Series 3 - National Commodities Futures
Spreading - Answers
- C. That is an inter-exchange spread.
- D. This is a bear spread because the near-future contract was sold and the far-future contract was bought. Whether it is a bull or a bear spread, the far-future price exceeds the near-future price, as it will in a normal market, so the basis (near-future price minus far-future price) remains negative.
- A. If the question were about the basis, without description, rather than "the basis for the spread," -$5 would also be correct.
- C. The others are false.
- B. Speculators profit from a reverse crush spread in the processor's (hedger's) gross profit margin on soybean production is flat or negative. In a normal (rising) market, however, this scenario would be less likely; the reverse spread would tend to be unprofitable.
- A. Speculators are long the output and short the input. The reverse crush spread is an example.
- B. Spreading may be used as a speculative tool as well as a hedging tool. The differing margin requirements between hedgers and speculators using spreads, attests to this fact. Additionally, both legs of a spread could move in a direction other than what the trader (be he a speculator or hedger) intended. Some risk management or speculative scenarios may warrant only a long or a short position.
- E. It may be entered as one trade or as a pair of trades. The former option is more common and more cost effective as trading systems allow for a single entry to a trade with multiple parts.
- B. As this type of spread is speculative, margin requirements would be higher.
- B. Futures markets help to reduce price risk of the actuals. Standardization is a feature of a futures market. Bespoke or custom designed contracts are hallmarks of a forward market.
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