General Theory - Summary And Review

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?

    1. Japanese rice and silk contracts
    2. Forward contracts
    3. Exchange-traded options
    4. To-arrives

2. In which way does a future contract differ from a forward contract?

    1. It can be customized in terms of quantity of goods and delivery dates.
    2. It trades directly between buyer and seller.
    3. It is guaranteed by an exchange.
    4. 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:

    1. a hedger taking a long position
    2. a hedger taking a short position
    3. a speculator taking a long position
    4. 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:

    1. retender
    2. delta
    3. conversion
    4. time value

6. Hedging is the inverse of speculation

    1. False
    2. True

7. An associated person hedging an asset or futures position with a similar, but not identical contract has entered into a cross hedge

    1. True
    2. False

8. A manufacturer of 200,000 pounds of Unobtanium is desirous of hedging her inventory. Each contract is 50,000 pounds.

    1. Purchase four futures contracts.
    2. Sell eight futures contracts.
    3. Sell four futures contracts.
    4. Purchase eight futures contracts.

9. An artisanal baker wants to hedge the risk in increased costs of flour. He should:

    1. Be long wheat futures.
    2. Be short flour futures
    3. Be long flour futures.
    4. Be short wheat futures.

10. To hedge falling prices, a holder of inventory should purchase futures contract equal to the quantity of inventory.

    1. False
    2. True

11. Commodity Pool Operators (CPOs) advise on the purchase of commodities or a commodities-based investment strategy.

    1. True
    2. False
Related Articles
  1. 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 ...
  2. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  3. 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.
  4. 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?
  5. 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?
  6. Economics

    Is the U.S. Economy Ready for Liftoff?

    The Fed continues to delay normalizing rates, citing inflation concerns and “global economic and financial developments” in explaining its rationale.
  7. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  8. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  9. Forex Fundamentals

    What Are the Best Hours to Trade the Mexican Peso?

    The best times to trade the Mexican peso are centered around economic releases, typically in the morning hours.
  10. Chart Advisor

    Trade Base Metals With These 3 ETFs

    News out of Alcoa is causing active traders to turn toward base metals for opportunities. Before diving into the market, check out the charts of these three ETFs.
  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. 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. ...
  2. Capitalization Rate

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

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
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!