Problem 1: While you were writing this quiz, an announcement of an important scientific discovery was made: a German chemist Hanz Richerberg has discovered a new inexpensive method of turning iron into gold. What will be the effect of this announcement on the basis of April futures gold contracts?

1. The bases will significantly increase
2. The basis will significantly decrease
3. The effect on the basis will be small

Ans: C

Problem 2: Assume that the expected short-term interest rate in the future is equal to the current short-term interest rate. Then, according to the Liquidity Preference Theory,

1. Forward short-term interest rates are equal to the current long-term interest rates
2. Forward short-term interest rates are lower than the current long-term interest rates
3. Forward short-term interest rates are higher than the current long-term interest rates
4. No prediction can be made about the relation between forward short-term interest rates and current long-term interest rates

Ans: C

Question 3: An investor owns 1,000 shares of AAA inc. currently worth $35 per share. Assume both call and put options on AAA inc. are traded on the market. How the investor can hedge his portfolio using these options?

1. Buy 1000 call options only
2. Sell 1000 call options only
3. Buy 1000 put options only
4. Sell 1000 put options only
5. Either buy 1000 call options or sell 1000 put options
6. Either buy 1000 put options or sell 1000 call options

Ans: C

Question 4: The initial margin for a future contract on 10,000 bushels of corn is $4,000 and the maintenance margin for the same contract is $3,500. At the beginning of the day you had $4,250 on your margin account. During the trading day the futures price went down by $0.08 while the spot price went down only by $0.06. If you have one long position in futures contracts, which of the following is true:

1. You will receive a margin call and you will need to add $800 to your margin account
2. You will receive a margin call and you will need to add $600 to your margin account
3. You will receive a margin call and you will need to add $550 to your margin account
4. You will receive a margin call and you will need to add $350 to your margin account
5. You will receive a margin call and you will need to add $50 to your margin account
6. You will not receive a margin call

Ans: C

Please explain each of the answers