Fina 6624 Investment Management Exam Iii

Front 1

futures contract

Back 1

a contract managed by an organized exchange that allows a buyer and seller to agree on a price today for an exchange of goods that will occur sometime in the future.

Front 2

futures price

Back 2

a price that is negotiated today and paid in the future.

Front 3

long position

Back 3

a market position which allows you to profit when market prices increase but causes you a loss when market prices decline.

Front 4

The holder of a short position realize a profit when prices _____________(incline/decline).

Back 4

The holder of a short position realize a profit when prices decline.

Front 5

An investor who accepts the risk of a loss in exchange for the chance to earn a profit is referred to as a ______________.

Back 5

An investor who accepts the risk of a loss in exchange for the chance to earn a profit is referred to as a speculator

Front 6

An investor who shifts risk is referred to as a _________.

Back 6

An investor who shifts risk is referred to as a hedger.

Front 7

A financial instrument on which a futures contract is based is called an _____________________.

Back 7

A financial instrument on which a futures contract is based is called an underlying asset.

Front 8

You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you will be taking a _________(long/short) hedge.

Back 8

You own 450,000 bushels of wheat. If you decide to add a short futures position in wheat you will be taking a short hedge.

Front 9

A ________ (short/long) hedge is the addition of a long futures position to a short position in the underlying asset.

Back 9

A long hedge is the addition of a long futures position to a short position in the underlying asset.

Front 10

Futures Margin

Back 10

defined as the deposit of funds into a futures trading account to cover potential losses from outstanding positions.

Front 11

Marking-to-market

Back 11

defined as the process of recognizing gains and losses on outstanding futures positions on a daily basis.

Front 12

Maintenance margin

Back 12

defined as the minimum margin required in a futures account at all times

Front 13

Margin Call

Back 13

notification to a futures contract holder that additional margin funds are needed.

Front 14

Reverse Trade

Back 14

a trade that will close out a previously established futures position.

Front 15

Cash Price Following

Back 15

the price of a commodity designated for delivery today.

Front 16

Spot market

Back 16

another name for the cash market.

Front 17

cash-futures arbitrage

Back 17

the strategy of earning risk-free profits by taking advantage of any unusual differences between cash and futures prices.

Front 18

Basis

Back 18

The difference between the cash and futures price of a commodity

Front 19

inverted market

Back 19

Term that describes when the spot price is higher than the futures price

Front 20

Index Arbitrage

Back 20

the strategy of monitoring the futures price on a stock index in relation to the value of the underlying index to profit from any parity deviations.

Front 21

Program Trading

Back 21

entails the use of computers to monitor prices and also to submit trade orders in response to arbitrage opportunities

Front 22

Cross-Hedge

Back 22

Type of hedge that involves using an alternative commodity to offset gains or losses in the base commodity. Example A farmer has a long position in barley and hedges it with a short position in wheat.

Front 23

Cheapest-to-Deliver

Back 23

the seller of a futures contract is granted a choice among various assets to deliver

Front 24

T of F: Futures contracts are managed through an organized exchange while forward contracts are not.

Back 24

T. Futures contracts are managed through an organized exchange while forward contracts are not.

Front 25

T or F: In 2007, the Chicago Mercantile Exchange merged with the Chicago Board of Trade.

Back 25

T. In 2007, the Chicago Mercantile Exchange merged with the Chicago Board of Trade.

Front 26

T or F: Both the buyer and the seller of the futures contract are obligated to fulfill their duties as outlined in the futures contract.

Back 26

T. Both the buyer and the seller of the futures contract are obligated to fulfill their duties as outlined in the futures contract.

Front 27

Regarding futures contracts, ______ and ___________ are the two key considerations when establishing the settlement procedures.

Back 27

Regarding futures contracts, cost and convenience are the two key considerations when establishing the settlement procedures.

Front 28

T or F. The normal means of delivery on a Treasury note futures contract is a change in registered ownership.

Back 28

T. The normal means of delivery on a Treasury note futures contract is a change in registered ownership.

Front 29

Chicago

Back 29

the city which does the largest volume of futures trading in the United States.

Front 30

T or F. the typical initial margin requirements for a futures contract is 2 to 5 percent of contract value on both long and short positions.

Back 30

T. the typical initial margin requirements for a futures contract is 2 to 5 percent of contract value on both long and short positions.

Front 31

T or F. You can withdraw funds from your margin account without closing your futures contract given marking-to-market adds funds to your margin account and margin balance after the withdrawal will exceed the initial margin requirement.

Back 31

T. You can withdraw funds from your margin account without closing your futures contract given marking-to-market adds funds to your margin account and margin balance after the withdrawal will exceed the initial margin requirement.

Front 32

Reverse Trade

Back 32

Futures contracts can be closed out by entering a

Front 33

Reasons why commodities may have a negative basis include ____________ costs, _____________ fluctuations, _______________ costs, and ____________costs.

Back 33

Reasons why commodities may have a negative basis include storage costs, seasonal price fluctuations, transportation costs, and interest costs.

Front 34

spot-futures parity exists

Back 34

what parity exists if the future price must equal the future value of the spot price at the risk-free rate in an index future.

Front 35

A futures contract on the S&P 500 settled with?

Back 35

A futures contract on the S&P 500 settled with cash

Front 36

A fully-hedged stock portfolio will have a beta equal to an _____________.

Back 36

A fully-hedged stock portfolio will have a beta equal to an U.S. Treasury bill.

Front 37

U.S. Treasury notes are generally used to hedge a __________________.

Back 37

U.S. Treasury notes are generally used to hedge a bond portfolio.

Front 38

The duration of an interest rate futures contract is equal to the summation of the duration of the _____________________ and the
_____________________ on the futures contract.

Back 38

The duration of an interest rate futures contract is equal to the summation of the duration of the underlying instrument and the time remaining on the futures contract.