RSM435
Futures and Options Markets
University of Toronto · Rotman Commerce
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COMPLETE EXAM Q&A BUNDLE
Midterm + Final Exam Preparation
50 Exam-Style Questions · Verified Answers · Full Rationales
Based on Hull — Options, Futures & Other Derivatives, 11th Ed.
· Graded A+
Topics Covered:
Futures Mechanics · Hedging Strategies · Interest Rates · Forward/Futures Pricing · Interest Rate
Futures
Swaps · Option Properties · Trading Strategies · Binomial Trees · Black-Scholes-Merton · The Greeks
How to Use This Document
This bundle covers all 11 RSM435 weekly topics based on the official Fall 2025 / Summer 2026 course
outline and Hull 11th Edition. Questions mirror RSM435 Examplify exam style. Work through each question
before checking the verified answer and rationale.
UNIT 1: Mechanics of Futures Markets & Central Counterparties (Hull Ch. 1–
2)
Q1. What is the difference between a long and short futures position, and what obligation does
each carry?
✔ Answer: Long position: obligation to BUY the underlying asset at the futures price on the delivery date.
Short position: obligation to SELL the underlying asset at the futures price on delivery. Both parties are legally
obligated — futures contracts are not optional (unlike options).
💡 Rationale: The long benefits when futures prices rise; the short benefits when prices fall. Most futures contracts
are closed out before delivery by taking the opposite position — less than 2% of contracts result in actual delivery.
Q2. Explain how margin accounts and daily mark-to-market work in futures markets.
✔ Answer: Initial margin: deposit required to open a futures position (typically 5–15% of contract value). Daily
mark-to-market: gains/losses are credited/debited to the margin account daily based on settlement price
, changes. If the margin falls below the maintenance margin, a margin call requires topping up to the initial
margin level.
💡 Rationale: Daily settlement eliminates the buildup of large credit exposures. It effectively converts a single
contract into a series of daily forward contracts, each settled at end of day. This is why futures have lower credit risk
than forwards.
Q3. What role does a Central Counterparty (CCP) play in futures markets, and how does it
eliminate counterparty risk?
✔ Answer: A CCP (clearinghouse) inserts itself as the buyer to every seller and seller to every buyer — it
becomes the counterparty to both sides. It collects margin from all members, nets positions, and guarantees
performance. Members post initial and variation margin daily. If a member defaults, the CCP uses their margin
(and its own default fund) to cover losses.
💡 Rationale: The CCP's guarantee makes futures markets work efficiently because traders don't need to assess each
other's creditworthiness. CCPs became mandatory for standardised OTC derivatives post-2008 financial crisis under
Dodd-Frank (US) and EMIR (EU).
Q4. A futures contract on crude oil has a contract size of 1,000 barrels. An investor goes long 5
contracts at $85/barrel. The next day the settlement price is $83.50. What is the daily mark-to-
market gain/loss?
✔ Answer: Price change = $83.50 − $85.00 = −$1.50/barrel. Loss per contract = −$1.50 × 1,000 = −$1,500. Total
loss = −$1,500 × 5 contracts = −$7,500. This amount is debited from the investor's margin account.
💡 Rationale: The long position loses when prices fall because the investor is locked in to buy at the higher futures
price. The $7,500 is transferred to the short side's margin account on the same day — zero-sum game.
UNIT 2: Hedging Strategies Using Futures (Hull Ch. 3)
Q5. What is the minimum variance hedge ratio and how is it calculated?
✔ Answer: h* = ρ × (σS / σF), where ρ is the correlation between spot and futures price changes, σS is the
standard deviation of spot price changes, and σF is the standard deviation of futures price changes. It
minimises the variance of the hedged position.
💡 Rationale: The optimal hedge ratio is not always 1.0 — it depends on the correlation between the asset and the
futures contract. For cross-hedges (hedging with a related but not identical futures), h* is particularly important. OLS
regression of ΔS on ΔF directly estimates h*.
Q6. A company expects to sell 2 million barrels of oil in 3 months. The standard deviation of
monthly spot price changes is $0.90, futures price changes $0.80, and correlation is 0.85. Each
futures contract covers 1,000 barrels. How many contracts to short?
✔ Answer: h* = 0.85 × (0.90/0.80) = 0.85 × 1.125 = 0.956. Number of contracts = h* × (QA/QF) = 0.956 ×
(2,000,000/1,000) = 0.956 × 2,000 = 1,913 contracts (round to 1,913).
💡 Rationale: The firm shorts 1,913 contracts to hedge its long exposure to oil prices. If oil prices fall, the short
futures position gains, offsetting the lower selling price on the physical oil. The hedge is imperfect due to basis risk.
Futures and Options Markets
University of Toronto · Rotman Commerce
─────────────────────────────────
COMPLETE EXAM Q&A BUNDLE
Midterm + Final Exam Preparation
50 Exam-Style Questions · Verified Answers · Full Rationales
Based on Hull — Options, Futures & Other Derivatives, 11th Ed.
· Graded A+
Topics Covered:
Futures Mechanics · Hedging Strategies · Interest Rates · Forward/Futures Pricing · Interest Rate
Futures
Swaps · Option Properties · Trading Strategies · Binomial Trees · Black-Scholes-Merton · The Greeks
How to Use This Document
This bundle covers all 11 RSM435 weekly topics based on the official Fall 2025 / Summer 2026 course
outline and Hull 11th Edition. Questions mirror RSM435 Examplify exam style. Work through each question
before checking the verified answer and rationale.
UNIT 1: Mechanics of Futures Markets & Central Counterparties (Hull Ch. 1–
2)
Q1. What is the difference between a long and short futures position, and what obligation does
each carry?
✔ Answer: Long position: obligation to BUY the underlying asset at the futures price on the delivery date.
Short position: obligation to SELL the underlying asset at the futures price on delivery. Both parties are legally
obligated — futures contracts are not optional (unlike options).
💡 Rationale: The long benefits when futures prices rise; the short benefits when prices fall. Most futures contracts
are closed out before delivery by taking the opposite position — less than 2% of contracts result in actual delivery.
Q2. Explain how margin accounts and daily mark-to-market work in futures markets.
✔ Answer: Initial margin: deposit required to open a futures position (typically 5–15% of contract value). Daily
mark-to-market: gains/losses are credited/debited to the margin account daily based on settlement price
, changes. If the margin falls below the maintenance margin, a margin call requires topping up to the initial
margin level.
💡 Rationale: Daily settlement eliminates the buildup of large credit exposures. It effectively converts a single
contract into a series of daily forward contracts, each settled at end of day. This is why futures have lower credit risk
than forwards.
Q3. What role does a Central Counterparty (CCP) play in futures markets, and how does it
eliminate counterparty risk?
✔ Answer: A CCP (clearinghouse) inserts itself as the buyer to every seller and seller to every buyer — it
becomes the counterparty to both sides. It collects margin from all members, nets positions, and guarantees
performance. Members post initial and variation margin daily. If a member defaults, the CCP uses their margin
(and its own default fund) to cover losses.
💡 Rationale: The CCP's guarantee makes futures markets work efficiently because traders don't need to assess each
other's creditworthiness. CCPs became mandatory for standardised OTC derivatives post-2008 financial crisis under
Dodd-Frank (US) and EMIR (EU).
Q4. A futures contract on crude oil has a contract size of 1,000 barrels. An investor goes long 5
contracts at $85/barrel. The next day the settlement price is $83.50. What is the daily mark-to-
market gain/loss?
✔ Answer: Price change = $83.50 − $85.00 = −$1.50/barrel. Loss per contract = −$1.50 × 1,000 = −$1,500. Total
loss = −$1,500 × 5 contracts = −$7,500. This amount is debited from the investor's margin account.
💡 Rationale: The long position loses when prices fall because the investor is locked in to buy at the higher futures
price. The $7,500 is transferred to the short side's margin account on the same day — zero-sum game.
UNIT 2: Hedging Strategies Using Futures (Hull Ch. 3)
Q5. What is the minimum variance hedge ratio and how is it calculated?
✔ Answer: h* = ρ × (σS / σF), where ρ is the correlation between spot and futures price changes, σS is the
standard deviation of spot price changes, and σF is the standard deviation of futures price changes. It
minimises the variance of the hedged position.
💡 Rationale: The optimal hedge ratio is not always 1.0 — it depends on the correlation between the asset and the
futures contract. For cross-hedges (hedging with a related but not identical futures), h* is particularly important. OLS
regression of ΔS on ΔF directly estimates h*.
Q6. A company expects to sell 2 million barrels of oil in 3 months. The standard deviation of
monthly spot price changes is $0.90, futures price changes $0.80, and correlation is 0.85. Each
futures contract covers 1,000 barrels. How many contracts to short?
✔ Answer: h* = 0.85 × (0.90/0.80) = 0.85 × 1.125 = 0.956. Number of contracts = h* × (QA/QF) = 0.956 ×
(2,000,000/1,000) = 0.956 × 2,000 = 1,913 contracts (round to 1,913).
💡 Rationale: The firm shorts 1,913 contracts to hedge its long exposure to oil prices. If oil prices fall, the short
futures position gains, offsetting the lower selling price on the physical oil. The hedge is imperfect due to basis risk.
