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If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign
exchange rate risk by ____.
A) selling foreign exchange futures short
B) buying foreign exchange futures long
C) staying out of the exchange futures market
D) selling foreign exchange forward contracts short
Answer: B
Diff: 2 Type: MC Page Ref: 331 - 332
Skill: Applied
Objective List: 14.1 Distinguish among forwards, futures, options, and swaps
What is an interest-rate futures contract? How does it differ from an interest-rate forward
contract?
Answer: An interest-rate futures contract is similar to an interest-rate forward contract in that it
specifies that a financial instrument must be delivered by one party to another on a stated future
date. However it differs from an interest-rate forward contract in several ways that overcome
some of the liquidity and default problems of forward contracts.
Diff: 1 Type: SA Page Ref: 326 - 327
Skill: Recall
Objective List: 14.1 Distinguish among forwards, futures, options, and swaps
Explain using an example the statement that "at the expiration date of a futures contract, the
price of the contract is the same as the price of the underlying asset to be delivered."
Answer: Consider what happens on the expiration date of a June contract at the end of June
when the price of the underlying $100,000 face value Canadian bond is 110 ($110,000). If the
futures contract sells bellow 110, say at 109, a trader can buy the contract for $109,000 and take
delivery of the bond and immediately sell it for $110,000, thereby earning a quick profit of
$1000. That means that everyone will try to buy the contract and this will drive its price up to
- If the price is 111 instead everyone will try to sell the contract at $111,000 and buy it from
the market to deliver at $110,000. Thus everyone will try to sell and this will drive the price
down to 110.
Diff: 3 Type: SA Page Ref: 326
Skill: Applied
Objective List: 14.1 Distinguish among forwards, futures, options, and swaps
- Where are financial futures traded? Describe that market.
Answer: Financial futures contracts are traded on organized exchanges such as the Chicago
Board of Trade, the Chicago Mercantile Exchange, the Montreal Exchange, the London
International Financial Futures Exchange etc. These futures exchanges are highly competitive
with one another, and each organization tries to design contracts and set rules that will increase
the amount of futures trading on its exchange. The exchanges are also regulated to ensure that
prices in the market are not manipulated.
Diff: 1 Type: SA Page Ref: 326
Skill: Recall
Objective List: 14.1 Distinguish among forwards, futures, options, and swaps