General Theory - Answers

  1. C. The advent of forward contracts in general provided the framework for futures; the Japanese contracts were varieties of forwards. To-arrives were an intermediate step in the development of futures. Options weren't exchange-traded until more than a hundred years after futures were.
  2. D. As opposed to a forward, a future is standardized and exchange-traded, not customized and principals-only. It is guaranteed, but by a clearinghouse, not an exchange.
  3. False. First, we divide the October price by the July price and get 1.0045. That means the implied interest rate is 0.45% for the three-month period. Then we annualize the interest rate. From July to October is three months, or one-fourth of the year. So we raise 1.0240 to the fourth power to annualize it to 1.0183. That means the implied annualized rate is 1.83%. The BA rate is above that, so the market is below full carry.
  4. D. Acting on her own account suggests that she is not representing a firm that would want to deliver or take delivery of the underlying asset. That makes her a speculator. She is selling an asset she intends to replace at a lower price, so she is taking a short position.
  5. B. "Retender" is the return of a future contract's notice to the clearinghouse in advance of its reissue. "Conversion" is a position created by selling a call option, buying a put option, and buying the underlying instrument. "Time value" is the portion of an option's premium that exceeds the intrinsic value.
  6. B. Whereas speculators take on risk, hedgers wish to protect what they have, transferring it to the speculators. In this sense, futures markets are a zero-sum game.
  7. A. A cross hedge utilizes the item to hedge which is closest to being fungible with the item being hedged.
  8. C. Selling the futures protects the price of the existing inventory. To obtain the number of contracts needed, take the quantity to hedge and divide it by the contract value. In this instance, it would be 200,000 lbs of Unobtanium/50,000 lbs (individual contract size) = 4 contracts to be sold against inventory.
  9. C. To secure a favorable price in the face of a possible increase, the baker should purchase flour futures. If he or she were a miller, they would purchase wheat futures to lock in the price of wheat which would be milled into flour. The baker is one step closer to the ultimate end user, the retail customer.
  10. B. The sale of futures would lock in a favorable price of the actuals which the producer or commercial hedger owns.
  11. B. CPOs manage a pool of commodities in a trust to trade futures contracts. The statement presented in the stem of the question defines a commodity trading advisor (CTA).
Margin Requirements
Related Articles
  1. Investing Basics

    Learn How To Trade Gold In 4 Steps

    Trading spot gold or gold futures, equities and options isn’t hard to learn, but the activity requires skill sets unique to these markets.
  2. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  3. Markets

    How Does Flatiron School Work and Make Money?

    Examine the Flatiron School as it pertains to the product it offers; learn how it monetizes its product and the role the school plays as an industry disruptor.
  4. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  5. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  6. Investing News

    Glencore Shares Surge in Hong Kong

    Shares of Glencore International, a leading multinational commodities and mining company, jumped by around 15% on London Stock Exchange, after the shares had gained about 71% earlier on the Hong ...
  7. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  8. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  9. Investing

    Oil: Why Not to Put Faith in Forecasts

    West Texas Intermediate oil futures have recently made pronounced movements. What do they bode for the world market?
  10. Investing

    The Quinoa Quandary for Bolivian Farmers

    Growing global demand for quinoa has impacted Bolivian farmers' way of life. Should the American consumer be wary of buying this product?
  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Plain Vanilla

    The most basic or standard version of a financial instrument, ...
  3. Derivative

    A security with a price that is dependent upon or derived from ...
  4. Series 6

    A securities license entitling the holder to register as a limited ...
  5. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  6. Best To Deliver

    The security that is delivered by the short position holder in ...
  1. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  2. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  3. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  4. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  5. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  6. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
Hot Definitions
  1. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  2. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  3. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  4. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  5. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  6. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!