Futures Quiz Answers

Futures & Options Quiz - Answers and Explanations

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1. Futures contracts are:

(a) - the same as forward contracts.

(b) - standardized contracts to make or take delivery of a commodity at a predetermined place and time.

(d) - all of the above.

Futures contracts are standardized as to quantity, quality, delivery time and place. Price is the only variable. In contrast, the terms of a forward contract are privately negotiated.

2. Futures prices are arrived at by:
	(a) - bids and offers.
	(b) - officers and directors of the exchange.
	(c) - written and sealed bids.
	(d) - the Board of Trade Clearing Corporation
	(e) - both (b) and (d).
All futures prices are established through competition between buyers and sellers of a given commodity. Neither the exchange nor the Clearing Corporation participates in the process of price discovery.

3. The primary function of the Clearing Corporation is to:
	(a) - prevent speculation in futures contracts.
	(b) - ensure the integrity of the contracts traded.
	(c) - clear every trade made at the CBOT.
	(d) - supervise trading on the exchange floor.
	(e) - both (b) and (c).
The Clearing Corporation performs both of these functions. The Clearing Corporation ensures the integrity of futures and options contracts traded at the Chicago Board of Trade and clears every trade made at the CBOT.

4. Gains and losses on futures positions are settled:
	(a) - by signing promissory notes.
	(b) - each day after the close of trading.
	(c) - within five business days.
	(d) - directly between the buyer and seller.
	(e) - none of the above.
*At the end of each trading session, the Clearing Corporation determines net gains or losses for each member firm, and each member firm does the same with its customers accounts.*

5. Speculators help to:
	(a) - increase the number of potential buyers and sellers in the market.
	(b) - add to market liquidity.
	(c) - aid in the process of price discovery.
	(d) - facilitate hedging.
	(e) - all of the above.
*Speculators perform all of these functions.*

6. Hedging involves:
	(a) - taking a futures position opposite to one's cash market position.
	(b) - taking a futures position identical to one's cash market position.
	(c) - holding only a futures market position.
	(d) - holding only a cash market position.
	(e) - none of the above.
A true hedge involves holding opposite positions in the cash and futures markets. The other positions are merely forms of speculation, since they cannot offset losses in one market with gains in another.

7. Margins in futures trading:
	(a) - serve the same purpose as margins for common stock.
	(b) - limit the use of credit in buying commodities.
	(c) - serve as a down payment.
	(d) - serve as a performance bond.
	(e) - are required only for long positions.
Futures margins act as performance bonds that provide proof of an individual's financial integrity and one's ability to withstand a loss in the event of an unfavorable price change. They do not involve credit or down payments, as securities margins do.

8. You may receive a margin call if:
	(a) - you have a long (buy) futures position and prices increase.
	(b) - you have a long (buy) futures position and prices decrease.
	(c) - you have a short (sell) futures position and prices increase.
	(d) - you have a short (sell) futures position and prices decrease.
	(e) - both (a) and (d).
	(f) - both (b) and (c).
Being long in a falling market (b) or short in a rising market (c) would result in a loss and, therefore, could lead to a margin call. Because situations (a) and (d) are both profitable, there would not be a margin call.

9. Margin requirements for customers are established by:
	(a) - the Federal Reserve Board.
	(b) - the Commodity Futures Trading Commission.
	(c) - the brokerage firms, subject to exchange minimums.
	(d) - the Clearing Corporation.
	(e) - private agreement between buyer and seller.
Customer margin requirements are set by each brokerage firm, while clearing margin requirements for clearing member firms are set by the Clearing Corporation. Neither the Federal Reserve Board nor the Commodity Futures Trading Commission is involved with setting margins.

10. Futures trading gains credited to a customer's margin account can be withdrawn by the customer:
	(a) - as soon as the funds are credited.
	(b) - only after the futures position is liquidated.
	(c) - only after the account is closed.
	(d) - at the end of the month.
	(e) - at the end of the year.
A customer can withdraw gains as soon as they are credited to the account, provided they are not required to cover losses on other futures positions. Accounts are settled after the markets close, so funds are usually available by the start of the next business day. Return to Quiz Return to ACS Home Page

There is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.
Past performance is not indicative of future results.

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