Question

1. If futures prices are lower than the expectations of spot prices in the future,

	a.	Hedgers and speculators will take the same positions
	b.	Speculators will take a net long position
	c.	Speculators will take a net short position
	d.	Hedgers will take a net long position

2. Which of the following statements is true about emerging technologies and innovations in the financial sector

	a.	They will increase the number of intermediaries who help facilitate the provision of financial products and services.
	b.	They will enable more homogeneity in the provision of financial products and services.
	c.	They will allow financial institutions to understand customers and markets more accurately.
	d.	They will decrease the pressure to change traditional end-to-end financial services models

3. If the current price of a security is $75, the trade position that would mitigate the effects from market movements causing downward pressures on that security is:

		a short call with a strike price of $70
		a long put with a strike price of $70
		a long put with a strike price of $80
		a short put with a strike price of $80

4. Which of the following is true about margins in the context of futures contracts

	a.	they are financial guarantees that short positions will be profitable.
	b.	they are used to guarantee the that profits do not fall below a certain threshold.
	c.	they are financial guarantees that long positions will be profitable.
	d.	they are used to ensure that market movements are settled daily.

5. Suppose a firm expects the price of an input to increase. If the firm will need the input in 4 months time, the best strategy the firm can pursue is to:

	a.	buy a futures contract for the input with a settlement price that is equal to the expected future market price.
	b.	buy a futures contract for the input with a settlement price that is equal to the current market price.
	c.	buy the input at the current market price and bear high storage costs.
	d.	buy a futures contract for the input with a settlement price that is lower than the expected future market price.

6. Which of the following would most likely be a contributor to low levels of liquidity that could exist in forward contracts markets compared to futures markets

	a.	When NPV of the contract is equal to zero on the day the contract is signed
	b.	The lack of standardization of forward contracts
	c.	Market middlemen, i.e. clearing houses, processing forward contracts slowly
	d.	The fact that the value of the underlying asset could change before maturity

Answer 1

1.If future price is lower than the expectation of spot prices in the future, speculators will take a net long position. This is a a scenario of backwardation in the market.

This is because the speculators are estimating that the prices are going to go into a state of equilibrium and they want to play on the price difference.

hedgers will not look much into it because hedging is not a technique relating to difference in pricing of spot and futures it is just to hedge a particular risk, not to make returns.

So the correct answer would be option (B)