Unit 1.A

Question 1

A futures contract is legally binding, but it does not always require the original buyer or seller to take or make delivery.

A. True
B. False

Answer 1

True: An open long or short futures position is an obligation to take or make delivery of the actual commodity if the position is held until he contracts delivery date. (Most are closed prior to delivery)

Question 2

Forward contracts differ from futures contracts in that:
A: they are non-standardized
B: They are not regulated by the CFTC
C: Their prices are not set in a competitive market
D: All of the above

Answer 2

D: All of the above

Forward contracts are unique and non-standardized and are direct obligations between a particular buyer and seller. Nearly all forward contracts are deliver, unlike futures contracts, where most transactions are offset rather than delivered. Forward are not regulated by the CFTC.

Question 3

To offset a long futures position, a trader must:
A: liquidate the purchase of a long futures contract by selling an equal number of contracts of the same delivery month on the same exchange
B: Liquidate the purchase of a long futures contract by selling an equal number of contracts of the same delivery month on any exchange
C: recognize that only short positions can be offset
D: Never transfer the obligation to others

Answer 3

A: Liquidating a long position offsets an open futures position. Must sell the same contract on the same exchange.

Question 4

The efficiency of a futures market is primarily determined by the:
A: number of active traders
B: leadership skills of exchange officials
C: Availability of cash supplies
D: Required margin amounts

Answer 4

A: market efficiency depends how well prices reflect available information. The greater the number of active participants the more efficient the market. B &C effect prices, not efficiency. Margin requirements have little effect on efficiency.

Question 5

The price of a futures contract is determined by:
A: the NFA
B: the CFTC
C: prearranged agreements between the floor brokers
D: open bids and offers on the exchange

Answer 5

D: Futures prices are established on futures exchanges.

Question 6

Hedging is using a futures contract (or futures option) to reduce risk that you normally would have in relation to a particular commodity.
A: True
B: False

Answer 6

A: Hedgers look to protect crops against a decline in value, or as a buyer an increase in price. Futures may be used to hedge in both situation.

Question 7

Hedging is making money in the futures contract to offset what you are losing in what you own or will acquire:
A: True
B: False

Answer 7

A: The money hedgers make offsets some or all of the losses they may experience.

Question 8

A futures contract is a legally binding agreement between a seller and buyer enforcing the delivery of a specified commodity, index, currency, or underlying instrument.

A: True
B: False

Answer 8

A: A futures contract is a legally binding agreement that delineates the future delivery of a commodity or other instrument. Usually these contracts are offset by case or another contract and not actually delivered.

Question 9

A buyer of a futures contract is called

A: hedging
B: speculating
C: long
D: short

Answer 9

C: Buying is going long, selling is going short. This is true for futures and options as well as stocks and bonds.

Question 10

Size, grades, and delivery locations of futures contracts are set by:

A: the NFA
B: CFTC
C: the US Department of Agriculture
D: the exchange where the contract is traded

Answer 10

D: The exchanges set the standards and enforce all the terms and conditions of all futures contracts traded on their platforms.