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Quizzes > Quizzes for Business > Finance

Futures Trading Knowledge Test Practice Quiz

Test Your Futures Trading Skills in Minutes

Difficulty: Moderate
Questions: 20
Learning OutcomesStudy Material
Colorful paper art depicting elements related to a Futures Trading Knowledge Test quiz

Elevate your understanding with this Futures Trading Knowledge Test designed as a dynamic practice quiz. Ideal for aspiring traders, finance students, and professionals eager to refine market skills, it covers contract mechanics, margin requirements, and trend analysis. Each question is fully customisable in our editor to suit classroom lessons or personal study plans. For additional challenges, try the Forex Trading Knowledge Test or the Financial Trading Knowledge Quiz. Discover all available quizzes to keep your trading knowledge sharp.

Which of the following best describes a futures contract?
A standardized agreement to buy or sell an asset at a predetermined price on a specified future date
An option granting the right but not the obligation to trade an asset
A spot transaction settled immediately at the current market price
A bilateral over-the-counter agreement without standardized terms
A futures contract is exchange-traded and standardized regarding quantity, quality, delivery date, and price. It obligates both parties to execute the transaction at the specified future date and price.
What is the primary purpose of the initial margin in futures trading?
A penalty paid if a position is held past the expiration date
The commission fee paid to the broker for each trade
Collateral required to open a position and cover potential losses
An insurance premium against counterparty default
Initial margin serves as collateral to ensure that traders can meet potential losses and reduce credit risk. It is required to open a futures position.
In exchange-traded futures, who acts as the central counterparty guaranteeing performance?
The broker
The regulatory authority
The clearing house
The exchange's market maker
The clearing house interposes itself between buyers and sellers to guarantee the performance of futures contracts and manage counterparty risk. Brokers and market makers facilitate trades but do not guarantee performance.
What is the function of daily mark-to-market in futures trading?
To settle gains and losses each trading day based on the daily settlement price
To calculate broker commissions daily
To determine the final delivery price at expiration
To adjust initial margin requirements at contract start
Daily mark-to-market ensures that profits and losses are realized each day by settling accounts at the daily settlement price. It maintains margin requirements and reduces credit exposure.
What does the maintenance margin represent in a futures account?
The maximum leverage allowed by the exchange
The total initial collateral required to open a position
The fee paid at contract expiration
The minimum equity that must be maintained to avoid a margin call
Maintenance margin is the minimum account balance required to keep a futures position open without triggering a margin call. Falling below this level necessitates additional funds to restore the initial margin.
How is the daily profit or loss for a futures position calculated?
The sum of all trading fees for the day
The difference between the current and previous daily settlement prices multiplied by contract size
The spot price change multiplied by the contract's notional value
The variation margin minus the initial margin
Daily P&L is computed by multiplying the change in the daily settlement price by the contract size. This reflects mark-to-market gains or losses settled each day.
If the futures price is lower than the spot price for a commodity, the market is said to be in:
Backwardation
Contango
Normal
Reverse contango
Backwardation occurs when futures prices are below the spot price, often due to high convenience yields or immediate demand. Contango is the opposite, where futures prices exceed spot prices.
What does the term 'basis' refer to in futures markets?
The commission charged per contract
The total margin requirement
The difference between the spot price and the futures price
The net profit from an arbitrage trade
Basis is defined as the spot price minus the futures price. It plays a critical role in hedging decisions and reflects storage costs, convenience yield, and other factors.
Which formula represents the optimal hedge ratio using variances and correlation?
Correlation between spot and futures divided by total margin
Futures price minus spot price
Spot price divided by futures price
Correlation between spot and futures multiplied by spot volatility divided by futures volatility
The optimal hedge ratio is calculated as the correlation between spot and futures returns times the ratio of their volatilities. This minimizes the variance of the hedged position.
What is a calendar spread in futures trading?
Holding both long and short positions in the same contract month
Simultaneously buying and selling futures contracts of the same asset with different delivery months
Trading futures and options on the same underlying asset
Buying one commodity and selling another related commodity
A calendar spread involves taking opposite positions in futures contracts on the same underlying but with different expiration months to profit from changes in the price relationship over time.
How does an increase in risk-free interest rates generally affect non-dividend-paying futures prices?
It raises futures prices due to higher cost of carry
It lowers futures prices because of increased discounting
It has no impact on futures prices
It causes futures prices to converge to spot prices
For non-dividend-paying assets, the cost-of-carry model suggests that higher interest rates increase carrying costs, leading to higher futures prices relative to spot.
Which technical indicator is a momentum oscillator that measures overbought or oversold conditions?
Relative Strength Index (RSI)
Fibonacci Retracement
Moving Average Convergence Divergence (MACD)
Bollinger Bands
The RSI is a momentum oscillator that compares the magnitude of recent gains to recent losses to identify overbought or oversold conditions. MACD and Bollinger Bands serve different technical functions.
In a moving average crossover system, what signal indicates a bullish trend?
Price remains between moving averages
Moving averages converge without crossing
Long-term moving average crosses above short-term moving average
Short-term moving average crosses above long-term moving average
A bullish signal occurs when the short-term moving average moves above the long-term moving average, suggesting upward momentum. The reverse crossover would indicate bearish momentum.
A negative basis in commodity futures typically indicates the market is in:
Backwardation
Contango
Inverse spread
Normal spread
Negative basis (spot price minus futures price being negative) implies that futures prices exceed spot prices, a condition known as contango. Backwardation is the opposite scenario.
Which of the following factors does NOT directly influence the price of a futures contract?
Underlying asset's volatility
Current spot price of the underlying asset
Time to contract expiration
Risk-free interest rate
Futures prices are determined by spot price, interest rates, storage costs, and time to expiration; volatility does not directly affect futures prices since there is no optionality embedded.
A refiner hedges the price risk of 100,000 barrels of oil using futures. Each futures contract covers 1,000 barrels. If the optimal hedge ratio is 0.75, how many futures contracts should the refiner use?
150
25
75
100
The number of contracts equals (exposure size ÷ contract size) multiplied by the hedge ratio: (100,000 ÷ 1,000) à - 0.75 = 75. This minimizes variance of the hedged position.
Using the cost-of-carry model, what is the fair futures price for a non-dividend-paying asset with a spot price of $50, an annual risk-free rate of 5%, and six months to maturity?
$50.62
$52.50
$51.27
$55.00
Using F = S à - e^{rT}, F = 50 à - e^{0.05à - 0.5} ≈ 50 à - 1.0253 = $51.27. This reflects the cost of carrying the asset to maturity.
What type of risk arises when hedging one asset with futures on a similar but not identical underlying asset?
Operational risk
Liquidity risk
Cross-hedging risk (basis risk)
Credit risk
Cross-hedging involves hedging with a futures contract on a different but related asset, exposing the hedger to basis risk if the price relationship does not move perfectly.
A trader has an initial margin of $5,000 and a maintenance margin of $4,000. If account equity falls to $3,500 after mark-to-market losses, what must the trader do?
Liquidate the position immediately without adding funds
Deposit $500 to reach the maintenance margin level
Deposit $1,500 to restore the account to the initial margin level
No action is required since equity is above zero
Because equity has fallen below the maintenance margin, a margin call requires restoring the account to the initial margin of $5,000, so the trader must deposit $1,500.
In the cost-of-carry framework, if the convenience yield exceeds storage costs, the futures price will be:
Below the spot price (backwardation)
Above the spot price (contango)
Unrelated to the spot price
Equal to the spot price
When convenience yield (benefits of holding the physical asset) exceeds storage costs, the net cost-of-carry is negative, leading to futures prices below spot (backwardation).
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Learning Outcomes

  1. Analyse futures contract specifications and market mechanics
  2. Evaluate risk management strategies in futures scenarios
  3. Identify factors influencing futures prices and volatility
  4. Apply technical indicators to gauge market trends
  5. Demonstrate understanding of margin requirements and position sizing
  6. Compare hedging techniques using futures contracts

Cheat Sheet

  1. Key Components of a Futures Contract - Understanding the building blocks of a futures contract - like the underlying asset, contract size, expiration date, and settlement method - helps you trade with confidence. For instance, an E-mini S&P 500 futures contract represents $50 times the index price, giving you clear exposure to the market. Understanding Futures Trading: A Beginner's Guide
  2. Margin Requirements & Leverage - Learning how initial and maintenance margins work is crucial to managing your buying power and risk. Controlling a $100,000 futures contract with just a $5,000 deposit means you're using 20:1 leverage - exciting but potentially risky if you don't stay disciplined. Futures Trading Basics
  3. Risk Management Strategies - Position sizing and stop-loss orders are your safety nets when markets turn against you. By following the 1 - 2% rule, you never risk more than a small slice of your trading capital on a single position, helping you sleep easier at night. Futures Trading Basics
  4. Factors Influencing Futures Prices - Interest rates, storage costs, and convenience yields all feed into the futures price formula F(t,T) = S(t)e^(r+u - y)(T - t). Breaking down these components demystifies why prices move and helps you anticipate market shifts. Futures Contract (Wikipedia)
  5. Technical Indicators - Tools like moving averages and the Relative Strength Index (RSI) transform raw price data into actionable signals. When RSI climbs above 70, you might be looking at overbought territory; dip below 30, and oversold opportunities could be knocking. Technical Indicators for Futures
  6. Hedging Techniques - Futures aren't just for speculating - they're powerful tools for protecting your business or portfolio. A wheat farmer selling futures before harvest locks in a price today, insulating against tomorrow's market swings. Hedging with Futures
  7. Market Participants - From hedgers and speculators to market makers and arbitrageurs, each player adds depth and liquidity to futures markets. Knowing who's on the other side of your trade gives you insight into price behavior and potential opportunities. Futures Trading Guide for Beginners
  8. Types of Futures Contracts - Whether it's agricultural, energy, or metal commodities, or financial futures on stock indices, interest rates, and currencies, each contract has its own quirks and margin rules. Exploring different categories lets you diversify and find your niche. Types of Futures Contracts
  9. Common Trading Strategies - Trend following, mean reversion, spread trading, scalping, and hedging each offer unique ways to capture profits or manage risk. Testing these strategies on paper first helps you refine your edge before putting real money on the line. Common Futures Strategies
  10. Continuous Learning & Market Awareness - The futures landscape shifts with economic reports, geopolitical events, and breaking news. Staying informed through reputable analysis and real-time data ensures you're never caught off guard when the next big move hits. Market News & Insights
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