Spreading - Summary And Review

Summary
Spreading is a risk reduction and control strategy similar to hedging, except that the basis is the difference between nearby and more distant-future prices, rather than a cash and a futures price. Traders and speculators alike employ spreads in the pursuit of their respective goals. Bull spreads and bear spreads are created in expectation of rising and fall markets, respectively.

Review



  1. Which is NOT TRUE of an intra-market spread?
    1. It is also called a calendar spread.
    2. It is also called an intra-delivery spread.
    3. It presents an arbitrage opportunity between two exchanges.
    4. It can be either a bull spread or a bear spread.


  1. It is March and you sell a May corn contract for $2.50/bushel and buy a July corn contract for $2.70/bushel. Which statement is TRUE?
    1. The basis is $0.20/bushel and this is a bull spread.
    2. The basis is -$0.20/bushel and this is a bull spread.
    3. The basis is $0.20/bushel and this is a bear spread.
    4. The basis is -$0.20/bushel and this is a bear spread.


  1. It is August, AIG stock is trading for $57/share and an investor buys a contract to deliver AIG shares in October for $60 and sells another contract to deliver AIG shares in November for $64. A month later, the spot price has reached $59, the October price is still $60, and the November price is now $65. The basis for the spread as of September is:
    1. widening.
    2. narrowing.
    3. $5
    4. -$5


  1. Why are spread margins generally lower than uncovered margins?
    1. Investors taking spread positions are generally more creditworthy.
    2. Spreads increase the volume traded on the exchange.
    3. Spreads are inherently less risky.
    4. The question proceeds from a false premise; spread margins are not lower than uncovered margins.

  2. In a rising market, a reverse crush spread works to the disadvantage of
    1. Processors
    2. Speculators
    3. Both a. and b.
    4. Neither a. nor b.

  3. Speculators are long the input and short the output.
    1. False
    2. True

  4. Spreading is a more effective hedge than a simple long or short position.
    1. True
    2. False

  5. A spread order
    1. Must be entered as two separate trades.
    2. May be entered as one order that has two components.
    3. Must be entered as one combined trade.
    4. May be entered as two separate orders.
    5. Both b and d.

  6. The margin requirements on a reverse crush spread are lower.
    1. True
    2. False

  7. The objective of futures markets is to
    1. Create a standardized market that reduces counterparty risk.
    2. Reduces price risk.
    3. Allows for bespoke contract design
    4. All of the above.
Answers
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