ch_13 - Chapter 13 Financial Futures Markets Questions 1....

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Chapter 13 Financial Futures Markets Questions 1. Describe the general characteristics of a futures contract. ANSWER: A futures contract is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date. 2. How does a clearinghouse facilitate the trading of financial futures contracts? ANSWER: It records all transactions and guarantees timely payments on futures contracts. This precludes the need for a purchaser of a futures contract to check the creditworthiness of the contract seller. 3. How does the price of a financial futures contract change as the market price of the security it represents changes? Why? ANSWER: As the market price of the security changes, so does the futures price, in a similar manner. The futures price should reflect the expectation as of settlement date, and expectations will change in accordance with changes in the prevailing market price. 4. Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk. ANSWER: Ideally, the underlying instrument represented by the futures contract would be similarly sensitive to interest rate movements as the assets that are being hedged. 5. Will speculators buy or sell Treasury bond futures contracts if they expected interest rates to increase? Explain. ANSWER: Speculators should sell Treasury bond futures contracts. If they expected interest rates to increase, this implies expectations of lower bond prices. Thus, if security prices decline so will futures prices. Speculators could then close out their position by purchasing an identical futures contract. 6. What is the maximum loss to a purchaser of a futures contract? ANSWER: The maximum loss is the amount to be paid at settlement date as specified by the contract. 7. Explain how purchasers of financial futures contracts can offset their position. How is their gain or loss determined? ANSWER: Purchasers of financial futures contracts can offset their positions by selling the identical contracts. Their gain is the difference between what they sold the contracts for and their purchase price. 8.
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ch_13 - Chapter 13 Financial Futures Markets Questions 1....

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