CMFAS Futures and Derivatives M4 2

Question 1

What is 'basis' in the context of futures trading?

Accepted Answer

The difference between the spot price and the futures price of an asset

Answer

Basis is calculated as the spot (cash) price minus the futures price, and it typically converges to zero as the contract approaches expiry.

Question 2

A hedger using futures contracts to protect an existing long position in a commodity portfolio is exposed to which residual risk?

Accepted Answer

Basis risk

Answer

Even when hedged with futures, the hedger retains basis risk because the futures price and spot price may not move in perfect lockstep.

Question 3

Which of the following is a key difference between exchange-traded futures and over-the-counter (OTC) derivatives?

Accepted Answer

Futures are standardised contracts cleared through a CCP, whereas OTC derivatives are customised bilateral agreements

Answer

Exchange-traded futures are standardised in terms and cleared centrally, eliminating counterparty risk, while OTC derivatives are bespoke bilateral contracts with direct counterparty exposure.

Question 4

If a futures trader receives a margin call, what must they do?

Accepted Answer

Deposit additional funds to restore the margin account to at least the initial margin level

Answer

When a margin call is issued because the account falls below the maintenance margin level, the trader must top up the account to at least the initial margin requirement.

Question 5

What does 'open interest' measure in a futures market?

Accepted Answer

The total number of outstanding futures contracts that have not been settled or closed

Answer

Open interest represents the total number of futures contracts that remain open (not yet offset by an opposite trade or settled by delivery) at any point in time.

CMFAS Practice Test

CMFAS Practice Test

CMFAS Futures and Derivatives M4 2