Series 3 - National Commodities Futures

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Spreading - Answers

  1. C. That is an inter-exchange spread.
  2. 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.
  3. A. If the question were about the basis, without description, rather than "the basis for the spread," -$5 would also be correct.
  4. C. The others are false.
  5. 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.
  6. A. Speculators are long the output and short the input. The reverse crush spread is an example.
  7. 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.
  8. 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.
  9. B. As this type of spread is speculative, margin requirements would be higher.
  10. 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.



Profit/Loss Calculations For Speculative Trades
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