Test Bank
For Fundamentals of Futures and Options Markets 9e, Global
Edition John C. Hull University of Toronto
,Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull)
Chapter 1: Introduction
1) A one-year forward contract is an agreement where
A) One side has the right to buy an asset for a certain price in one year's time
B) One side has the obligation to buy an asset for a certain price in one year's time
C) One side has the obligation to buy an asset for a certain price at some time during the next
year
D) One side has the obligation to buy an asset for the market price in one year's time
Answer: B
2) Which of the following is NOT true?
A) When a CBOE call option on IBM is exercised, IBM issues more stock
B) An American option can be exercised at any time during its life
C) An call option will always be exercised at maturity if the underlying asset price is greater than
the strike price
D) A put option will always be exercised at maturity if the strike price is greater than the
underlying asset price
Answer: A
3) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on
the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one
put option. The breakeven stock price above which the trader makes a profit is
A) $35
B) $40
C) $30
D) $36
Answer: A
4) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on
the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one
put option. The breakeven stock price below which the trader makes a profit is
A) $25
B) $28
C) $26
D) $20
Answer: D
5) Which of the following is approximately true when size is measured in terms of the
underlying principal amounts or value of the underlying assets?
A) The exchange-traded market is twice as big as the over-the-counter market
B) The over-the-counter market is twice as big as the exchange-traded market
C) The exchange-traded market is ten times as big as the over-the-counter market
D) The over-the-counter market is ten times as big as the exchange-traded market
Answer: D
,6) Which of the following best describes the term "spot price"?
A) The price for immediate delivery
B) The price for delivery at a future time
C) The price of an asset that has been damaged
D) The price of renting an asset
Answer: A
7) Which of the following is true about a long forward contract?
A) The contract becomes more valuable as the price of the asset declines
B) The contract becomes more valuable as the price of the asset rises
C) The contract is worth zero if the price of the asset declines after the contract has been entered
into
D) The contract is worth zero if the price of the asset rises after the contract has been entered into
Answer: B
8) An investor sells a futures contract an asset when the futures price is $1,500. Each contract is
on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of
the following is true?
A) The investor has made a gain of $4,000
B) The investor has made a loss of $4,000
C) The investor has made a gain of $2,000
D) The investor has made a loss of $2,000
Answer: B
9) Which of the following describes European options?
A) Sold in Europe
B) Priced in Euros
C) Exercisable only at maturity
D) Calls (there are no puts)
Answer: C
10) Which of the following is NOT true?
A) A call option gives the holder the right to buy an asset by a certain date for a certain price
B) A put option gives the holder the right to sell an asset by a certain date for a certain price
C) The holder of a call or put option must exercise the right to sell or buy an asset
D) The holder of a forward contract is obligated to buy or sell an asset
Answer: C
11) Which of the following is NOT true about call and put options?
A) An American option can be exercised at any time during its life
B) A European option can only be exercised only on the maturity date
C) Investors must pay an upfront price (the option premium) for an option contract
D) The price of a call option increases as the strike price increases
Answer: D
,12) The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike
price of $60 when the option price is $2. The options are exercised when the stock price is $65.
The trader's net profit is
A) $700
B) $500
C) $300
D) $600
Answer: C
13) The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a
strike price of $120 when the option price is $5. The options are exercised when the stock price
is $110. The trader's net profit or loss is
A) Gain of $1,000
B) Loss of $2,000
C) Loss of $2,800
D) Loss of $1,000
Answer: D
14) The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a
strike price of $90 when the option price is $10. The options are exercised when the stock price
is $85. The trader's net profit or loss is
A) Loss of $1,000
B) Loss of $2,000
C) Gain of $200
D) Gain of $1000
Answer: A
15) The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a
strike price of $40 when the option price is $2. The options are exercised when the stock price is
$39. The trader's net profit or loss is
A) Loss of $800
B) Loss of $200
C) Gain of $200
D) Loss of $900
Answer: C
16) A speculator can choose between buying 100 shares of a stock for $40 per share and buying
1000 European call options on the stock with a strike price of $45 for $4 per option. For second
alternative to give a better outcome at the option maturity, the stock price must be above
A) $45
B) $46
C) $55
D) $50
Answer: D
,17) A company knows it will have to pay a certain amount of a foreign currency to one of its
suppliers in the future. Which of the following is true?
A) A forward contract can be used to lock in the exchange rate
B) A forward contract will always give a better outcome than an option
C) An option will always give a better outcome than a forward contract
D) An option can be used to lock in the exchange rate
Answer: A
18) A short forward contract on an asset plus a long position in a European call option on the
asset with a strike price equal to the forward price is equivalent to
A) A short position in a call option
B) A short position in a put option
C) A long position in a put option
D) None of the above
Answer: C
19) A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The
stock index is currently 1,250. Futures contract trade on the index with one contract being on 250
times the index. To remove market risk from the portfolio the trader should
A) Buy 16 contracts
B) Sell 16 contracts
C) Buy 20 contracts
D) Sell 20 contracts
Answer: B
20) Which of the following best describes a central clearing party?
A) It is a trader that works for an exchange
B) It stands between two parties in the over-the-counter market
C) It is a trader that works for a bank
D) It helps facilitate futures trades
Answer: B
,Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull)
Chapter 2 Mechanics of Futures Markets
1) Which of the following is true?
A) Both forward and futures contracts are traded on exchanges
B) Forward contracts are traded on exchanges, but futures contracts are not
C) Futures contracts are traded on exchanges, but forward contracts are not
D) Neither futures contracts nor forward contracts are traded on exchanges
Answer: C
2) Which of the following is NOT true?
A) Futures contracts nearly always last longer than forward contracts
B) Futures contracts are standardized; forward contracts are not
C) Delivery or final cash settlement usually takes place with forward contracts; the same is not
true of futures contracts
D) Forward contracts usually have one specified delivery date; futures contract often have a
range of delivery dates
Answer: A
3) In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery locations.
Which of the following is true?
A) This flexibility tends increase the futures price
B) This flexibility tends decrease the futures price
C) This flexibility may increase and may decrease the futures price
D) This flexibility has no effect on the futures price
Answer: B
4) A company enters into a short futures contract to sell 50,000 units of a commodity for 70
cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the
futures price per unit above which there will be a margin call?
A) 78 cents
B) 76 cents
C) 74 cents
D) 72 cents
Answer: D
5) A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will
allow $2,000 to be withdrawn from the margin account?
A) $58
B) $62
C) $64
D) $66
Answer: B
1
Copyright © 2017 Pearson Education, Ltd.
,6) One futures contract is traded where both the long and short parties are closing out existing
positions. What is the resultant change in the open interest?
A) No change
B) Decrease by one
C) Decrease by two
D) Increase by one
Answer: B
7) Who initiates delivery in a corn futures contract?
A) The party with the long position
B) The party with the short position
C) Either party
D) The exchange
Answer: B
8) You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units and the initial margin per contract that you provide is $2,000. The
maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012
per unit. What is the balance of your margin account at the end of the day?
A) $1,800
B) $3,300
C) $2,200
D) $3,700
Answer: A
9) A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to
hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the
futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013.
What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract
is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000
Answer: D
10) A speculator takes a long position in a futures contract on a commodity on November 1,
2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31,
2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1,
2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each
contract is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000
Answer: C
2
Copyright © 2017 Pearson Education, Ltd.
,11) The frequency with which margin accounts are adjusted for gains and losses is
A) Daily
B) Weekly
C) Monthly
D) Quarterly
Answer: A
12) Margin accounts have the effect of
A) Reducing the risk of one party regretting the deal and backing out
B) Ensuring funds are available to pay traders when they make a profit
C) Reducing systemic risk due to collapse of futures markets
D) All of the above
Answer: D
13) Which entity in the United States takes primary responsibility for regulating futures market?
A) Federal Reserve Board
B) Commodities Futures Trading Commission (CFTC)
C) Security and Exchange Commission (SEC)
D) US Treasury
Answer: B
14) For a futures contract trading in April 2012, the open interest for a June 2012 contract, when
compared to the open interest for Sept 2012 contracts, is usually
A) Higher
B) Lower
C) The same
D) Equally likely to be higher or lower
Answer: A
15) Clearing houses are
A) Never used in futures markets and sometimes used in OTC markets
B) Used in OTC markets, but not in futures markets
C) Sometimes used in both futures markets and OTC markets
D) Always used in both futures markets and OTC markets
Answer: C
16) A haircut of 20% means that
A) A bond with a market value of $100 is considered to be worth $80 when used to satisfy a
collateral request
B) A bond with a face value of $100 is considered to be worth $80 when used to satisfy a
collateral request
C) A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
D) A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
Answer: A
3
Copyright © 2017 Pearson Education, Ltd.
,17) With bilateral clearing, the number of agreements between four dealers, who trade with each
other, is
A) 12
B) 1
C) 6
D) 2
Answer: C
18) Which of the following best describes central clearing parties?
A) Help market participants to value derivative transactions
B) Must be used for all OTC derivative transactions
C) Are used for futures transactions
D) Perform a similar function to exchange clearing houses
Answer: D
19) Which of the following are cash settled?
A) All futures contracts
B) All option contracts
C) Futures on commodities
D) Futures on stock indices
Answer: D
20) A limit order
A) Is an order to trade up to a certain number of futures contracts at a certain price
B) Is an order that can be executed at a specified price or one more favorable to the investor
C) Is an order that must be executed within a specified period of time
D) None of the above
Answer: B
4
Copyright © 2017 Pearson Education, Ltd.
, Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull) Chapter 3 Hedging Strategies Using Futures
1) The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short
futures position. The basis increases unexpectedly. Which of the following is true?
A) The hedger's position improves
B) The hedger's position worsens
C) The hedger's position sometimes worsens and sometimes improves
D) The hedger's position stays the same
Answer: A
2) Futures contracts trade with every month as a delivery month. A company is hedging the
purchase of the underlying asset on June 15. Which futures contract should it use?
A) The June contract
B) The July contract
C) The May contract
D) The August contract
Answer: B
3) On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the
spot price is $64 and the August futures price is $63.50. A company entered into futures
contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position
on July 1. What is the effective price (after taking account of hedging) paid by the company?
A) $59.50
B) $60.50
C) $61.50
D) $63.50
Answer: A
4) On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On
November 1 the price is $980 and the December futures price is $981. A producer of the
commodity entered into a December futures contracts on March 1 to hedge the sale of the
commodity on November 1. It closed out its position on November 1. What is the effective price
(after taking account of hedging) received by the company for the commodity?
A) $1,016
B) $1,001
C) $981
D) $1,014
Answer: D
1
Copyright © 2017 Pearson Education, Ltd.
For Fundamentals of Futures and Options Markets 9e, Global
Edition John C. Hull University of Toronto
,Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull)
Chapter 1: Introduction
1) A one-year forward contract is an agreement where
A) One side has the right to buy an asset for a certain price in one year's time
B) One side has the obligation to buy an asset for a certain price in one year's time
C) One side has the obligation to buy an asset for a certain price at some time during the next
year
D) One side has the obligation to buy an asset for the market price in one year's time
Answer: B
2) Which of the following is NOT true?
A) When a CBOE call option on IBM is exercised, IBM issues more stock
B) An American option can be exercised at any time during its life
C) An call option will always be exercised at maturity if the underlying asset price is greater than
the strike price
D) A put option will always be exercised at maturity if the strike price is greater than the
underlying asset price
Answer: A
3) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on
the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one
put option. The breakeven stock price above which the trader makes a profit is
A) $35
B) $40
C) $30
D) $36
Answer: A
4) A one-year call option on a stock with a strike price of $30 costs $3; a one-year put option on
the stock with a strike price of $30 costs $4. Suppose that a trader buys two call options and one
put option. The breakeven stock price below which the trader makes a profit is
A) $25
B) $28
C) $26
D) $20
Answer: D
5) Which of the following is approximately true when size is measured in terms of the
underlying principal amounts or value of the underlying assets?
A) The exchange-traded market is twice as big as the over-the-counter market
B) The over-the-counter market is twice as big as the exchange-traded market
C) The exchange-traded market is ten times as big as the over-the-counter market
D) The over-the-counter market is ten times as big as the exchange-traded market
Answer: D
,6) Which of the following best describes the term "spot price"?
A) The price for immediate delivery
B) The price for delivery at a future time
C) The price of an asset that has been damaged
D) The price of renting an asset
Answer: A
7) Which of the following is true about a long forward contract?
A) The contract becomes more valuable as the price of the asset declines
B) The contract becomes more valuable as the price of the asset rises
C) The contract is worth zero if the price of the asset declines after the contract has been entered
into
D) The contract is worth zero if the price of the asset rises after the contract has been entered into
Answer: B
8) An investor sells a futures contract an asset when the futures price is $1,500. Each contract is
on 100 units of the asset. The contract is closed out when the futures price is $1,540. Which of
the following is true?
A) The investor has made a gain of $4,000
B) The investor has made a loss of $4,000
C) The investor has made a gain of $2,000
D) The investor has made a loss of $2,000
Answer: B
9) Which of the following describes European options?
A) Sold in Europe
B) Priced in Euros
C) Exercisable only at maturity
D) Calls (there are no puts)
Answer: C
10) Which of the following is NOT true?
A) A call option gives the holder the right to buy an asset by a certain date for a certain price
B) A put option gives the holder the right to sell an asset by a certain date for a certain price
C) The holder of a call or put option must exercise the right to sell or buy an asset
D) The holder of a forward contract is obligated to buy or sell an asset
Answer: C
11) Which of the following is NOT true about call and put options?
A) An American option can be exercised at any time during its life
B) A European option can only be exercised only on the maturity date
C) Investors must pay an upfront price (the option premium) for an option contract
D) The price of a call option increases as the strike price increases
Answer: D
,12) The price of a stock on July 1 is $57. A trader buys 100 call options on the stock with a strike
price of $60 when the option price is $2. The options are exercised when the stock price is $65.
The trader's net profit is
A) $700
B) $500
C) $300
D) $600
Answer: C
13) The price of a stock on February 1 is $124. A trader sells 200 put options on the stock with a
strike price of $120 when the option price is $5. The options are exercised when the stock price
is $110. The trader's net profit or loss is
A) Gain of $1,000
B) Loss of $2,000
C) Loss of $2,800
D) Loss of $1,000
Answer: D
14) The price of a stock on February 1 is $84. A trader buys 200 put options on the stock with a
strike price of $90 when the option price is $10. The options are exercised when the stock price
is $85. The trader's net profit or loss is
A) Loss of $1,000
B) Loss of $2,000
C) Gain of $200
D) Gain of $1000
Answer: A
15) The price of a stock on February 1 is $48. A trader sells 200 put options on the stock with a
strike price of $40 when the option price is $2. The options are exercised when the stock price is
$39. The trader's net profit or loss is
A) Loss of $800
B) Loss of $200
C) Gain of $200
D) Loss of $900
Answer: C
16) A speculator can choose between buying 100 shares of a stock for $40 per share and buying
1000 European call options on the stock with a strike price of $45 for $4 per option. For second
alternative to give a better outcome at the option maturity, the stock price must be above
A) $45
B) $46
C) $55
D) $50
Answer: D
,17) A company knows it will have to pay a certain amount of a foreign currency to one of its
suppliers in the future. Which of the following is true?
A) A forward contract can be used to lock in the exchange rate
B) A forward contract will always give a better outcome than an option
C) An option will always give a better outcome than a forward contract
D) An option can be used to lock in the exchange rate
Answer: A
18) A short forward contract on an asset plus a long position in a European call option on the
asset with a strike price equal to the forward price is equivalent to
A) A short position in a call option
B) A short position in a put option
C) A long position in a put option
D) None of the above
Answer: C
19) A trader has a portfolio worth $5 million that mirrors the performance of a stock index. The
stock index is currently 1,250. Futures contract trade on the index with one contract being on 250
times the index. To remove market risk from the portfolio the trader should
A) Buy 16 contracts
B) Sell 16 contracts
C) Buy 20 contracts
D) Sell 20 contracts
Answer: B
20) Which of the following best describes a central clearing party?
A) It is a trader that works for an exchange
B) It stands between two parties in the over-the-counter market
C) It is a trader that works for a bank
D) It helps facilitate futures trades
Answer: B
,Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull)
Chapter 2 Mechanics of Futures Markets
1) Which of the following is true?
A) Both forward and futures contracts are traded on exchanges
B) Forward contracts are traded on exchanges, but futures contracts are not
C) Futures contracts are traded on exchanges, but forward contracts are not
D) Neither futures contracts nor forward contracts are traded on exchanges
Answer: C
2) Which of the following is NOT true?
A) Futures contracts nearly always last longer than forward contracts
B) Futures contracts are standardized; forward contracts are not
C) Delivery or final cash settlement usually takes place with forward contracts; the same is not
true of futures contracts
D) Forward contracts usually have one specified delivery date; futures contract often have a
range of delivery dates
Answer: A
3) In the corn futures contract a number of different types of corn can be delivered (with price
adjustments specified by the exchange) and there are a number of different delivery locations.
Which of the following is true?
A) This flexibility tends increase the futures price
B) This flexibility tends decrease the futures price
C) This flexibility may increase and may decrease the futures price
D) This flexibility has no effect on the futures price
Answer: B
4) A company enters into a short futures contract to sell 50,000 units of a commodity for 70
cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the
futures price per unit above which there will be a margin call?
A) 78 cents
B) 76 cents
C) 74 cents
D) 72 cents
Answer: D
5) A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per
unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will
allow $2,000 to be withdrawn from the margin account?
A) $58
B) $62
C) $64
D) $66
Answer: B
1
Copyright © 2017 Pearson Education, Ltd.
,6) One futures contract is traded where both the long and short parties are closing out existing
positions. What is the resultant change in the open interest?
A) No change
B) Decrease by one
C) Decrease by two
D) Increase by one
Answer: B
7) Who initiates delivery in a corn futures contract?
A) The party with the long position
B) The party with the short position
C) Either party
D) The exchange
Answer: B
8) You sell one December futures contracts when the futures price is $1,010 per unit. Each
contract is on 100 units and the initial margin per contract that you provide is $2,000. The
maintenance margin per contract is $1,500. During the next day the futures price rises to $1,012
per unit. What is the balance of your margin account at the end of the day?
A) $1,800
B) $3,300
C) $2,200
D) $3,700
Answer: A
9) A hedger takes a long position in a futures contract on a commodity on November 1, 2012 to
hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31, 2012 the
futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1, 2013.
What gain is recognized in the accounting year January 1 to December 31, 2013? Each contract
is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000
Answer: D
10) A speculator takes a long position in a futures contract on a commodity on November 1,
2012 to hedge an exposure on March 1, 2013. The initial futures price is $60. On December 31,
2012 the futures price is $61. On March 1, 2013 it is $64. The contract is closed out on March 1,
2013. What gain is recognized in the accounting year January 1 to December 31, 2013? Each
contract is on 1000 units of the commodity.
A) $0
B) $1,000
C) $3,000
D) $4,000
Answer: C
2
Copyright © 2017 Pearson Education, Ltd.
,11) The frequency with which margin accounts are adjusted for gains and losses is
A) Daily
B) Weekly
C) Monthly
D) Quarterly
Answer: A
12) Margin accounts have the effect of
A) Reducing the risk of one party regretting the deal and backing out
B) Ensuring funds are available to pay traders when they make a profit
C) Reducing systemic risk due to collapse of futures markets
D) All of the above
Answer: D
13) Which entity in the United States takes primary responsibility for regulating futures market?
A) Federal Reserve Board
B) Commodities Futures Trading Commission (CFTC)
C) Security and Exchange Commission (SEC)
D) US Treasury
Answer: B
14) For a futures contract trading in April 2012, the open interest for a June 2012 contract, when
compared to the open interest for Sept 2012 contracts, is usually
A) Higher
B) Lower
C) The same
D) Equally likely to be higher or lower
Answer: A
15) Clearing houses are
A) Never used in futures markets and sometimes used in OTC markets
B) Used in OTC markets, but not in futures markets
C) Sometimes used in both futures markets and OTC markets
D) Always used in both futures markets and OTC markets
Answer: C
16) A haircut of 20% means that
A) A bond with a market value of $100 is considered to be worth $80 when used to satisfy a
collateral request
B) A bond with a face value of $100 is considered to be worth $80 when used to satisfy a
collateral request
C) A bond with a market value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
D) A bond with a face value of $100 is considered to be worth $83.3 when used to satisfy a
collateral request
Answer: A
3
Copyright © 2017 Pearson Education, Ltd.
,17) With bilateral clearing, the number of agreements between four dealers, who trade with each
other, is
A) 12
B) 1
C) 6
D) 2
Answer: C
18) Which of the following best describes central clearing parties?
A) Help market participants to value derivative transactions
B) Must be used for all OTC derivative transactions
C) Are used for futures transactions
D) Perform a similar function to exchange clearing houses
Answer: D
19) Which of the following are cash settled?
A) All futures contracts
B) All option contracts
C) Futures on commodities
D) Futures on stock indices
Answer: D
20) A limit order
A) Is an order to trade up to a certain number of futures contracts at a certain price
B) Is an order that can be executed at a specified price or one more favorable to the investor
C) Is an order that must be executed within a specified period of time
D) None of the above
Answer: B
4
Copyright © 2017 Pearson Education, Ltd.
, Fundamentals of Futures and Options Markets, 9th Edition, Global
Edition (Hull) Chapter 3 Hedging Strategies Using Futures
1) The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short
futures position. The basis increases unexpectedly. Which of the following is true?
A) The hedger's position improves
B) The hedger's position worsens
C) The hedger's position sometimes worsens and sometimes improves
D) The hedger's position stays the same
Answer: A
2) Futures contracts trade with every month as a delivery month. A company is hedging the
purchase of the underlying asset on June 15. Which futures contract should it use?
A) The June contract
B) The July contract
C) The May contract
D) The August contract
Answer: B
3) On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the
spot price is $64 and the August futures price is $63.50. A company entered into futures
contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position
on July 1. What is the effective price (after taking account of hedging) paid by the company?
A) $59.50
B) $60.50
C) $61.50
D) $63.50
Answer: A
4) On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On
November 1 the price is $980 and the December futures price is $981. A producer of the
commodity entered into a December futures contracts on March 1 to hedge the sale of the
commodity on November 1. It closed out its position on November 1. What is the effective price
(after taking account of hedging) received by the company for the commodity?
A) $1,016
B) $1,001
C) $981
D) $1,014
Answer: D
1
Copyright © 2017 Pearson Education, Ltd.
