07 - Stock Futures

Objective Questions

1. When an investor buys stock futures, and if it results in physical settlement, then
a. The investor has to pay the margin amount and take delivery of the stock.
b. The investor takes the delivery and pays at an agreed upon future date.
c. The investor can take the delivery on payment of a meager amount.
d. The investor takes the delivery and his broker pays for him.
e. The investor has to pay for the contracted price and take delivery of the stock.

2. When the stock futures are sold and it results in physical settlement, then the physical shares should be delivered by the investor to
a. The broker.
b. The exchange.
c. The buyer.
d. The custodian of the buyer.
e. Any individual who is authorized by the buyer to receive the shares.

3. When the futures contract results in physical settlement, then the brokerage originally expensed
a. Should be capitalized and taken to the concerned shares account.
b. Should be discounted.
c. Should be considered as part of the cost.
d. Should be reversed to the investor account.
e. Both a and d.

4. Which among the following is a correct accounting entry on payment of margin?

COMP: Please make the following choices somehow match the previous multiple choice NumberSub style, as “a.” “b.” etc.

a)

Date                    Particulars                                                        Debit (JPY)                     Credit (JPY)
1-Jan-X1         Futures Margin Account                                      25,000.00
To Bank Account                                                                                        25,000.00
(Being the margin amount on purchase of futures paid)

b)
Date                  Particulars                                                         Debit (JPY)                     Credit (JPY)
1-Jan-X1         Investment Equity stock Account                       25,000.00
To Bank Account                                                                                     25,000.00
(Being the margin amount on purchase of futures paid)

c)
Date                  Particulars                                                        Debit (JPY)                      Credit (JPY)
1-Jan-X1          Bank Account                                                   25,000.00
To Futures Margin Account                                                                     25,000.00
(Being the margin amount on purchase of futures paid)

d)
Date                  Particulars                                                       Debit (JPY)                       Credit (JPY)
1-Jan-X1          Bank Account                                                  25,000.00
To Investment Equity stock Account                                                      25,000.00
(Being the margin amount on purchase of futures paid)

e)
Date                 Particulars                                                      Debit (JPY)                        Credit (JPY)
1-Jan-X1         Futures Margin Account                                  25,000.00
To Investment Equity stock Account                                                      25,000.00
(Being the margin amount on purchase of futures paid)

5. Assuming a sale of stock futures being liquidation of long stock futures, which among the following is true in case of available-for-sale?
a. Receivable from broker amount will be shown as investments on the asset side of balance sheet.
b. Receivable from broker amount will be shown in the P&L account.
c. Receivable from broker will be shown as current assets on the balance sheet.
d. Receivable from broker shown off balance sheet.
e. Receivable from broker will be adjusted to payable to broker.

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• When the investor buys the stock futures, and if it results in physical settlement, then the investor has to pay the contracted price and take delivery of the stock. The margin money paid will, however, be adjusted against the total money that the investor should pay the exchange.
• The brokerage paid on the futures trade would have been directly expensed and not taken as part of the cost of the shares that was to be acquired.
• When the futures contract results in physical settlement, then the brokerage originally expensed should be capitalized and taken to the concerned shares account.

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