Financial Markets Lesson 12 Quiz Answer

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Week- 5

Lesson #12 Quiz

Q1) What is the effect of traders storing grain to wait for higher prices?

It is essential in preventing grain shortages.
Most shortages could have been prevented if traders had not speculated on grain prices.
Most grain ends up getting moldy in storage.
Traders are able to monopolize the market.

Q2) In commodities trading, what is the role of forwards and futures?

Farmers and warehouses sell exclusively in futures.
Farmers sell in forwards and warehouses sell in futures.
Farmers and warehouses sell crops in both forwards and futures.
Warehouses buy from the farmer in forwards, and then hedge on futures.

Q3) When an investor uses margin to buy or sell securities, how are the securities paid for?

A combination of an investor’s own funds and futures
On money borrowed from a broker only
A combination of an investor’s own funds and money borrowed from a broker.

On money borrowed from a broker whereby the broker may tell the investor at any time to sell securities or contribute money.

Q4) What is the primary purpose of purchasing futures if they are rarely delivered?

To protect against price fluctuations.
To purchase the industry standard of a commodity, such as those put out by the Chicago Board of Trade (CBOT)

To allow a corporation to buy and sell commodities, which would be impossible without futures.
To negotiate the best price on a commodity with a farmer.

Q5) What often happens to futures at the time of the crop for commodities with a specific well-defined harvest window?

They tend to be traded above the expected spot price at the contract’s maturity.
Due to defaults, investors could lose a lot of money.
They tend to be traded below the expected spot price at the contract’s maturity.
They tend to be traded exactly at the expected spot price at the contract’s maturity, making it difficult to profit as an investor.

Q6) How is it possible to have a future based on the S&P500?

On the last day, there is a final settlement of a combination of the other commodities on the futures market.

On the last day there is a final settlement of the difference between the futures price and the actual index.

There is a large fine on anyone who still holds the security on the final day.
Anyone still holding the security on the final day will receive a proportionate number of shares in an S&P500 index fund.

Q7) What is the fair value of a futures contract with a storage cost of 3%, an interest rate of 5%, and a spot price of $1000 over a 1 year time period?

$1800.00
$1080.00
$1081.50
$1000.00

Q8) How can you determine whether a future is in backwardation or contango?

If the price is rising at an increasingly fast rate (has a positive second derivative), it is backwardation, but if it is falling at an increasingly fast rate (has a negative second derivative), it is contango.

If the price is falling at an increasingly fast rate (has a negative second derivative), it is backwardation, but if it is rising at an increasingly fast rate (has a positive second derivative), it is contango.

If the price rises over time (has a positive derivative), it is backwardation, but if it falls (a negative derivative), it is contango.

If the price falls over time (has a negative derivative), it is backwardation, but if it rises (a positive derivative), it is contango.

Q9) What is the Federal Funds Futures Market?

Futures contracts created by the government which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.

Futures contracts created by an exchange board which are settled at the end of each month for 100 minus the federal funds rate averaged over the month.

Futures contracts created by an exchange board which are settled at the end of each year for 100 minus the federal funds rate averaged over the month.