Topic 2 tutorial questions:
• Who initiates delivery in a corn futures contract?
• The party with the long position
• The party with the short position
• Either party
• The exchange
• 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?
• $1,800
• $3,300
• $2,200
• $3,700
• The frequency with which futures margin accounts are adjusted for gains and losses is
• Daily
• Weekly
• Monthly
• Quarterly
• Margin accounts have the effect of
• Reducing the risk of one party regretting the deal and backing out
• Ensuring funds are available to pay traders when they make a profit
• Reducing systemic risk due to collapse of futures markets
• All of the above
• Clearing houses are
• Never used in futures markets and sometimes used in OTC markets
• Used in OTC markets, but not in futures markets
• Always used in futures markets and sometimes used in OTC markets
• Always used in both futures markets and OTC markets
• 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?
• The hedger’s position improves.
• The hedger’s position worsens.
• The hedger’s position sometimes worsens and sometimes improves.
• The hedger’s position stays the same.
• A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?
• Long 192 contracts
• Short 192 contracts
• Long 48 contracts
• Short 48 contracts
• A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging?
• It leads to a better exchange rate being paid
• It leads to a more predictable exchange rate being paid
• It caps the exchange rate that will be paid
• It provides a floor for the exchange rate that will be paid
• Which of the following best describes “stack and roll”?
• Creates long-term hedges from short term futures contracts
• Can avoid losses on futures contracts by entering into further futures contracts
• Involves buying a futures contract with one maturity and selling a futures contract with a different maturity
• Involves two different exposures simultaneously
• Which of the following increases basis risk?
• A large difference between the futures prices when the hedge is put in place and when it is closed out
• Dissimilarity between the underlying asset of the futures contract and the hedger’s exposure
• A reduction in the time between the date when the futures contract is closed and its delivery month
• None of the above
LTCM case study:
1. What type of fund was LTCM’s?
2. What were their strategies?
3. Did they employ leverage?
4. Between which years was the fund active?
5. If trading performance drops, how should a fund react and should LTCM have had a stop loss strategy?
6. How was their risk management strategy for derivatives?
7. What were the assumptions LTCM made that proved problematic?
8. Do you think LTCM had problems of size and liquidity restrictions?
9. What is moral hazard from a central bank’s point of view?
10. ‘ The market can remain irrational longer than you can remain solvent.’ Comment.