Chapter 14

Question 1

Agreement between a buyer and a seller, who both commit to a transaction at a future date at a price set by negotiation today

Answer 1

Forward Contract

Question 2

Contract between a seller and a buyer specifying a commodity or financial instrument to be delivered and price paid at contract maturity

Answer 2

Futures Contract

Question 3

Price negotiated by buyer and seller at which the underlying commodity or financial instrument will be delivered and paid for to fulfill the obligations of a futures contract

Answer 3

Futures Price

Question 4

A market position where the holder benefits from price increases and loses from price decreases

Answer 4

Long Position

Question 5

A market position where the holder benefits from price decreases and loses from price increases

Answer 5

Short Position

Question 6

A person or firm that takes the risk of loss for the chance for profit

Answer 6

Speculator

Question 7

Trader who seeks to transfer price risk by taking a futures position opposite to an existing position in the underlying asset

Answer 7

Hedger

Question 8

The commodity or financial instrument on which the futures contract is based

Answer 8

Underlying Asset

Question 9

Adding a short futures position to a long position in the underlying asset

Answer 9

Full Hedge

Question 10

Adding a long futures position to a short position in the underlying asset

Answer 10

Long Hedge

Question 11

Deposit of funds in a futures trading account dedicated to covering potential losses from an outstanding futures position

Answer 11

Futures Margin

Question 12

Amount required when a futures contract is first bought or sold

Answer 12

Initial Margin

Question 13

In futures trading accounts, the process whereby gains and losses on outstanding futures positions are recognized on a daily basis

Answer 13

Marking-to-Market

Question 14

The minimum margin level required in a futures trading account at all times

Answer 14

Maintenance Margin

Question 15

Notification to increase the margin level in a trading account

Answer 15

Margin Call

Question 16

A trade that closes out a previously established futures position by taking the opposite position

Answer 16

Reverse Trade

Question 17

Price of a commodity or financial instrument quoted for current delivery

Answer 17

Cash Price

Question 18

Market in which commodities or financial instruments are traded for immediate

Answer 18

Cash Market

Question 19

Strategy for earning risk-free profits from an unusual difference between cash and futures prices

Answer 19

Cash-Futures Arbitrage

Question 20

The difference between the cash price and the futures price for a commodity

Answer 20

Basis

Question 21

The case where the futures price is greater than the cash price

Answer 21

Carrying-Charge Market

Question 22

The case where the futures price is less than the cash price

Answer 22

Inverted Market

Question 23

The relationship between spot prices and futures prices that holds in the absence of arbitrage opportunities

Answer 23

Spot-Futures Parity

Question 24

Strategy of monitoring the futures price on a stock index and the level of the underlying index to exploit deviations from parity

Answer 24

Index Arbitrage

Question 25

Computer-assisted monitoring of relative prices of financial assets

Answer 25

Program Trading

Question 26

Hedging a particular spot position with futures contracts on a related, but not identical, commodity or financial instrument

Answer 26

Cross-Hedge

Question 27

Seller’s option to deliver the cheapest instrument when a futures contract allows several instruments for delivery

Answer 27

Cheapest-to-Deliver Option