Convergence property implies that on the delivery day, a. cost-of-carry is paid

Question

Convergence property implies that on the delivery day,

a. cost-of-carry is paid

b. gain on the long position equals loss on the short position

c. observed futures price equals observed spot price

d. hedgers make money

One of the differences between a futures and a forward contract is that forward is settled on the delivery day and futures is marked to market daily. (True / False)

Commodity futures price

a.Is related to spot price by cost-of-carry, borrowing cost, and convenience yield

b.Increases if cost of carry decreases

c.Converges to basis at maturity

d.All of the above

A speculator who has a _______position in wheat futures wants the futures price of wheat to _______ in the future.

a.long; increase

b.long; decrease

c.short; increase

d.long; stay the same

e.short; stay the same

For commodity futures, when convenience yield is smaller than the carrying cost, F > S (contango). (True / False)

For equity futures, higher dividend yield, all else equal, implies lower futures price. (True / False)

For exchange rate futures, the higher is the interest rate in the foreign country (relative to the interest rate in the U.S.), all else equal, the lower is the futures exchange rate. (True / False)

For interest rate futures, the cash price received by the trader for the bond delivered is the same as the futures settlement price. (True / False)

The unsecured overnight borrowing / lending rate between banks and the Fed is referred to as

a.LIBOR

b.OIS

c.The Fed Fund Rate

d.The Repo Rate

Eurodollar is a dollar deposited in a U.S. of foreign bank in Europe only. (True / False)

As a speculator, you short crude oil futures when the futures price settles at $70 per barrel. In one month, the same contract settles for $65 per barrel. Your gain is

a.Zero, because the contract hasn’t matured yet

b.$5 per barrel

c.-$5 per barrel

d.Depends on the spot price

You are an airline trying to hedge fuel prices. You decide to hedge with crude oil futures, as you figure that higher oil prices imply higher fuel prices. You need to short crude oil futures to hedge. (True / False)

A U.S. company has a liability of 100,000 Euro to be paid back in one year. To hedge, the company needs to buy Euro futures. (True / False)

Explanation / Answer

Convergence property implies that on the delivery day,

c. observed futures price equals observed spot price

One of the differences between a futures and a forward contract is that forward is settled on the delivery day and futures is marked to market daily. (True )

Commodity futures price

d.All of the above

A speculator who has a _______position in wheat futures wants the futures price of wheat to _______ in the future.

a.long; increase

For commodity futures, when convenience yield is smaller than the carrying cost, F > S (contango). (True / False)

For equity futures, higher dividend yield, all else equal, implies lower futures price. (True )

For exchange rate futures, the higher is the interest rate in the foreign country (relative to the interest rate in the U.S.), all else equal, the lower is the futures exchange rate. (True)

For interest rate futures, the cash price received by the trader for the bond delivered is the same as the futures settlement price. (True / False)

The unsecured overnight borrowing / lending rate between banks and the Fed is referred to as

b.OIS

Eurodollar is a dollar deposited in a U.S. of foreign bank in Europe only. (True )

As a speculator, you short crude oil futures when the futures price settles at $70 per barrel. In one month, the same contract settles for $65 per barrel. Your gain is

b.$5 per barrel

You are an airline trying to hedge fuel prices. You decide to hedge with crude oil futures, as you figure that higher oil prices imply higher fuel prices. You need to short crude oil futures to hedge. False)

A U.S. company has a liability of 100,000 Euro to be paid back in one year. To hedge, the company needs to buy Euro futures. (True

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