General Theory - Answers

  1. C. The advent of forward contracts in general provided the framework for futures; the Japanese contracts were varieties of forwards. To-arrives were an intermediate step in the development of futures. Options weren't exchange-traded until more than a hundred years after futures were.
  2. D. As opposed to a forward, a future is standardized and exchange-traded, not customized and principals-only. It is guaranteed, but by a clearinghouse, not an exchange.
  3. False. First, we divide the October price by the July price and get 1.0045. That means the implied interest rate is 0.45% for the three-month period. Then we annualize the interest rate. From July to October is three months, or one-fourth of the year. So we raise 1.0240 to the fourth power to annualize it to 1.0183. That means the implied annualized rate is 1.83%. The BA rate is above that, so the market is below full carry.
  4. D. Acting on her own account suggests that she is not representing a firm that would want to deliver or take delivery of the underlying asset. That makes her a speculator. She is selling an asset she intends to replace at a lower price, so she is taking a short position.
  5. B. "Retender" is the return of a future contract's notice to the clearinghouse in advance of its reissue. "Conversion" is a position created by selling a call option, buying a put option, and buying the underlying instrument. "Time value" is the portion of an option's premium that exceeds the intrinsic value.
  6. B. Whereas speculators take on risk, hedgers wish to protect what they have, transferring it to the speculators. In this sense, futures markets are a zero-sum game.
  7. A. A cross hedge utilizes the item to hedge which is closest to being fungible with the item being hedged.
  8. C. Selling the futures protects the price of the existing inventory. To obtain the number of contracts needed, take the quantity to hedge and divide it by the contract value. In this instance, it would be 200,000 lbs of Unobtanium/50,000 lbs (individual contract size) = 4 contracts to be sold against inventory.
  9. C. To secure a favorable price in the face of a possible increase, the baker should purchase flour futures. If he or she were a miller, they would purchase wheat futures to lock in the price of wheat which would be milled into flour. The baker is one step closer to the ultimate end user, the retail customer.
  10. B. The sale of futures would lock in a favorable price of the actuals which the producer or commercial hedger owns.
  11. B. CPOs manage a pool of commodities in a trust to trade futures contracts. The statement presented in the stem of the question defines a commodity trading advisor (CTA).
Margin Requirements
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