to-market account adjustments, the contract value is calculated just like that of a forward contract; it is the difference between the price at the last mark-to-market and the current futures price, (i.e. the futures price on a newly issued contract). The mark-to-market of a futures contract is the payment or receipt of funds necessary to adjust for the gains or losses on the position. This adjusts the contract price to the ‘no-arbitrage’ price currently prevailing in the market.

kmf229

The primary difference in credit risk between forwards and futures contracts is most likely because:

A) forwards markets have higher-quality participants.

B) futures markets have higher-quality participants.

C) futures are marked to market daily.

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Futures are marked to market daily—this reduces credit risk to a single day’s losses.

kmf229

At the expiration of a futures contract, the difference between the spot and the futures price is:

A) equal to zero.

B) always positive.

C) at its point of highest volatility.

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The difference must be zero at expiration because both the spot price and the futures price are, at that point in time, the price of the underlying asset for immediate delivery.

kmf229

At the expiration of a futures contract, the futures price is:

A) equal to the market price for immediate delivery of the asset.

B) the same as the price at the initiation of the contract.

C) above or below the market price, depending on supply and demand.

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At expiration, the futures price is equal to the price of the asset for immediate delivery because the contract calls for delivery of the asset on that date. Note that at expiration, the spot price and the futures price are equal.

kmf229

Regarding futures contracts, the spot price refers to the:

A) price of the underlying asset in a particular location, or ‘spot’, in the future.

B) present value of the expected future price.

C) current market price of the asset underlying the futures contract.

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The spot price refers to the current market price of the asset underlying the contract. It is the price for immediate delivery of the asset.

kmf229

The difference between the spot and the futures price must converge to zero at futures expiration because:

A) the futures contract becomes equivalent to the underlying asset at expiration.

B) an arbitrage trade can be implemented using only other futures contracts.

C) the futures contract has to be worth the same as all other delivery months.

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If the futures and spot prices are not equal, arbitrage activity will occur.