FUTURES FINAL EXAM ACTUAL QUESTIONS AND ANSWERS ALREADY GRADED A+

FUTURES FINAL EXAM ACTUAL QUESTIONS AND ANSWERS ALREADY GRADED A+ A trader who is long 5 corn futures contract (5,000 bushels per contract) at $4.20 offsets her position at $4.45. Assuming commission is $50 per contract per round turn, what is her gain or loss on the trade? Ans- Gain of $6,000 Market Orders to sell futures contracts are matched against the best or highest limit order bids Ans- True Hedging margin is set at the same level as a speculator's Ans- maintenance margin The process by which the margin accounting system is settled each trading day is referred to as Ans- Mark-To-Market A speculator's initial margin level can never exceed his maintenance level Ans- False A trader who is long 10 corn futures contract (5,000 bushels per contract) at $5.00 offsets her position at $4.80. Assuming commission is $50 per contract per round turn, what is her gain or loss on the trade? Ans- Loss of $10,500 A high stocks-to-use ratio is typically associated with higher than average cash prices Ans- False The U.S. government allows futures trading because Ans- it provides the important economic benefits of price discovery and hedging In futures trading it is possible to initially sell a commodity you don't own Ans- True Once you've bought a futures contract what happens next? Ans- Either you take delivery of the commodity or you offset your position by selling a futures contract for the same delivery period. A trader who is short 2 corn futures contract (5,000 bushels per contract) at $6.40 offsets her position at $6.30. Assuming commission is $50 per contract, what is her gain or loss on the trade? Ans- Gain of $900. Futures trading is said to be a zero sum game because Ans- For every winning trade there has to be a losing trade Long-hedgers benefit from a strengthening of the basis Ans- False What is the difference between speculating and hedging? Ans- Speculators have no cash position. Futures contracts are standardized in terms of quality, quantity and delivery time Ans- True Futures investments are said to provide leverage because Ans- the initial investment capital is far less than the face value of the investment itself A hog farmer buying corn for feed could use what type of futures hedge to lock in his input price? Ans- a long-hedge Basis is defined as Ans- local cash price less futures price. A futures contract is Ans- a legal contract calling for the acceptance or delivery of a commodity of a specific quality and quantity to a specific delivery point on or by some subsequent data After a corn farmer has hedged his cash position he is left with Ans- basis risk What is meant by price discovery in futures markets? Ans- It describes the process whereby futures prices reveal the market consensus of future expected prices. A market order instructs your broker Ans- to buy or sell a certain number of commodity futures contracts as soon as possible at the best possible price By selling a February live cattle futures contract a trader is agreeing to Ans- Deliver a fixed quantity of live cattle at a designated location sometime in February Futures contracts for different delivery periods trade simultaneously at a futures exchange Ans- True To offset an existing or open long futures position a trader must Ans- sell an equal number of contracts for the same commodity, for the same delivery month at the same exchange. Hedging a cash transaction with an opposite futures transaction protects against price risk because Ans- gain or loss in the cash price is offset by a similar loss or gain in the futures ..........................