1. Which of the followings reduce(s) credit risk in futures contracts? (1) Stand
ID: 2768352 • Letter: 1
Question
1. Which of the followings reduce(s) credit risk in futures contracts?
(1) Standardization of futures contracts
(2) Trading in exchanges
(3) Marking to market
A. Only (1)
B. Only (2)
C. Only (3)
D. Only (1) and (3)
E. All of (1), (2) and (3)
2. Let’s distinguish the meanings of transaction types of Buy, Sell, Short and Cover. If you want to speculate on price movement and expect the price of a certain option is expected to fall, then which transaction do you have to do?
A. buy
B. sell
C. short
D. cover
3. What does “contract size” mean in derivatives trades?
A. Number of contracts
B. Dollar value of one contract
C. Dollar value of the total contracts
D. Number of unit that denominates the asset per one contract
4. Suppose you are a speculator and expecting the price of soybeans to fall in three months. (You don’t have soybeans) Which transaction do you have to make in the futures market?
A. Buy
B. Sell
C. Short
D. Cover
5. Suppose you are a fund manager and worrying about risk arising from the uncertain performance of the market as a whole. In order to reduce risk, which position of index futures do you have to take?
A. Buy
B. Sell
C. Short
D. Cover
6. Which of the following conditions does NOT cause the basis risk in hedge using futures?
a. Length of time to hedge is shorter than the length of time for futures to expire.
b. Length of time to hedge is longer than the length of time for futures to expire.
c. The underlying asset of futures is not the same as the asset to be hedged
d. The amount to be hedged is different from the amount of futures contracts
Explanation / Answer
Sol 1.
In order to answer the question, we have to first understand these three terminologies
Standardization
Traded futures contracts are standardized to ensure that contracts can be easily traded and priced.
Mark to market
One of the unique features of futures contracts is that the positions of both buyers and sellers of the contracts are adjusted every day for the change in the market
Price that day. In other words, the profits or losses associated with price movements are credited or debited from an investor’s account even if he or she does not trade.
Trading in exchange
Price Limits Futures exchanges generally impose ‘price movement limits’on most futures contracts.
Thus ans would be c.
Sol 2.
If we want to speculate on price movement and expect the price of a certain option is expected to fall, then which should now short the position so that we can buy the security when price will b reduced.
Sol 3.
Contract size represents a specific quantity of the underlying commodity to be delivered some time in the future for a pre-agreed price thus answer would be D.
SOL 4
We will short the position, as expecting the price of soybeans to fall in three months.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.