Commodities and Commodity Derivatives: An Introduction – Question Bank
Set 1 Questions
1. The price of which commodity least likely reflects the demand for industrial production
activity?
A. Platinum.
B. Copper.
C. Coffee.
2. The quality of which of the following commodity sectors is most likely affected by storage? A.
Softs.
B. Industrial metals.
C. Grains.
3. Which of the following statements is most accurate?
A. The timing to maturity in livestock decreases with size.
B. Farmers and consumers trade grain futures with the delivery months matching the different
growing cycle times of grains.
C. Ranchers trade cattle futures to hedge against meat commitments from live cattle but not
young cattle.
4. Which of the following best describes the life cycle for crude oil and gasoline? A. Straight-
through production to consumption.
B. Input-output production life cycle.
C. Seasonal production.
5. Valuation of commodities depends upon the fact that stocks and bonds are financial assets
whereas commodities are: A. physical assets.
B. contingent claims.
C. derivative contracts with infinite time horizon.
6. Valuation of commodities most likely requires: A. discounting future cash flows.
B. discounting of future prices where future prices are susceptible to supply and demand
and expected price volatility of the commodities. C. a thorough fundamental analysis.
7. One of the differences in valuation of commodities as opposed to financial assets is that
commodities:
A. incur transportation and storage costs.
B. provide periodic income.
C. generate future cash flows.
8. Which of the following statements regarding participants of the commodity futures markets is
correct?
A. Hedgers speculate on market direction and volatility.
Copyright © IFT. All rights reserved. Page 1
, Commodities and Commodity Derivatives: An Introduction – Question Bank B.
Exchanges often provide insurance to hedgers.
C. Traders and investors provide liquidity and price discovery for futures markets.
9. The fdifference fbetween fspot fand ffutures fprices fis fknown fas: fA. fbasis. f
B. calendar fspread. f
C. net ffutures fprice. f
f
10. When fthe fnear-term ffutures fcontract fprice fis fhigher fthan fthe flonger-term ffutures fcontract
fprice ffor fthe fsame fcommodity, fthe fcalendar fspread fis: f
A. positive fand fcommodity ffutures fmarkets fare fin fbackwardation. f
B. negative fand fcommodity ffutures fmarket fare fin fcontango. f
C. positive fand fthe ffutures fmarkets fare fin fcontango. f f
f
11. Which fof fthe ffollowing fstatements fis fleast faccurate? f
A. Physical-settled fcommodity ffutures fcontracts frequire fthat fthe ftitle fof fthe fcommodity fbe
ftransferred fto fthe fbuyer. f
B. Cash-settled fcommodity ffutures fcontracts fensure fa fconvergence fof fthe ffutures fand fspot
fmarket. f
C. As fopposed fto fcommodity fspot fprices, ffutures fprices fcan fbe fglobal, fstandardized fand
fact fas fa freference fprice ffor fforward fcontracts. f f
f
12. Which fof fthe ffollowing fstatements fis fleast faccurate? fAccording fto fthe fInsurance fTheory: f
A. producers fsell ftheir fcommodities fin fthe ffutures fmarkets fto fhedge fsales fprices, fmaking
ftheir frevenues fmore fcertain. f
B. the ffutures fcurve fis fin fbackwardation f“normally” fbecause fthe fproducers fconstantly fsell
fforward fto flock fin fprices, fresulting fin flower fprices fin ffuture. f
C. the fspot fprice fis fhigher fthan fthe ffutures fprice fbecause fthe fproducers ftake fon fthe fprice
frisk. f f
f
13. In fwhich fsituation fis fthe fHedging fPressure fHypothesis fsimilar fto fthe fInsurance fTheory? f
A. When fcommodity fproducers fselling fforward fexceed fcommodity fconsumers fneeded fto
fcomplete fthe fmarket fresulting fin fthe ffutures fprice fcurve fin fbackwardation. f
B. When fprice fprotection fdemanded fby fcommodity fproducers fequal fthe fneeds fof fthe
fcommodity fconsumers, fand fthe fhedging fneeds fof fthe fbuyer foffset fthose fof fthe fseller. f
C. When fthere fis fan fimbalance fin fthe fdemand ffor fprice finsurance fwhere fthe fbuyers
fexceed fthe fsellers fcausing fthe ffutures fmarkets fto fbe fin fcontango. f
f
14. Under fthe fTheory fof fStorage, fwhat fis fthe frelationship fbetween fconvenience fyield fand fthe
flevel fof finventory? f
A. The flevel fof finventory fdoes fnot fimpact fconvenience fyield. f f
B. As finventory fbecomes fmore fabundant, fconvenience fyield frises. f f
C. As finventory fbecomes fscarce, fconvenience fyield frises. f f
f
15. The ftotal freturn fon fa ffully fcollateralized fcommodity ffutures fcontract fis fgiven fas fthe: fA.
fspot fprice freturn fplus fthe froll freturn fplus fthe fcollateral freturn. f
Copyright © IFT. All rights reserved. Page 2
Set 1 Questions
1. The price of which commodity least likely reflects the demand for industrial production
activity?
A. Platinum.
B. Copper.
C. Coffee.
2. The quality of which of the following commodity sectors is most likely affected by storage? A.
Softs.
B. Industrial metals.
C. Grains.
3. Which of the following statements is most accurate?
A. The timing to maturity in livestock decreases with size.
B. Farmers and consumers trade grain futures with the delivery months matching the different
growing cycle times of grains.
C. Ranchers trade cattle futures to hedge against meat commitments from live cattle but not
young cattle.
4. Which of the following best describes the life cycle for crude oil and gasoline? A. Straight-
through production to consumption.
B. Input-output production life cycle.
C. Seasonal production.
5. Valuation of commodities depends upon the fact that stocks and bonds are financial assets
whereas commodities are: A. physical assets.
B. contingent claims.
C. derivative contracts with infinite time horizon.
6. Valuation of commodities most likely requires: A. discounting future cash flows.
B. discounting of future prices where future prices are susceptible to supply and demand
and expected price volatility of the commodities. C. a thorough fundamental analysis.
7. One of the differences in valuation of commodities as opposed to financial assets is that
commodities:
A. incur transportation and storage costs.
B. provide periodic income.
C. generate future cash flows.
8. Which of the following statements regarding participants of the commodity futures markets is
correct?
A. Hedgers speculate on market direction and volatility.
Copyright © IFT. All rights reserved. Page 1
, Commodities and Commodity Derivatives: An Introduction – Question Bank B.
Exchanges often provide insurance to hedgers.
C. Traders and investors provide liquidity and price discovery for futures markets.
9. The fdifference fbetween fspot fand ffutures fprices fis fknown fas: fA. fbasis. f
B. calendar fspread. f
C. net ffutures fprice. f
f
10. When fthe fnear-term ffutures fcontract fprice fis fhigher fthan fthe flonger-term ffutures fcontract
fprice ffor fthe fsame fcommodity, fthe fcalendar fspread fis: f
A. positive fand fcommodity ffutures fmarkets fare fin fbackwardation. f
B. negative fand fcommodity ffutures fmarket fare fin fcontango. f
C. positive fand fthe ffutures fmarkets fare fin fcontango. f f
f
11. Which fof fthe ffollowing fstatements fis fleast faccurate? f
A. Physical-settled fcommodity ffutures fcontracts frequire fthat fthe ftitle fof fthe fcommodity fbe
ftransferred fto fthe fbuyer. f
B. Cash-settled fcommodity ffutures fcontracts fensure fa fconvergence fof fthe ffutures fand fspot
fmarket. f
C. As fopposed fto fcommodity fspot fprices, ffutures fprices fcan fbe fglobal, fstandardized fand
fact fas fa freference fprice ffor fforward fcontracts. f f
f
12. Which fof fthe ffollowing fstatements fis fleast faccurate? fAccording fto fthe fInsurance fTheory: f
A. producers fsell ftheir fcommodities fin fthe ffutures fmarkets fto fhedge fsales fprices, fmaking
ftheir frevenues fmore fcertain. f
B. the ffutures fcurve fis fin fbackwardation f“normally” fbecause fthe fproducers fconstantly fsell
fforward fto flock fin fprices, fresulting fin flower fprices fin ffuture. f
C. the fspot fprice fis fhigher fthan fthe ffutures fprice fbecause fthe fproducers ftake fon fthe fprice
frisk. f f
f
13. In fwhich fsituation fis fthe fHedging fPressure fHypothesis fsimilar fto fthe fInsurance fTheory? f
A. When fcommodity fproducers fselling fforward fexceed fcommodity fconsumers fneeded fto
fcomplete fthe fmarket fresulting fin fthe ffutures fprice fcurve fin fbackwardation. f
B. When fprice fprotection fdemanded fby fcommodity fproducers fequal fthe fneeds fof fthe
fcommodity fconsumers, fand fthe fhedging fneeds fof fthe fbuyer foffset fthose fof fthe fseller. f
C. When fthere fis fan fimbalance fin fthe fdemand ffor fprice finsurance fwhere fthe fbuyers
fexceed fthe fsellers fcausing fthe ffutures fmarkets fto fbe fin fcontango. f
f
14. Under fthe fTheory fof fStorage, fwhat fis fthe frelationship fbetween fconvenience fyield fand fthe
flevel fof finventory? f
A. The flevel fof finventory fdoes fnot fimpact fconvenience fyield. f f
B. As finventory fbecomes fmore fabundant, fconvenience fyield frises. f f
C. As finventory fbecomes fscarce, fconvenience fyield frises. f f
f
15. The ftotal freturn fon fa ffully fcollateralized fcommodity ffutures fcontract fis fgiven fas fthe: fA.
fspot fprice freturn fplus fthe froll freturn fplus fthe fcollateral freturn. f
Copyright © IFT. All rights reserved. Page 2
