CAIA - CHAPTER 11 QUESTIONS AND ANSWERS 2023.

List the primary advantage of forward contracts to the parties involved. Forward contacts are ad hoc contracts negotiated between two parties with flexibility regarding details that help meet the needs and preferences of the parties. Futures contracts tend to be standardized What is the name of the credit-related event affecting a derivative contract that is mitigated at the settlement date by the marking-to-market process? Crisis at maturity, when payment exchanges are deferred until settlement After a margin call, to what level must an investor return the account's margin? To the initial margin requirement What is another name for deferred contracts or back contracts? Distant Contracts What are the three costs of carry that determine the price of a forward contract on a physical asset? Storage costs, convenience yield (when viewed as a negative cost), and interest (financing) charges An analyst calculates the theoretical price of a forward contract on a physical commodity using the spot price and the cost-of-carry model. What is the primary reason that the forward price could be substantially smaller than the price generated by the model? The analyst has underestimated the commodity's high convenience yield (i.e., a benefit -of-carry) such as in the case of a crop in short supply but with an anticipation of a large harvest. Why might lumber have inelastic supply? It is difficult to increase the amount of timber available rapidly due to the long time between planting and harvesting. What is the name of the condition in which the expected spot price of a commodity in one year exceeds the one-year forward price of the commodity? Normal Backwardation What is the name of the following quantity: the spot price of a commodity minus a forward price on the commodity The basis of the commodity contract An investor has established a calendar spread using forward contracts on a commodity. The investor is long the contract has a longer time to settlement. With carrying costs held constant, generally, what would be the effect on the calendar spread of an increase in the spot price of the commodity? Changes in the spot price will not affect calendar spreads as long as the sum of the carrying costs does not change. All forward prices will move up and down by the same quantity with the trader hedged against changes in the spot price by holding an equal number of long and short contracts