Exercise 9-1

1. Comparing “forward” and “futures” exchange contracts, we can say that:

a)they are both “marked-to-market” daily

b)their major difference is in the way the underlying asset is priced for future purchase or sale

c)a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC

d)b and c

Answer: d

2.In reference to the derivatives market, a “speculator”

a)attempts to profit from a change in the futures price

b)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position

c)plays a zero-sum game

d)b and c

Answer: a

3.The “open interest” shown in currency futures quotations is:

a)the total number of people indicating interest in buying the contracts in the near future

b)the total number of people indicating interest in selling the contracts in the near future

c)the total number of people indicating interest in buying or selling the contracts in the near future

d)the total number of long or short contracts outstanding for the particular delivery month

Answer: d

USE THE FOLLOWING INFORMATION TO ANSWER QUESTIONS 45

Today’s settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days’ settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000).

4.If you have a short position in one futures contract, the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be:

Rationale:

$2,000 + ¥12,500,000 x [(0.008011 - 0.008057) + (0.008057 - 0.007996)

+ (0.007996 - 0.007985)] = $2,325

Please note that $0.8011/¥100 = $0.008011/¥ and $0.8057/¥100 = $0.008057/¥, etc.

5.If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be:

Rationale:

$2,000 + ¥12,500,000 x [(0.008057 - 0.008011) + (0.007996 - 0.008057)

+ (0.007985 - 0.007996)] = $1,675