Speculating - Summary And Review

Summary
A trader needs to know how to compute gross profit and loss for both uncovered and spread positions. Once that is calculated, the trader needs to know how to calculate return on equity, regardless of the underlying commodity, on pre-tax basis. The trader also needs to be able to compare the yields for taxable and tax-exempt futures.

The trader needs to know how to recommend specific trades given expected market conditions, as well as the best way to structure the trade.

Review
A speculator sells 100 eurodollar September futures for $96.6650 and buys 25 eurodollar December futures for $96.6700. The September price then goes down to $96.6600 and the December price goes down to $96.6640. Contract values vary $25 per basis point. There is a 10% margin and a $50/trade commission for spreads.

  1. Which is TRUE of the basis?
    1. It narrows from -50 bps to -40 bps.
    2. It widens from -50 bps to -60 bps.
    3. It widens from -40 bps to -50 bps.
    4. It narrows from -60 bps to -50 bps.


  1. Which statement is TRUE?
    1. The speculator expects eurodollar contract prices to go up and short-term interest rates to go up.
    2. The speculator expects eurodollar contract prices to go down and short-term interest rates to go up.
    3. The speculator expects eurodollar contract prices to go up and short-term interest rates to go down.
    4. The speculator expects eurodollar contract prices to go down and short-term interest rates to go down.


  1. The gross profit realized upon exiting the position is:
    1. $100,000
    2. $87,500
    3. $112,500
    4. -$87,500


  1. The return on equity is:
    1. $966.65
    2. $1,066.65
    3. $1,208.33
    4. $1,308.33


  1. If your client would like to ensure that the market is moving a certain direction before entering or exiting a position you might recommend a:
    1. Market order
    2. Fill-or-kill order
    3. Stop-limit order
    4. Good-till-cancelled order

  2. In a falling market, a speculator would employ pyramiding as a profitable strategy.
    1. True
    2. False

  3. A trader anticipates a decline in short-term interest rates and wants to lock in lower Eurodollar prices. She goes long 100 eurodollar futures contracts for $9,375. The rate on this contract is 6.25%.
    1. False
    2. True
Answers
Related Articles
  1. Chart Advisor

    Traders Step Back to Assess Commodities Damage

    Traders are turning to these exchange-traded notes and exchange-traded funds to analyze key commodities and determine what could be coming next.
  2. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  3. Investing News

    Oil or Gold: Which Will Recover First?

    Not sure where oil and gold are headed? The answer is complex.
  4. Investing Basics

    Explaining Forward Rate Agreements

    Forward rate agreement (FRA) refers to an interest rate or foreign exchange hedging strategy.
  5. Investing

    Using Fibonacci to Analyze Gold

    Use Fibonacci studies to analyze gold by picking out hidden harmonic levels that can provide major support or resistance.
  6. Options & Futures

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  7. Mutual Funds & ETFs

    ETF Analysis: United States Natural Gas Fund LP

    Find out more about the United States Natural Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: United States Oil Fund

    Find out more about the United States Oil Fund, the characteristics of USO, and the suitability and recommendations of the ETF for investors.
  9. Investing

    Why High Yield Still Has A Role To Play

    An asset class of this bull market has been high yield debt, as many searching for income in a low-rate world have turned to these higher-yielding bonds.
  10. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Gold Sector

    Find out more about the top ETFs that track the gold sector, such as the SPDR Gold Shares ETF, the PowerShares DB Gold ETF and the iShares Gold Trust ETF.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  3. Best To Deliver

    The security that is delivered by the short position holder in ...
  4. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  5. Advanced Diploma In Insurance

    A qualification earned by insurance professionals and conferred ...
  6. Associate In Personal Insurance ...

    A designation earned by professionals looking for training in ...
RELATED FAQS
  1. Can I use my IRA to pay for my college loans?

    If you are older than 59.5 and have been contributing to your IRA for more than five years, you may withdraw funds to pay ... Read Full Answer >>
  2. Can I use my 401(k) to pay for my college loans?

    If you are over 59.5, or separate from your plan-sponsoring employer after age 55, you are free to use your 401(k) to pay ... Read Full Answer >>
  3. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!