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Question 1 of 10
1. Question
Which of the following statements is true regarding risk and ownership?
Correct
Risk and ownership
A common refrain is that trading in a futures market is essentially the transfer of risk, while trading in a securities market is simply the transfer of ownership. Trading in securities is an essential element of the capital formation process, and confers a fractional ownership interest to the buyer. Futures (and options) trading exists for the purpose of managing risk (hedging) and facilitating investment strategies (speculating). Futures traders rarely take ownership of the underlying commodity upon contract expiry. Futures are a form of derivatives in that the value of each contract is based upon (that is, derived from) an underlying commodity, asset, or form of economic measurement (interest rates, stock indices, currency exchange rates, etc.). Buying traders have a right to receive (and selling traders have an obligation to provide) delivery of the product in exchange for the agreed upon consideration.
Incorrect
Risk and ownership
A common refrain is that trading in a futures market is essentially the transfer of risk, while trading in a securities market is simply the transfer of ownership. Trading in securities is an essential element of the capital formation process, and confers a fractional ownership interest to the buyer. Futures (and options) trading exists for the purpose of managing risk (hedging) and facilitating investment strategies (speculating). Futures traders rarely take ownership of the underlying commodity upon contract expiry. Futures are a form of derivatives in that the value of each contract is based upon (that is, derived from) an underlying commodity, asset, or form of economic measurement (interest rates, stock indices, currency exchange rates, etc.). Buying traders have a right to receive (and selling traders have an obligation to provide) delivery of the product in exchange for the agreed upon consideration.
Question 2 of 10
2. Question
Which of the following statements is true regarding predecessor of the modern forward contract?
Correct
Predecessor of the modern forward contract
The predecessor of the modern forward contract was a type of agreement established by agricultural interests in the 19th century. Farmers partnered with merchants to deliver certain products on a certain future date in exchange for an agreed upon fixed price. The farmer thus knew for certain what types of crops he should plant (and in what quantities), and the merchant was assured a supply for sale. The farmer reduced the risk associated with choosing crops and over/under planting, and transferred the sales price risk to the merchant. The merchant, in turn, reduced his risk of not having adequate supply available for sale.
Incorrect
Predecessor of the modern forward contract
The predecessor of the modern forward contract was a type of agreement established by agricultural interests in the 19th century. Farmers partnered with merchants to deliver certain products on a certain future date in exchange for an agreed upon fixed price. The farmer thus knew for certain what types of crops he should plant (and in what quantities), and the merchant was assured a supply for sale. The farmer reduced the risk associated with choosing crops and over/under planting, and transferred the sales price risk to the merchant. The merchant, in turn, reduced his risk of not having adequate supply available for sale.
Question 3 of 10
3. Question
Regarding to-arrive contract, which of the following statements is true ?
Correct
To-arrive contract
A to-arrive contract was an early private agreement between a buyer and a seller in which the terms and conditions of the sale and purchase were agreed upon in advance. The contract was actually settled (by exchange of goods and consideration) once the goods arrived (usually by ocean shipment) at the delivery location. As such, a to-arrive contract is essentially a forward contract in which the terms and conditions of the contract are specific to the buyer and the seller (i.e. personalized). To-arrive contracts were introduced in the U.S. as early as the 19th century, but were commonly used in the England cotton trade in the late 18th century.
Incorrect
To-arrive contract
A to-arrive contract was an early private agreement between a buyer and a seller in which the terms and conditions of the sale and purchase were agreed upon in advance. The contract was actually settled (by exchange of goods and consideration) once the goods arrived (usually by ocean shipment) at the delivery location. As such, a to-arrive contract is essentially a forward contract in which the terms and conditions of the contract are specific to the buyer and the seller (i.e. personalized). To-arrive contracts were introduced in the U.S. as early as the 19th century, but were commonly used in the England cotton trade in the late 18th century.
Question 4 of 10
4. Question
Which of the following statements is false regarding late 20th century contracts?
Correct
Late 20th century contracts
Throughout the latter part of the 20th century, exchanges continued to develop additional futures products wherever a need existed to hedge a financial position. Interest rate futures were first introduced by the CME in 1976 using the rate of U.S. T-Bills. Later, interest products enabled both private enterprises and banks to hedge positions within and between each other, in effect exchanging fixed rate instruments for variable instruments, and vice versa. Eurodollar contracts followed soon after, using the rate of interest applicable to U.S. dollar denominated accounts on deposits overseas. Other futures products include stock index futures (first using the S&P 500), currencies, and metals.
Incorrect
Late 20th century contracts
Throughout the latter part of the 20th century, exchanges continued to develop additional futures products wherever a need existed to hedge a financial position. Interest rate futures were first introduced by the CME in 1976 using the rate of U.S. T-Bills. Later, interest products enabled both private enterprises and banks to hedge positions within and between each other, in effect exchanging fixed rate instruments for variable instruments, and vice versa. Eurodollar contracts followed soon after, using the rate of interest applicable to U.S. dollar denominated accounts on deposits overseas. Other futures products include stock index futures (first using the S&P 500), currencies, and metals.
Question 5 of 10
5. Question
Which of the following statements is true regarding currency futures?
Correct
Currency futures
Currency futures first evolved in the early 1970s as a result of the so-called Nixon Shock. This occurred when the U.S. Congress severed the relationship between the U.S. dollar and the price of gold at the behest of Richard Nixon, the U.S. president at the time. As a result, the rate of exchange of the developed world currencies was free to float (the post-WWII Bretton Woods agreement ensured these rates remained fixed). This created opportunities for futures to be used to mitigate currency exchange risk.
Incorrect
Currency futures
Currency futures first evolved in the early 1970s as a result of the so-called Nixon Shock. This occurred when the U.S. Congress severed the relationship between the U.S. dollar and the price of gold at the behest of Richard Nixon, the U.S. president at the time. As a result, the rate of exchange of the developed world currencies was free to float (the post-WWII Bretton Woods agreement ensured these rates remained fixed). This created opportunities for futures to be used to mitigate currency exchange risk.
Question 6 of 10
6. Question
Which of the following statements is not included in solutions to shortcomings of early practices?
Correct
Solutions to shortcomings of early practices
Modern futures markets provided solutions for many of the shortcomings of early practices, including the following:
• lack of adequate storage for contracts settled by delivery
• standardization of product quality (and defined premiums and discounts for quality differences)
• controlled payment methods and terms
• publication of pricing
• guaranteed contract performance (via exchanges and clearing houses)
• standardization of trading practices (via exchange rules and procedures)
Incorrect
Solutions to shortcomings of early practices
Modern futures markets provided solutions for many of the shortcomings of early practices, including the following:
• lack of adequate storage for contracts settled by delivery
• standardization of product quality (and defined premiums and discounts for quality differences)
• controlled payment methods and terms
• publication of pricing
• guaranteed contract performance (via exchanges and clearing houses)
• standardization of trading practices (via exchange rules and procedures)
Question 7 of 10
7. Question
Which of the following statements is not included in the futures contract characteristics?
Correct
Futures contract characteristics
A futures contract represents an agreement between two parties (buyer and seller) for the sale and purchase of a product (or a commodity or an asset) on a specified future date. This type of contract has three primary characteristics:
1. The buyer and the seller agree to fulfill the contract at a price stipulated at the time the contract is executed.
2. The purpose of the contract is to reduce the risk of adverse price movements (hedge), or to benefit from beneficial price movements (speculate).
3. The contract may be fulfilled at maturity either through delivery of the underlying product or through the creation of a value offset with other contracts.
Incorrect
Futures contract characteristics
A futures contract represents an agreement between two parties (buyer and seller) for the sale and purchase of a product (or a commodity or an asset) on a specified future date. This type of contract has three primary characteristics:
1. The buyer and the seller agree to fulfill the contract at a price stipulated at the time the contract is executed.
2. The purpose of the contract is to reduce the risk of adverse price movements (hedge), or to benefit from beneficial price movements (speculate).
3. The contract may be fulfilled at maturity either through delivery of the underlying product or through the creation of a value offset with other contracts.
Question 8 of 10
8. Question
Which of the following statements is true regarding bespoke agreement?
Correct
Bespoke agreement
A bespoke agreement is one in which the terms and conditions are negotiated for each individual agreement. Contract fulfillment is a private transaction between the parties, and there is a risk that either party could fail to fulfill the agreed upon obligations. In contrast, a futures contract is constructed using standardized terms and conditions, and it trades on an exchange. An exchange clearing organization acts as a guarantor with regard to settlement and contract fulfillment, thus minimizing the risk associated with contract abrogation.
Incorrect
Bespoke agreement
A bespoke agreement is one in which the terms and conditions are negotiated for each individual agreement. Contract fulfillment is a private transaction between the parties, and there is a risk that either party could fail to fulfill the agreed upon obligations. In contrast, a futures contract is constructed using standardized terms and conditions, and it trades on an exchange. An exchange clearing organization acts as a guarantor with regard to settlement and contract fulfillment, thus minimizing the risk associated with contract abrogation.
Question 9 of 10
9. Question
Which of the following statements is true regarding offset provisions?
Correct
Offset provisions
Offsetting or closing out is a process whereby a futures position, either long or short, is settled or liquidated with an equal but opposite transaction prior to contract expiration. For example, a customer who is “long” 100 contracts of July wheat would sell (short) an equal number of July contracts prior to the expiration date. Contracts which are held until the expiration date (or a contractually determined date prior to the formal expiration date) must be fulfilled through delivery or delivery acceptance of the underlying product. If delivery is not part of the contract, it must be settled through a cash transaction. Note that under certain market conditions, it may not be possible to engage in an offset transaction.
Incorrect
Offset provisions
Offsetting or closing out is a process whereby a futures position, either long or short, is settled or liquidated with an equal but opposite transaction prior to contract expiration. For example, a customer who is “long” 100 contracts of July wheat would sell (short) an equal number of July contracts prior to the expiration date. Contracts which are held until the expiration date (or a contractually determined date prior to the formal expiration date) must be fulfilled through delivery or delivery acceptance of the underlying product. If delivery is not part of the contract, it must be settled through a cash transaction. Note that under certain market conditions, it may not be possible to engage in an offset transaction.
Question 10 of 10
10. Question
Which of the following statements is true regarding general provisions when futures contracts are not offset?
Correct
General provisions when futures contracts are not offset
At the end of the last trading day specified, futures contracts not offset are subject to either delivery or cash settlement. If delivery is required, it is the responsibility of the seller to issue a notice of intent to deliver to the clearinghouse. The seller retains responsibility for meeting the logistical requirements related to delivery completion. The notice of intent to deliver must include all of the essential details of the delivery, such as the date, place, and time of delivery; the specific product grade and weight; and pricing information. Upon receipt of the notice, the clearinghouse is responsible for identifying a buyer and assigning the delivery notice. A clearinghouse typically follows an established, specific protocol to determine the appropriate member firm and assign the delivery to an eligible customer.
Incorrect
General provisions when futures contracts are not offset
At the end of the last trading day specified, futures contracts not offset are subject to either delivery or cash settlement. If delivery is required, it is the responsibility of the seller to issue a notice of intent to deliver to the clearinghouse. The seller retains responsibility for meeting the logistical requirements related to delivery completion. The notice of intent to deliver must include all of the essential details of the delivery, such as the date, place, and time of delivery; the specific product grade and weight; and pricing information. Upon receipt of the notice, the clearinghouse is responsible for identifying a buyer and assigning the delivery notice. A clearinghouse typically follows an established, specific protocol to determine the appropriate member firm and assign the delivery to an eligible customer.
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