Futures contracts have existed in some form for a very long time, but weren't standardized and exchange-traded until the mid-19th century. Futures were historically based on agricultural products, but financial futures were developed starting in 1971. Futures are conceptually similar to forward contracts, but differ in some key respects. The futures market has a unique structure in which hedgers and speculators participate, and a vocabulary not unlike that of the market for options, another type of derivative.
Review 1. Which is not an antecedent of the contemporary futures contract?
- Japanese rice and silk contracts
- Forward contracts
- Exchange-traded options
2. In which way does a future contract differ from a forward contract?
- It can be customized in terms of quantity of goods and delivery dates.
- It trades directly between buyer and seller.
- It is guaranteed by an exchange.
- It trades in a government-regulated market.
3. It is July. September futures for soybean oil settled today at 26'45 ($0.2645/pound) and December soybean oil futures settled at 26'57. The 90-day BA rate is an annualized 4.00%. True or false: The market for soybean oil is above full carry.
4. A trader expects the price of heating oil to decrease faster than the market predicts so she, on her own account, sells a futures contract "borrowed" from her firm. This market participant is acting as:
- a hedger taking a long position
- a hedger taking a short position
- a speculator taking a long position
- a speculator taking a short position
5. If an option's price would change $0.30 if its underlying commodity moved $1.00 then 0.3 is the:
- time value
6. Hedging is the inverse of speculation
7. An associated person hedging an asset or futures position with a similar, but not identical contract has entered into a cross hedge
8. A manufacturer of 200,000 pounds of Unobtanium is desirous of hedging her inventory. Each contract is 50,000 pounds.
- Purchase four futures contracts.
- Sell eight futures contracts.
- Sell four futures contracts.
- Purchase eight futures contracts.
9. An artisanal baker wants to hedge the risk in increased costs of flour. He should:
- Be long wheat futures.
- Be short flour futures
- Be long flour futures.
- Be short wheat futures.
10. To hedge falling prices, a holder of inventory should purchase futures contract equal to the quantity of inventory.
11. Commodity Pool Operators (CPOs) advise on the purchase of commodities or a commodities-based investment strategy.
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