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

Related Articles
  1. Investing

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
  2. Trading

    Which Vertical Option Spread Should You Use?

    Knowing which option spread strategy to use in different market conditions can significantly improve your odds of success in options trading.
  3. Trading

    Retail FX Spreads: Do They Even Matter?

    Learn how retail forex spreads affect your ability to trade currencies.
  4. Trading

    What is a Bull Call Spread?

    A bull call spread is an option strategy that involves the purchase of a call option, and the simultaneous sale of another option (on the same underlying asset) with the same expiration date ...
  5. Investing

    Spreading The Word About Portfolio Margin

    An underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
  6. Trading

    What is a Bear Call Spread?

    A bear call spread is an option strategy that involves the sale of a call option, and the simultaneous purchase of a call option (on the same underlying asset) with the same expiration date but ...
Frequently Asked Questions
  1. Why is social responsibility important to a business?

    Take social responsibility seriously, and your business could benefit from happier, more productive staff members while helping ...
  2. Which socially responsible retailers appeal most to ethical investors?

    Learn why ethical investors have many options in the retail sector, and discover which retail companies are most popular ...
  3. What are Some Examples of Free Market Economies?

    Learn which of the world's economies best resemble free market economies, marked by free trade, low government involvement, ...
  4. Who Decides When to Print money in India?

    Find out the role of the Reserve Bank of India, or RBI, and the amount of authority given to the government. Learn who is ...
Trading Center