Series 3 - National Commodities Futures

AAA

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
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