Spreading - Summary And Review
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.
- Which is NOT TRUE of an intra-market spread?
- It is also called a calendar spread.
- It is also called an intra-delivery spread.
- It presents an arbitrage opportunity between two exchanges.
- It can be either a bull spread or a bear spread.
- 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?
- The basis is $0.20/bushel and this is a bull spread.
- The basis is -$0.20/bushel and this is a bull spread.
- The basis is $0.20/bushel and this is a bear spread.
- The basis is -$0.20/bushel and this is a bear spread.
- 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:
- Why are spread margins generally lower than uncovered margins?
- Investors taking spread positions are generally more creditworthy.
- Spreads increase the volume traded on the exchange.
- Spreads are inherently less risky.
- The question proceeds from a false premise; spread margins are not lower than uncovered margins.
- In a rising market, a reverse crush spread works to the disadvantage of
- Both a. and b.
- Neither a. nor b.
- Speculators are long the input and short the output.
- Spreading is a more effective hedge than a simple long or short position.
- A spread order
- Must be entered as two separate trades.
- May be entered as one order that has two components.
- Must be entered as one combined trade.
- May be entered as two separate orders.
- Both b and d.
- The margin requirements on a reverse crush spread are lower.
- The objective of futures markets is to
- Create a standardized market that reduces counterparty risk.
- Reduces price risk.
- Allows for bespoke contract design
- All of the above.
TermBoth forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
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