Chapt 1

Question 1

A cash forward contract differs from a futures contract in that the futures contract…

Answer 1

is not personally negotiated between the buyer and the seller

Question 2

A ___________ futures contract is an agreement that’s entered into between a buyer and seller on the floor of an exchange.

Answer 2

commodity

Question 3

Transaction that involves the agreement between the buyer and seller for delivery of a specified amount of the cash commodity to be delivered at a specified time, price and delivery point

Answer 3

cash forward transaction

Question 4

this contract is negotiated on an exchange, which is a single, central market on which all purchase and sale orders are channeled

Answer 4

futures contract

Question 4

The cash forward transaction is what type of agreement between the buyer and the seller?

Answer 4

non-transferable agreement; which means both parties have obligations

Question 5

FUT contracts are not negotiated between the buyer and the seller. Who negotiates them?

Answer 5

the broker who represents the buyer and the seller, respectively

Question 6

this type of contract is set by a particular exchange and includes the size, point from which delivery will be made, grade of the commodity and price

Answer 6

commodity futures contract

Question 7

the standard grade that may be delivered in a commodities contract is…

Answer 7

the basis grade

Question 8

Outside of the basis grade, the exchange will allow the seller to deliver a substitute grade. Explain both options

Answer 8

grade that’s lower in quality at a discounted price
grade that’s higher in quality for a premium price

Question 9

This exists when an individual or group of individuals who are acting in concert accumulates all, or substantially all, of the available supply of a commodity

Answer 9

corners

Question 10

With control of the cash commodity, one is able to dictate the price that a seller must pay for the cash in order to make delivery on his/her short position

Answer 10

squeeze

Question 11

refers to a person who has an actual cash position

Answer 11

long

Question 12

used to describe a person who has an obligation to deliver the cash but doesn’t own it

Answer 12

short - this person is “short” the cash and will need to buy it at a later date

Question 13

the establishment of a futures position that’s opposite the cash

Answer 13

hedge

Question 14

a hedge is the establishment of a futures position that’s opposite the cash. what is its purpose?

Answer 14

to establish a temporary substitute for a cash market transaction that will be made at a later date; to reduce/mitigate risk

Question 15

What are the 6 benefits provided by the Futures Exchange?

Answer 15

1. hedging is allowed
2. reduction in price of the commodity to public
3. central point to channel risk capital of the speculator
4. producer or user can obtain credit from banks/lenders at more favorable rates if positions are hedged
5. provides focal point where all orders are sent
6. provides an Alternative market for whoever wants to buy or sell the commodity

**Hedge, reduction, central point, credit, focal point, Alternative

Question 16

individual who buys a commodity if he/she anticipates a price rise or sells a commodity if he/she anticipates a price decrease; assumes the risk a hedger is trying to avoid

describe the position this person takes on both a long & short

Answer 16

speculator

long position (buy futures) when prices will rise
short position (sell futures) when prices fall

Question 17

Who has the responsibility to supervise trading in commodity futures?

Answer 17

Commodity Futures Trading
Commission (CFTC) - a gov agency

Question 18

In order to be a member firm of an exchange, a firm must be associated with at least…

Answer 18

one individual who owns a membership.

Question 19

The CFTC allows exchanges to regulate themselves (handles complaints and assesses appropriate penalties), but the regulation is

Answer 19

subject to CFTC review

Question 20

What are the 2 conglomerate firms that run FUT exchanges?

Answer 20

CME (Chicago Mercantile Exchange) & ICE (Intercontinental Exchange)

Question 21

settles disputes between members, member firms and the public. all parties involved must voluntarily agree to submit the dispute to this committee

Answer 21

arbitration

Question 22

committee that investigates business practices against members and prevents price manipulation; supervises the conduct of members as well as member firms and their employees to ensure compliance

Answer 22

business conduct committee

Question 23

how is trading conducted on the floor of an exchange?

Answer 23

“open outcry” - announce in a loud and clear voice

Question 23

establishes rules regarding floor trading and settles disputes that arise between members; ensures all transactions are conducted on the floor of the exchange

Answer 23

floor committee

Question 24

members who execute the orders on a floor

Answer 24

floor brokers

Question 24

members who trade for their own accounts (and risk); typically establish and close in the same trading session

Answer 24

floor traders AKA locals or scalpers

those who hold positions for more than one session are considered “position traders”

Question 25

3 ways you have a successful exchange market:

Answer 25

1. large number of participants
2. minimum gov control for prices to reach natural level without artificial influences
3. commodity must be on that is easily graded and standardized

Question 26

a market has few participants - what is the market referred to and explain the spread expectations

Answer 26

inefficient or “thin market” AKA illiquid or volatile market

the spread between bids and offers will widen, and be wide, and there will be large fluctuations between successive transactions

Question 27

a market has many participants - what is the market referred to and explain the spread expectations

Answer 27

efficient AKA continuous or liquid

there is small variations between bids and offers and there will be small variations between successive transactions

Question 28

this type of contract is a legally binding contract and always requires the original buyer or seller to make or take delivery

Answer 28

forward contract