Back To School Exam #3

1. What is the purpose of “open outcry” in futures trading?

To look good for the nightly business report

To offer all traders an equal chance to respond to bids and offer

To confuse onlookers and obscure the pricing process

Open outcry in a multi-level trading pit offers every trader in the pit an equal opportunity to respond to all bids and offers. Orders are filled on a first come first serve basis. Despite the fairness inherent in pit trading, the pits are giving way to electronic trading, which now account for more than 90% of all grain futures transactions.

Explanation

Open outcry in a multi-level trading pit offers every trader in the pit an equal opportunity to respond to all bids and offers. Orders are filled on a first come first serve basis. Despite the fairness inherent in pit trading, the pits are giving way to electronic trading, which now account for more than 90% of all grain futures transactions.

2. The United States exports about 40% of soybeans produced. Which country or trading bloc is the largest buyer of U.S. soybeans?

China

European Union

Mexico

Japan

China is by far our single most important destination for U.S. soybeans. In the 2007/2008 crop year, they bought over 500 million bushels, more than the European Union, Mexico and Japan combined.

Explanation

China is by far our single most important destination for U.S. soybeans. In the 2007/2008 crop year, they bought over 500 million bushels, more than the European Union, Mexico and Japan combined.

3. When a call option is exercised, the buyer of the call...

Is long the underlying futures contract

Is short the underlying futures contract

Pays the premium

Is long a put

When exercised, the buyer of a call option is long the underlying futures contract. The buyer of a call option has bought the right to buy futures. If the buyer exercises the right to buy, the oldest seller of the call option will take the other side - the short side - of the futures contract.

Explanation

When exercised, the buyer of a call option is long the underlying futures contract. The buyer of a call option has bought the right to buy futures. If the buyer exercises the right to buy, the oldest seller of the call option will take the other side - the short side - of the futures contract.

4. To simultaneously buy corn futures and sell soybean futures is an example of a (an)...

Intercommodity spread

Bear spread

Interdelivery or intramarket spread

Cross-hedge

Buying corn futures and selling soybean futures is an example of an intercommodity spread. Spread trading is a very popular form of trading in commodity markets. Traders like them because they offer numerous trading possibilities, are generally less risky than flat price trades and have favorable margin requirements.

Explanation

Buying corn futures and selling soybean futures is an example of an intercommodity spread. Spread trading is a very popular form of trading in commodity markets. Traders like them because they offer numerous trading possibilities, are generally less risky than flat price trades and have favorable margin requirements.

5. Regulation and oversight of the futures industry occurs at three different levels; the CFTC (Commodity Futures Trading Commission), NFA (National Futures Association), and the futures exchanges. Which of these organizations is responsible for designing and offering new contracts?

CFTC

NFA

The individual futures exchanges

The exchanges take the lead in designing new contracts for trading. Several years ago, a new ethanol contract started trading. The contracted was proposed and written by the CBOT – the CFTC approves all new contracts.

Explanation

The exchanges take the lead in designing new contracts for trading. Several years ago, a new ethanol contract started trading. The contracted was proposed and written by the CBOT – the CFTC approves all new contracts.

6. What is the lowest closing price level attained by a November soybean futures contract since 1980?

$4.63¼

$4.38

$4.05¼

$3.95

The November 1999 contract traded at a low of $4.05¼ on July 7, 1999. Three years in particular - 1999, 2000 and 2001 - were bad years for soybean prices. Cash prices traded, at times, below $4 per bushel.

Explanation

The November 1999 contract traded at a low of $4.05¼ on July 7, 1999. Three years in particular - 1999, 2000 and 2001 - were bad years for soybean prices. Cash prices traded, at times, below $4 per bushel.

7. What is the highest closing price level ever attained by a December (i.e., new crop) corn futures contract?

$6.89

$7.32

$7.68

$7.96

On June 27, 2008 the December’08 corn contract reached $7.96, just 4 cents shy of the $8 mark. The Dec’09 contract reached it’s high of $7 per bushel days later – this same contract is trading closer to the $3 mark as the 2009 harvest is about to begin.

Explanation

On June 27, 2008 the December’08 corn contract reached $7.96, just 4 cents shy of the $8 mark. The Dec’09 contract reached it’s high of $7 per bushel days later – this same contract is trading closer to the $3 mark as the 2009 harvest is about to begin.

8. What do you call an options trading strategy involving the simultaneous purchase of out-of-the-money puts and calls in the same commodity?

Short straddle

Bull spread

Long strangle

Call ratio backspread

A trading strategy that involves the simultaneous purchase out-of-the-money puts and calls is called a long strangle. A straddle would involve at-the-money puts and calls. A long strangle strategy works for the trader who is certain that market prices are about to breakout, but is not certain as to the direction of the breakout.

Explanation

A trading strategy that involves the simultaneous purchase out-of-the-money puts and calls is called a long strangle. A straddle would involve at-the-money puts and calls. A long strangle strategy works for the trader who is certain that market prices are about to breakout, but is not certain as to the direction of the breakout.

9. What do you call a futures trading strategy involving the simultaneous sale of a nearby futures contract and purchase of a deferred contract in the same commodity?

Short straddle

Bear spread

Bull spread

Intercommodity spread

To sell nearby and buy deferred is a bear spread. The bear spread gets it’s name from the tendency for carrying charges to widen in a bear market. Let me offer a recent example. From mid-June to mid-July of 2009, the Nov’09 soybean contract declined nearly $2 per bushel (from about $10.80 to under $9 per bushel). Over that same period of time, the Nov’09 contract went from a 20 cent inverse to a 20 cent discount, relative to the July’10 soybean contract.

Explanation

To sell nearby and buy deferred is a bear spread. The bear spread gets it’s name from the tendency for carrying charges to widen in a bear market. Let me offer a recent example. From mid-June to mid-July of 2009, the Nov’09 soybean contract declined nearly $2 per bushel (from about $10.80 to under $9 per bushel). Over that same period of time, the Nov’09 contract went from a 20 cent inverse to a 20 cent discount, relative to the July’10 soybean contract.