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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Futures and Forward Markets

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	A futures contract
		A)	is an agreement to buy or sell a specified amount of an asset at the spot price on the expiration date of the contract.
		B)	is a contract to be signed in the future by the buyer and the seller of the commodity.
		C)	gives the buyer the right, but not the obligation, to buy an asset some time in the future.
		D)	is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract.
		E)	none of the above.


2	In a futures contract the futures price is
		A)	determined by the buyer and the seller when they initiate the contract.
		B)	determined by the futures exchange.
		C)	determined by the buyer and the seller when the delivery of the commodity takes place.
		D)	determined independently by the provider of the underlying asset.
		E)	none of the above.


3	The open interest on silver futures at a particular time is the
		A)	number of all silver futures outstanding contracts.
		B)	number of outstanding silver futures contracts for delivery within the next month.
		C)	number of silver futures contracts traded the previous day.
		D)	number of silver futures contracts traded during the day.
		E)	none of the above.


4	The expectations hypothesis of futures pricing
		A)	a. is not a zero sum game.
		B)	b. states that the futures price equals the expected value of the future spot price of the asset.
		C)	c. is the simplest theory of futures pricing.
		D)	a and b.
		E)	b and c.


5	Delivery of stock index futures
		A)	is never made.
		B)	requires delivery of 1 share of each stock in the index.
		C)	is made by a cash settlement based on the index value.
		D)	is made by delivering 100 shares of each stock in the index.
		E)	is made by delivering a value-weighted basket of stocks.


6	If a stock index futures contract is overpriced, you would exploit this situation by:
		A)	Selling both the stock index futures and the stocks in the index.
		B)	Buying the stock index futures and selling the stocks in the index.
		C)	Buying both the stock index futures and the stocks in the index.
		D)	Selling the stock index futures and simultaneously buying the stocks in the index.
		E)	None of the above.


7	Expiration-day volatility has been explained by
		A)	transactions costs.
		B)	program trading to exploit arbitrage opportunities.
		C)	lags in execution of arbitrage strategies.
		D)	all of the above
		E)	none of the above


8	Credit risk in the swap market
		A)	is extensive.
		B)	is equal to the total value of the payments that the floating rate payer was obligated to make.
		C)	is limited to the difference between the values of the fixed rate and floating rate obligations.
		D)	all of the above
		E)	none of the above.


9	One reason swaps are desirable is that
		A)	they are free of credit risk.
		B)	they have no transactions costs.
		C)	they offer participants easy ways to restructure their balance sheets.
		D)	they increase interest rate risk.
		E)	they increase interest rate volatility.


10	Arbitrage proofs in futures market pricing relationships
		A)	rely on the CAPM.
		B)	incorporate transactions costs.
		C)	demonstrate how investors can exploit misalignments.
		D)	all of the above.
		E)	none of the above.

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