Answer the following MCQs by choosing the correct answer and fill it up in the answer table provided at the end of this section. Each correct answer will be awarded 2 marks.

1. A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account?

A. $58

B. $62

C. $64

D. $66

2. A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call?

1. 78 cents
2. 76 cents
3. 74 cents
4. 72 cents

3. 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. $1,800
2. $3,300
3. $2,200
4. $3,700

4. A hedger takes a long position in a futures contract on Silver on November 1, 2020 to hedge an exposure on March 1, 2021. The initial futures price is $60 per gram. On December 31, 2020 the futures price is $61per gram. On March 1, 2021 it is $64 per gram. The contract is closed out on March 1, 2021. What gain is recognized in the accounting year January 1 to December 31, 2021? Each contract is on 1000 grams of the Silver.

1. $0
2. $1,000
3. $3,000
4. $4,000

5. Margin accounts have the effect of

1. Reducing the risk of one party regretting the deal and backing out
2. Ensuring funds are available to pay traders when they make a profit
3. Reducing systemic risk due to collapse of futures markets
4. All of the above

6. On March 1 a commoditys spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company?

1. $59.50
2. $60.50
3. $61.50
4. $63.50

7. On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity?

A. $1,016

B. $1,001

C. $981

D. $1,014

8. 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 increase beta to 1.8?

1. Long 192 contracts
2. Short 192 contracts
3. Long 96 contracts
4. Short 96 contracts

9. 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?

1. Long 192 contracts
2. Short 192 contracts
3. Long 48 contracts
4. Short 48 contracts

10. Which of the following increases basis risk?

1. A large difference between the futures prices when the hedge is put in place and when it is closed out
2. Dissimilarity between the underlying asset of the futures contract and the hedgers exposure
3. A reduction in the time between the date when the futures contract is closed and its delivery month
4. None of the above