2. The return on a futures contract is calculated as A) (purchase price - sellin

Question

2.      The return on a futures contract is calculated as

A)    (purchase price - selling price)/purchase price.

B)    (selling price - purchase price)/purchase price.

C)    (purchase price - selling price)/margin deposit.

D)    (selling price - purchase price)/margin deposit.

3.      What is the return on invested capital to an investor who purchased a futures contract at a price of 297 and sells the contract for 308? The contract is on 5,000 units, requires a 3% margin deposit and is priced in cents per unit.

A)    116.5%

B)    119.0%

C)    123.5%

D)    127.4%

4.      Midge feels that the price of gold is going to fall because inflation is on the decline. To profit from her prediction, assuming she is correct, Midge should

A)    buy gold bullion today and then sell an equivalent amount of gold futures.

B)    buy a gold futures contract today.

C)    sell short a futures contract today.

D)    sell short one futures contract and offset it by buying an equivalent long futures contract.

5.      The purchasing manager of a jewelry manufacturer is worried that the rising price of gold will have a negative impact on profit margins on items it has promised to merchants in 3 months. She should

A)    buy gold bullion today and then sell an equivalent amount of gold futures.

B)    buy a gold futures contract today.

C)    sell short a futures contract today.

D)    sell short one futures contract and offset it by buying an equivalent long futures contract.

Explanation / Answer

Q2 ---- D) Return/ initial money one has to keep

Q3 - (Selling Price - Purchase Price)/ (Purchase Price * Margin %) = (308-297)/(297*3%) = 123.5%

Q4 - Sell short a future contact today. If the price is X today and (N<X) tomorrow, she would make money. If buyer makes (Selling Price - Purchase Price), seller looses teh same amount, if N<X, seller will make money through contract.

Q5 - Buy a gold future contract today. if gold pice rises (N>X), the jewelry firm would make money which they can use to offset their raw material (Gold) cost for Jewelery

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